Amendment No. 1 To Amended and Restated Recapitalization Agreement

          This Amendment No. 1 To Amended and Restated Recapitalization
Agreement (this “Amendment”) is made and entered into as of October 22, 2004
(the “Amendment Date”) by and between Northwest Biotherapeutics, Inc., and its
affiliates, if any (collectively, the “Company”), a Delaware corporation with
offices at 22322 20th Ave SE, Suite 150, Bothell, Washington, 98021, and Toucan
Capital Fund II, L.P., and its designees (collectively, “Investor”), a Delaware
limited partnership with offices at 7600 Wisconsin Avenue, Bethesda, MD 20814.
All capitalized terms used herein but not otherwise defined shall have the
meaning given such terms in the Agreement (as defined below).

Recitals

          Whereas, the Company and Investor have entered into that certain
Amended and Restated Recapitalization Agreement, dated as of July 30, 2004 (the
“Agreement”);

          Whereas, the Company and Investor desire to amend the Agreement in
order for Investor to provide the Company with up to $1,000,000 of additional
Bridge Funding and to make such other changes to the Agreement as are set forth
herein; and

          Whereas, Section 4.13(f) of the Agreement provides that the Agreement
may be amended or modified only by a written instrument signed by the Company
and Investor.

Amendment

          Now, Therefore, for and in consideration of the mutual promises and
covenants set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and
Investor hereby agree as follows:

          1.          Section 1.1 of the Agreement is hereby amended by
replacing “one hundred eighty (180)” with “two hundred twenty five (225) (or in
the event the November Bridge Funding (as defined herein) is not provided, one
hundred ninety five (195)).”

          2.          Section 1.2 of the Agreement is hereby amended by
inserting “, including without limitation, the Loan Agreement, Security
Agreement and 10% Convertible, Secured Promissory Note dated October 22, 2004
attached hereto as Exhibit A-6, the October 22 Bridge Warrant (as defined
herein) in the form attached hereto as Exhibit K-1 and, if issued, the Note
evidencing the November Bridge Funding (as defined herein) in the form attached
hereto as Exhibit A-7 and the November Bridge Warrant (as defined herein) in the
form attached hereto as Exhibit K-2” immediately following the phrase “such
other documents and agreements” in subsection (g) thereof.

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          3.          Section 2.1 of the Agreement is hereby amended by adding a
new subsection (k) immediately following Section 2.1(j) as follows:

          [***]*

          4.          Action 2.2(a) of the Agreement is hereby amended by
replacing “A-5” with “A-6 (and if issued, A-7).”

          5.          Section 2.3(b) of the Agreement is hereby amended by
adding the following text immediately following the third sentence thereof:

 

“On October 22, 2004 (the “Amendment Date”), Investor is providing an additional
$500,000 of Bridge Funding (the “October 22 Bridge Funding”) to cover general
operating expenses and certain other expenses of the Company agreed in advance
by Investor during the remaining Bridge Period following the period covered by
the Subsequent Bridge Funding.  The October 22 Bridge Funding shall be evidenced
by a Note in the form attached hereto as Exhibit A-6 and shall be provided on
the terms and conditions set forth herein. The October 22 Bridge Funding shall
be used only for the purposes and in the amounts set forth in the budget
included in the Schedule of Exceptions in connection with the October 22 Bridge
Funding.  Subject to the satisfaction, or waiver by Investor, of the conditions
set forth in Section 2.4(t) and Section 2.4(u) (as well as all other closing
conditions contained herein), on or before November 5, 2004 Investor shall
provide an additional $500,000 of Bridge Funding (the “November Bridge Funding”)
to cover general operating expenses and certain other expenses of the Company
agreed in advance by Investor during the remaining Bridge Period following the
period covered by the Subsequent Bridge Funding.  If provided, the November
Bridge Funding shall be evidenced by a Note in the form attached hereto as
Exhibit A-7 and shall be provided on the terms and conditions set forth herein.
If provided, the November Bridge Funding shall be used only for the purposes and
in the amounts set forth in the budget included in the Schedule of Exceptions in
connection with the November Bridge Funding.”

          6.          Section 2.3(b) of the Agreement is hereby further amended
by replacing the phrase “Subsequent Bridge Note funds” with “Subsequent Bridge
Funding, October 22 Bridge Funding or, if provided, November Bridge Funding” in
the fourth sentence thereof (i.e., the tenth sentence thereof after giving
effect to the inclusion of the six new sentences therein per Section 5 of this
Amendment).

          7.          Section 2.5(i) of the Agreement is hereby amended and
restated in its entirety as follows:

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* Confidential Treatment Requested

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“(i)          not deviate, during the period covered by such budgets, more than
$10,000 in aggregate from the budget included in the Schedule of Exceptions in
connection with the Subsequent Bridge Funding or the budget included in the
Schedule of Exceptions in connection with the October 22 Bridge Funding or the
November Bridge Funding, nor take any action or make any promise, undertaking or
commitment that would result in the Company incurring or accumulating payables
and/or other financial obligations of any kind, whether current or deferred,
direct or indirect, for purposes other than as set forth in budgets expressly
agreed to by Investor, and/or in any amounts in excess of the amounts set forth
in such agreed budgets, which equal or exceed $10,000 in aggregate, and which
have not been approved in writing in advance by Investor.”

          8.          Section 2.6(a) and Section 2.6(b) of the Agreement are
hereby each amended by replacing “one hundred eighty (180)” with “two hundred
twenty five (225).”

          9.          Section 2.4 of the Agreement is hereby amended by adding
new subsections 2.4(t) and 2.4(u) immediately following Section 2.4(s) thereof,
as follows:

 

“(t)          with respect to the October 22 Bridge Funding and the November
Bridge Funding only, the Company and Investor shall have agreed to a mutually
acceptable budget for the period from the Amendment Date through December 7,
2004.

 

 

 

(u)          with respect to the October 22 Bridge Funding and the November
Bridge Funding only, the Company to have reported to Investor the Company’s cash
position and all expenditures and agreements commitments or undertakings for
expenditures as of the Amendment Date and as of the date of such closing.”

          10.         The Agreement is hereby amended by adding new Sections
2.11 and 2.12, immediately following Section 2.10 thereof, as follows:

                        “2.11     October 22 Bridge Warrant:

 

             (a)          Issuance of October 22 Bridge Warrant.  On the
Amendment Date, Investor shall receive a warrant with coverage equal to one
hundred percent (100%) of the principal amount due under the Note evidencing the
October 22 Bridge Funding (the “October 22 Bridge Warrant”).  The Company shall,
therefore, issue $500,000 in warrant coverage on the $500,000 of October 22
Bridge Funding provided on the Amendment Date.  The number of shares subject to
the October 22 Bridge Warrant to be so issued shall be determined on the basis
of $0.10 per share (subject to adjustment for stock splits, stock dividends and
the like).  The total number of shares for which Investor shall initially be
able to exercise the October 22 Bridge Warrant shall therefore be 5,000,000
shares as of the Amendment Date.

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             (b)          Exercise of October 22 Bridge Warrant.  The October 22
Bridge Warrant shall be immediately exercisable upon issuance and continue to be
exercisable for a period of seven (7) years after its issuance date.  The
exercise price of the October 22 Bridge Warrant shall be the lesser of $0.10 per
share (subject to adjustment for stock splits, stock dividends and the like, as
provided more fully in the October 22 Bridge Warrant) and a 35% discount to the
average closing price during the twenty trading days prior to the first closing
of the sale of Convertible Preferred Stock; provided, however that in no event
will the exercise price be less than $0.04 per share (subject to adjustment for
stock splits, stock dividends and the like, as provided more fully in the
October 22 Bridge Warrant).  In the event the Convertible Preferred Stock is
approved and authorized, and the terms and conditions are the same as set forth
herein and in the Convertible Preferred Stock Term Sheet, and Other Investors
have purchased in cash (and not by conversion of debt, exercise of warrants or
options, or conversion or exercise of other securities or instruments) a minimum
of $15 million of such Convertible Preferred Stock, on the terms and conditions
set forth herein and in the Convertible Preferred Stock Term Sheet, then the
October 22 Bridge Warrant shall be exercisable solely for such Convertible
Preferred Stock (subject to Section 5 thereof).  However, if, for any reason,
such Convertible Preferred Stock is not approved or authorized, and/or is
approved or authorized on any terms different than any terms set forth herein
and in the Convertible Preferred Stock Term Sheet, and/or if Other Investors
have not purchased in cash (and not by conversion of debt, exercise of warrants
or options, or conversion or exercise of other securities or instruments) a
minimum of $15 million of such Convertible Preferred Stock, on the terms and
conditions set forth herein and in the Convertible Preferred Stock Term Sheet,
the October 22 Bridge Warrant shall be exercisable for any Equity Security
and/or Debt Security (each as defined in Section 2.7 hereof) and/or any
combination thereof, in each case that Investor shall designate in Investor’s
sole discretion (the securities so elected being the “Investor Designated
Securities”).

 

 

 

             (c)          No Impairment.  The Company shall not, by amendment of
its Charter or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
omission, or agreement, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed by the Company under and/or in
connection with the October 22 Bridge Warrant, but shall at all times in good
faith use best efforts to assist in carrying out of all the provisions of and/or
relating to such October 22 Bridge Warrant and in taking all such action as may
be necessary or appropriate to protect Investor’s rights, preferences and
privileges under and/or in connection with the October 22 Bridge Warrant against
impairment.  Investor’s rights, preferences and privileges granted under and/or
in connection with the October 22 Bridge Warrant may not be amended, modified or
waived without Investor’s prior written consent, and the documentation providing
for such rights, preferences and privileges will specifically provide as such.

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             (d)          Tax Treatment of October 22 Bridge Warrant and Note. 
The Company and Investor, as a result of arm’s length bargaining, agree that the
fair market value of the Note to be issued in connection with the October 22
Bridge Funding, if issued apart from the October 22 Bridge Warrant, is $495,000,
and the fair market value of the October 22 Bridge Warrant, if issued apart from
such Note, is $5,000.  The Company and Investor further agree that all tax
filings and records relating to or including this Agreement, the Note to be
issued in connection with the October 22 Bridge Funding and/or the October 22
Bridge Warrant shall be prepared on the basis of, and consistently reflect, the
agreed fair market values set forth in this Section 2.11(d), and the Company
shall instruct its accountants and other tax-preparation professionals to
prepare all tax filings and returns on the basis of the foregoing.

          2.12     November Bridge Warrant:

 

            (a)          Issuance of November Bridge Warrant.  Within fourteen
(14) calendar days of the Amendment Date, Investor shall receive a warrant with
coverage equal to one hundred percent (100%) of the principal amount due under
the Note evidencing the November Bridge Funding (the “November Bridge
Warrant”).  Therefore, if the November Bridge Funding is provided, the Company
shall issue $500,000 in warrant coverage on the $500,000 of November Bridge
Funding provided.  The number of shares subject to the November Bridge Warrant
to be so issued shall be determined on the basis of $0.10 per share (subject to
adjustment for stock splits, stock dividends and the like).  The total number of
shares for which Investor shall initially be able to exercise the November
Bridge Warrant, if issued, shall therefore be 5,000,000 shares as of issuance.

 

 

 

            (b)          Exercise of November Bridge Warrant.  The November
Bridge Warrant, if issued, shall be immediately exercisable upon issuance and
continue to be exercisable for a period of seven (7) years after its issuance
date.  The exercise price of the November Bridge Warrant, if issued, shall be
the lesser of $0.10 per share (subject to adjustment for stock splits, stock
dividends and the like, as provided more fully in the November Bridge Warrant)
and a 35% discount to the average closing price during the twenty trading days
prior to the first closing of the sale of Convertible Preferred Stock; provided,
however that in no event will the exercise price be less than $0.04 per share
(subject to adjustment for stock splits, stock dividends and the like, as
provided more fully in the November Bridge Warrant).  In the event the
Convertible Preferred Stock is approved and authorized, and the terms and
conditions are the same as set forth herein and in the Convertible Preferred
Stock Term Sheet, and Other Investors have purchased in cash (and not by
conversion of debt, exercise of warrants or options, or conversion or exercise
of other securities or instruments) a minimum of $15 million of such Convertible
Preferred Stock, on the terms and conditions set forth herein and in the
Convertible Preferred Stock Term Sheet, then the November Bridge Warrant, if
issued, shall be exercisable solely for such Convertible Preferred Stock
(subject to Section 5 thereof).  However, if, for any reason, such Convertible
Preferred Stock is not approved or authorized, and/or is approved or authorized
on any terms different than any terms set forth herein and in the Convertible
Preferred Stock Term Sheet, and/or if Other Investors have not purchased in cash
(and not by conversion of debt, exercise of warrants or options, or conversion
or exercise of other securities or instruments) a minimum of $15 million of such
Convertible Preferred Stock, on the terms and conditions set forth herein and in
the Convertible Preferred Stock Term Sheet, the November Bridge Warrant, if
issued, shall be exercisable for any Equity Security and/or Debt Security (each
as defined in Section 2.7 hereof) and/or any combination thereof, in each case
that Investor shall designate in Investor’s sole discretion (the securities so
elected being the “Investor Designated Securities”).

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             (c)          No Impairment.  The Company shall not, by amendment of
its Charter or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities, or any other voluntary action,
omission, or agreement, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed by the Company under and/or in
connection with the November Bridge Warrant, if issued, but shall at all times
in good faith use best efforts to assist in carrying out of all the provisions
of and/or relating to such November Bridge Warrant, if issued, and in taking all
such action as may be necessary or appropriate to protect Investor’s rights,
preferences and privileges under and/or in connection with the November Bridge
Warrant, if issued, against impairment.  Investor’s rights, preferences and
privileges granted under and/or in connection with the November Bridge Warrant,
if issued, may not be amended, modified or waived without Investor’s prior
written consent, and the documentation providing for such rights, preferences
and privileges will specifically provide as such.

 

 

 

             (d)          Tax Treatment of November Bridge Warrant and Note. 
The Company and Investor, as a result of arm’s length bargaining, agree that, if
the November Bridge Funding is provided, the fair market value of the Note to be
issued in connection with the November Bridge Funding, if issued apart from the
November Bridge Warrant, is $495,000, and the fair market value of the October
22 Bridge Warrant, if issued apart from such Note, is $5,000.  The Company and
Investor further agree that, if the November Bridge Funding is provided, all tax
filings and records relating to or including this Agreement, the Note to be
issued in connection with the November Bridge Funding and/or the November Bridge
Warrant shall be prepared on the basis of, and consistently reflect, the agreed
fair market values set forth in this Section 2.12(d), and the Company shall
instruct its accountants and other tax-preparation professionals to prepare all
tax filings and returns on the basis of the foregoing.”

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          11.          Section 3.4(b) of the Agreement is hereby amended by:

                         a.          replacing “$8 million” with “$7 million
(or, in the event that the November Bridge Funding is not provided, $7,500,000)”
in the first sentence thereof; and

                         b.          replacing “80,000,000” with “70,000,000
(or, in the event that the November Bridge Funding is not provided, 75,000,000)”
in the third sentence thereof.

          12.          Section 4.6(g) of the Agreement is hereby amended and
restated in its entirety as follows:

“(g)          The Company shall not deviate, during the period covered by such
budgets, more than $10,000 in aggregate from the budget included in the Schedule
of Exceptions in connection with the Subsequent Bridge Funding, the budget
included in the Schedule of Exceptions in connection with the October 22 Bridge
Funding, or the Schedule of Exceptions in connection with the November Bridge
Funding, if issued, nor take any action or make any promise, undertaking or
commitment that would result in the Company incurring or accumulating payables
and/or other financial obligations of any kind, whether current or deferred,
direct or indirect, for purposes other than as set forth in budgets expressly
agreed to by Investor, and/or in any amounts in excess of the amounts set forth
in such agreed budgets, which equal or exceed $10,000 in aggregate, and which
have not been approved in writing in advance by Investor;”

          13.          Section 4.7.15 of the Agreement is hereby amended and
restated in its entirety as follows:

          “4.7.15  Liabilities.  Other than (i) tax liabilities to the State of
Washington in the maximum amount of $492,000, (ii) amounts payable to Cognate
Therapeutics and (iii) future lease payments to Benaroya Capital Co. LLC for the
Company’s premises lease not yet due, the Company’s aggregate accrued,
contingent and/or other liabilities of any nature, either mature or immature, as
of the Amendment Date, do not exceed $400,000, of which (X) $276,000 are
currently due payables (including $204,966 for attorney and auditor fees), (Y)
$65,000 are the aggregate balances of capital leases payable in monthly
installments in the amounts set forth in the budget included in the Schedule of
Exceptions through the first calendar quarter of 2006, decreasing thereafter,
the last of which is fully amortized in May 2007, and (Z) $59,000 are accrued
vacation and sick pay.”

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          14.          The Agreement is hereby amended by adding new Exhibits
A-6 and A-7, immediately following Exhibit A-5 thereto, in the forms attached as
Exhibits A-6 and A-7 hereto.

          15.          The Agreement is hereby amended by adding new Exhibits
K-1 and K-2, immediately following Exhibit J thereto, in the forms attached as
Exhibits K-1 and K-2 hereto.

          16.          The October 22 Bridge Warrant in the form attached hereto
as Exhibit K-1 (and, if issued, the November Bridge Warrant attached hereto as
Exhibit K-2) shall be deemed to be a “Bridge Warrant” and a “Warrant” for all
purposes under the Agreement and any Related Recapitalization Document.  The
Note evidencing the October 22 Bridge Funding in the form attached hereto as
Exhibit A-6 issued on the Amendment Date (and, if issued, the Note evidencing
the November Bridge Funding in the form attached hereto as Exhibit A-7) shall be
deemed to be a “Note” for all purposes under the Agreement and any Related
Recapitalization Document.  Each of the October 22 Bridge Warrant and the Note
evidencing the October 22 Bridge Funding (and, if issued, the November Bridge
Warrant and the Note evidencing the November Bridge Funding) shall be deemed to
be “Related Recapitalization Documents” for all purposes under the Agreement and
all other Related Recapitalization Documents.

          17.          The Agreement is hereby amended by replacing Exhibit B
thereto (the “Convertible Preferred Stock Term Sheet”) with the Amended and
Restated Convertible Preferred Stock Term Sheet in the form attached hereto as
Exhibit B, which shall be deemed the “Convertible Preferred Stock Term Sheet”
for all purposes under this Agreement and all other Related Recapitalization
Documents.

          18.          Except as amended and/or restated hereby, all other terms
and conditions of the Agreement shall be unaffected hereby and remain in full
force and effect.  

          19.          This Amendment (including the Exhibits hereto, which are
an integral part of the Amendment), together with the Agreement (including the
Schedules and Exhibits thereto, which are an integral part of the Agreement) and
the Related Recapitalization Documents, constitute the entire agreement among
the parties hereto and thereto with regard to the subjects hereof and thereof
and supersede all prior agreements and understandings relating to the subject
matter hereof and thereof.

          20.          This Amendment shall be governed by and construed under
the laws of the State of Delaware, without regard to its conflicts of law
provisions.

          21.          This Amendment may be executed in one or more
counterparts, each of which will be deemed an original but all of which together
shall constitute one and the same agreement.

          22.          This Amendment shall take effect immediately upon
execution by the Company and Investor.

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EXECUTION VERSION

          In Witness Whereof, the parties hereto have executed this Amendment
No. 1 to Amended and Restated Recapitalization Agreement as of the Amendment
Date above written.

 

 

 

 

Northwest Biotherapeutics, Inc.

 

By:

/s/ Alton Boynton

 

 

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Name:  Alton L. Boynton

 

Title:  President

 

 

 

 

 

 

 

Toucan Capital Fund II, LP

 

By:

/s/ Linda Powers

 

 

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Name:  Linda F. Powers

 

Title:  Managing Director

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Exhibit A-6

Form of  $500,000 Loan Agreement, Security Agreement and 10% Convertible,
Secured Promissory Note Dated October 22, 2004

(Filed herewith as Exhibit 10.2)

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Exhibit A-7

Form of  $500,000 Loan Agreement, Security Agreement and 10% Convertible,
Secured Promissory Note to Evidence November Bridge Funding (If Provided)

NORTHWEST BIOTHERAPEUTICS, INC.
LOAN AGREEMENT, SECURITY AGREEMENT and
10% CONVERTIBLE, SECURED PROMISSORY NOTE

$

, 2004

SECTION 1.     GENERAL.

For value received, Northwest Biotherapeutics, Inc., a Delaware corporation (the
“Maker” or the “Company”), hereby promises to pay to the order of Toucan Capital
Fund II, L.P. or its assigns (collectively, the “Holder”), the principal amount
of ______________ Dollars ($) upon written demand by Holder made at any time on
or after the first anniversary of execution of this Loan Agreement, Security
Agreement and 10% Convertible, Secured Promissory Note (this “Note” or this
“Agreement”), or such earlier date as may be applicable under Sections 3 and 4
hereof (the “Maturity Date”).   Maker shall pay interest on the unpaid principal
amount of this Note, accruing from and after the date hereof at the rate of ten
percent (10%) per annum, compounding annually (computed on the basis of a
365-day year and the actual number of days elapsed) (the “Interest Rate”). 
Accrued interest shall be payable upon the payment of the principal of this
Note.  The principal of, and interest on, this Note shall be payable in lawful
currency of the United States of America by wire transfer in immediately
available funds to the account of Holder, as provided in writing to Maker by
Holder.  All payments shall be applied first to fees, costs and charges relating
to this Note (including, without limitation, any costs of collection), then to
accrued and unpaid interest, and thereafter to principal.  This loan is made by
Holder to Maker in anticipation of an equity financing.  Capitalized terms used
but not defined herein shall have the meanings ascribed to them in the
Recapitalization Agreement.

SECTION 2.     PRE-PAYMENT.

This Note may be pre-paid in whole or in part prior to the Maturity Date;
provided Maker provides Holder with 30 days prior written notice thereof, and
provided further that Holder shall have the option to convert this note in
accordance with Section 12 hereof by notifying Maker of Holder’s election on or
before the expiration of such thirty (30) day notice period.  In the event of
prepayment, Maker shall pay a penalty in the amount of 1% of the principal and
accrued interest then outstanding under this Note, unless a greater or lesser
penalty is established or approved by the U.S. Small Business Administration
(“SBA”).  Conversion of this Note shall not be deemed a prepayment.

A-1

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SECTION 3.     DEFAULT INTEREST.

Upon the occurrence of an Event of Default (as hereinafter defined), the unpaid
principal amount and accrued and unpaid interest shall bear interest payable on
demand at the lesser of (i) fourteen percent (14%) per annum, (ii) the maximum
rate permitted under applicable rules and regulations of the SBA, or (iii) the
maximum rate allowed by law  (the “Default Interest”). Such interest shall
accrue, commencing upon the occurrence of an Event of Default and continuing
until such Event of Default is cured or waived.

SECTION 4.     DEFAULTS.

          4.1             Definitions.  Each occurrence of any of the following
events shall constitute an “Event of Default”:

                             (a)          if a default occurs in the payment of
any principal of, interest on, or other obligation with respect to, this Note,
whether at the due date thereof or upon acceleration thereof, and such default
remains uncured for five (5) business days after written notice thereof from
Holder;

                             (b)          if any representation or warranty of
Maker made herein shall have been false or misleading in any material respect,
or shall have contained any material omission, as of the date hereof;

                             (c)          if a default occurs in the due
observance or performance of any covenant or agreement on the part of Maker to
be observed or performed pursuant to the terms of this Note and such default
remains uncured for five (5) business days after written notice thereof from
Holder;

                             (d)          if a default occurs in Maker’s
performance of any of the terms and conditions of that certain Amended and
Restated Recapitalization Agreement, dated as of July 30, 2004 and as amended on
October 22, 2004 (the “Recapitalization Agreement”) or any Related
Recapitalization Document;

                             (e)          if Maker shall (i) discontinue its
business, (ii) apply for or consent to the appointment of a receiver, trustee,
custodian or liquidator of Maker or any of its property, (iii) make a general
assignment for the benefit of creditors, or (iv) file a voluntary petition in
bankruptcy, or a petition or an answer seeking reorganization or an arrangement
with creditors, or take advantage of any bankruptcy, reorganization, insolvency,
readjustment of debt, dissolution or liquidation laws or statutes, or file an
answer admitting the material allegations of a petition filed against it in any
proceeding under any such law, provided, however, that insolvency of Maker shall
not constitute a default, or the basis for a default, during the Bridge Period;

                              (f)          if there shall be filed against Maker
an involuntary petition seeking reorganization of Maker or the appointment of a
receiver, trustee, custodian or liquidator of Maker or a substantial part of its
assets, or an involuntary petition under any bankruptcy, reorganization or
insolvency law of any jurisdiction, whether now or hereafter in effect (any of
the foregoing petitions being hereinafter referred to as an “Involuntary
Petition”) and such Involuntary Petition shall not have been dismissed within
ninety (90) days after it was filed, provided, however, that insolvency of Maker
shall not constitute a default, or the basis for a default, during the Bridge
Period;

A-2

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                             (g)          if final judgment(s) for the payment
of money in excess of an aggregate of $25,000 (excluding any portion thereof
that an insurance company of nationally recognized standing and creditworthiness
has agreed to pay) shall be rendered against Maker and the same shall remain
undischarged for a period of thirty (30) days;

                             (h)          if there occurs any event that may
have a material adverse effect on the business, affairs, prospects, operations,
properties, assets, liabilities, structure or condition, financial or otherwise,
of the Company (as such business is presently currently conducted and/or as it
is proposed to be conducted), or on any material assets or any Intellectual
Property or other Collateral developed, owned, controlled, licensed, possessed,
or used by Maker, or to which Maker has any right, option, entitlement or claim,
provided, however, that ongoing weakening of Maker’s financial condition due to
ongoing expenditures and Maker’s failure to obtain equity financing shall not
constitute a default, or the basis for a default, during the Bridge Period; or

                             (i)          if Maker deviates, during the period
covered by such budget, more than $10,000 in aggregate from the budget included
in the Disclosure Schedule (as defined herein), or takes any action or makes any
promise, undertaking or commitment that would result in Maker incurring or
accumulating payables and/or other financial obligations of any kind, whether
current or deferred, direct or indirect, for purposes other than as set forth in
budgets expressly agreed to by Holder, and/or in any amounts in excess of the
amounts set forth in such agreed budgets, which equal or exceed $10,000 in
aggregate, and which have not been approved in writing in advance by Holder.

          4.2              Cross-Default:  Maker acknowledges that the financing
contemplated by this Note is part of an integrated Recapitalization Plan, as set
forth in the Recapitalization Agreement and the Related Recapitalization
Documents.  Maker further acknowledges and agrees that this Note is subject to
all terms and conditions set forth in the Recapitalization Agreement and the
Related Recapitalization Documents, and that the Recapitalization Agreement and
the Related Recapitalization Documents are subject to all of the terms and
conditions of this Note.  Maker agrees that any default by Maker under any
provision of this Note, the Recapitalization Agreement or any of the Related
Recapitalization Documents will constitute a default under each other Related
Recapitalization Document and the Recapitalization Agreement.

          4.3              Remedies on Default.

                             (a)          Upon each and every such Event of
Default and at any time thereafter during the continuance of such Event of
Default: (i) any and all indebtedness of Maker to Holder under this Note or
otherwise shall immediately become due and payable, both as to principal and
interest (including any deferred interest and any accrued and unpaid interest
and any Default Interest); and (ii) Holder may exercise all the rights of a
creditor under applicable state and/or federal law.

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                             (b)          In case any one or more Events of
Default shall occur and be continuing, and acceleration of this Note or any
other indebtedness of Maker to Holder shall have occurred, Holder may, inter
alia, proceed to protect and enforce its rights by an action at law, suit in
equity and/or other appropriate proceeding, whether for the specific performance
of any agreement contained in this Note, or for an injunction against a
violation of any of the terms hereof or thereof or in furtherance of the
exercise of any power granted hereby or thereby or by law.  No right conferred
upon Holder by this Note shall be exclusive of any other right referred to
herein or therein or now or hereafter available at law, in equity, by statute or
otherwise.

SECTION 5.       DEFENSES.

          5.1              No Offsets.  The obligations of Maker under this Note
shall not be subject to reduction, limitation, impairment, termination, defense,
set-off, counterclaim or recoupment for any reason. 

          5.2              Usury Limitations.  It is the intention of the
parties hereto to comply with all applicable usury laws; accordingly, it is
agreed that notwithstanding any provisions to the contrary in this Note or any
other agreements or instruments between them, in no event shall such agreements
or instruments require the payment or permit the collection of interest (which
term, for purposes hereof, shall include any amount which, under applicable law,
is deemed to be interest, whether or not such amount is characterized by the
parties as interest) in excess of the maximum amount permitted by such laws.  If
any excess of interest is unintentionally contracted for, charged or received
under the Note or under the terms of any other agreement or instrument between
the parties, the effective rate of interest shall be automatically reduced to
the maximum lawful rate of interest allowed under the applicable usury laws as
now or hereafter construed by the courts having jurisdiction thereof. 

SECTION 6.     REPLACEMENT OF NOTE.

          Upon receipt by Maker of reasonable evidence of the loss, theft,
destruction, or mutilation of this Note, Maker will deliver a new Note
containing the same terms and conditions in lieu of this Note.  Any Note
delivered in accordance with the provisions of this Section 6 shall be dated as
of the date of this Note.

SECTION 7.     EXTENSION OF MATURITY.

          Should the principal of or interest on this Note become due and
payable on other than a business day, the due date thereof shall be extended to
the next succeeding business day, and, in the case of principal, interest shall
be payable thereon at the rate per annum herein specified during such
extension.  For the purposes of the preceding sentence, a business day shall be
any day that is not a Saturday, Sunday, or legal holiday in the State of
Delaware. 

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SECTION 8.     ATTORNEYS’ FEES AND COLLECTION FEES. 

          Should the indebtedness evidenced by this Note or any part hereof be
collected at law or in equity or in bankruptcy, receivership or other court
proceedings, arbitration or mediation, or any settlement of any of the
foregoing, Maker agrees to pay, in addition to principal and interest due and
payable hereon, all costs of collection, including, without limitation,
reasonable attorneys’ fees and expenses, incurred by Holder in collecting or
enforcing this Note. 

SECTION 9.     WAIVERS; CONSENT TO JURISDICTION.

          9.1            Waivers by Maker.  Maker hereby waives presentment,
demand for payment, notice of dishonor, notice of protest and all other notices
or demands in connection with the delivery, acceptance, performance or default
of this Note. 

          9.2            Actions of Holder not a Waiver.  No delay by Holder in
exercising any power or right hereunder shall operate as a waiver of any power
or right, nor shall any single or partial exercise of any power or right
preclude other or further exercise thereof, or the exercise of any other power
or right hereunder or otherwise; and no waiver or modification of the terms
hereof shall be valid unless set forth in writing by Holder and then only to the
extent set forth therein. 

          9.3            Consent to Jurisdiction.  Maker hereby irrevocably
submits to the jurisdiction of any state or federal court sitting in the State
of Delaware over any suit, action, or proceeding arising out of or relating to
this Note or any other agreements or instruments with respect to Holder.  Maker
hereby irrevocably waives, to the fullest extent permitted by law, any objection
that Maker may now or hereafter have to the laying of venue of any such suit,
action, or proceeding brought in any such court and any claim that any such
suit, action, or proceeding brought in any such court has been brought in an
inconvenient forum.  Final judgment in any such suit, action, or proceeding
brought in any such court shall be conclusive and binding upon Maker and may be
enforced in any court in which Maker is subject to jurisdiction by a suit upon
such judgment, provided that service of process is effected upon Maker as
provided in this Note or as otherwise permitted by applicable law.

          9.4            Waiver of Jury Trial.  MAKER WAIVES ITS RIGHT TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF THIS AGREEMENT OR ANY
DEALINGS BETWEEN MAKER AND HOLDER RELATING TO THE SUBJECT MATTER OF THIS NOTE. 
THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL
DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF
THIS NOTE, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, AND ALL
OTHER COMMON LAW AND STATUTORY CLAIMS.  THIS WAIVER IS IRREVOCABLE, MEANING THAT
IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY
TO ANY SUBSEQUENT AMENDMENTS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR
TO ANY OTHER DOCUMENT OR AGREEMENT RELATING TO THE LOAN.

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          9.5            Service of Process.  Maker hereby consents to process
being served in any suit, action, or proceeding instituted in connection with
this Note by delivery of a copy thereof by certified mail, postage prepaid,
return receipt requested, to Maker, and/or by delivery of a copy thereof to a
registered agent of Maker.  Refusal to accept delivery, and/or avoidance of
delivery, shall be deemed to constitute delivery.  Maker irrevocably agrees that
service in accordance with this Section 9.5 shall be deemed in every respect
effective service of process upon Maker in any such suit, action or proceeding,
and shall, to the fullest extent permitted by law, be taken and held to be valid
personal service upon Maker. Nothing in this Section 9.5 shall affect the right
of Holder to serve process in any manner otherwise permitted by law or limit the
right of Holder otherwise to bring proceedings against Maker in the courts of
any jurisdiction or jurisdictions.

SECTION 10.    COVENANTS.

          10.1            Affirmative Covenants.  So long as this Note shall
remain outstanding:

                             (a)          Office.  Maker shall maintain its
principal office, and the majority of its employees, assets and operations, in
the United States.

                             (b)          Use of Proceeds.  Maker will use the
proceeds from this Note only for the following purposes:

(i)          General operating expenses, expenses for the development and
protection of its intellectual property, and other usual and customary
commercial and business expenses incurred in pursuing its business plan and
strategy, on and after the effective date hereof; 

(ii)         Audit expenses and regular and special SEC filing expenses, for
audits and filings occurring on or after the effective date hereof, including,
without limitation, SEC filings relating to solicitation of any shareholder
consents to the recapitalization of Maker; and

(iii)        Expenses of accountants, attorneys, consultants and other
professionals (including, without limitation, the expenses of Investor described
in Section 4.11 of the Recapitalization Agreement) relating to the
recapitalization of Maker,

in each case only to the extent that both the nature and the amount of such
expenses are in conformity with the budget approved in advance in writing by
Holder and included in the Disclosure Schedule.  Maker will not use the proceeds
from this Note for any other purpose.  Without limiting the generality of the
foregoing, none of the proceeds will be used, without prior written agreement by
the Holder, (i) to purchase or carry (or refinance any borrowing, the proceeds
of which were used to purchase or carry) any “security” within the meaning of
the Securities Act of 1933, as amended (the “Securities Act”), (ii) to repay any
indebtedness or discharge any obligation to an person or entity, other than
trade payables incurred in the ordinary course of business on or after the
effective date hereof, and consistent with Maker’s operating plans and budgets
fully disclosed to the Holder prior to the Closing, or (iii) to engage in
business activities which would cause a violation of 13 CFR 107.720.  This
latter limitation prohibits, without limitation, the use of proceeds: (i)
directly or indirectly, for providing funds to others; (ii) for the purchase or
discounting of debt obligations; (iii) for factoring or long-term leasing of
equipment with no provision for maintenance or repair; (iv) for engaging in real
estate transactions such that Maker could reasonably be classified under Major
Group 65 (Real Estate) of the SIC Manual; (v) for business activities wherein
the assets of the business of Maker (the “Business”) will be reduced or
consumed, generally without replacement, as the life of the Business progresses,
and the nature of the Business does not require that a stream of cash payments
be made to the financing sources of the Business, on a basis associated with the
continuing sale of assets (examples of such businesses would include real estate
development projects, the financing and production of motion pictures, and oil
and gas well exploration, development and production); (vi) for a foreign
operation; (vii) to provide capital to a corporation licensed or sub-licensed
under the Small Business Investment Act, (viii) to acquire farm land, (ix) to
fund production of a single item or defined limited number of items generally
over a defined production period, such production to constitute the majority, of
the activities of Maker (examples include electric generating plants), or (x)
for any purpose contrary to the public interest (including, but not limited to,
activities which are in violation of law) or inconsistent with free competitive
enterprise, in each case, within the meaning of Section 107.720 of Title 13 of
the Code of Federal Regulations.

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                             (c)          Seniority.  Except as otherwise
expressly provided, and except for security interests and liens described in
items 2, 3 and 4 of Schedule 14.11 of the Disclosure Schedule attached hereto as
Exhibit B (the “Disclosure Schedule”), the indebtedness evidenced by this Note: 
(i) shall be senior in all respects to all other indebtedness or obligations of
Maker of any kind, direct or indirect, contingent or otherwise, other than
obligations of Maker owed directly to the state or federal government, and other
than any other indebtedness or obligations of Maker to Holder;  (ii) shall not
be made subordinate or subject in right of payment to the prior payment of any
other indebtedness or obligation of any kind, direct or indirect, contingent or
otherwise, other than obligations of Maker owed directly to the state or federal
government, and other than any other indebtedness or obligations of Maker to
Holder.

                             (d)          No Conflicting Agreements.  Maker
shall not enter into any agreement that would materially impair, interfere or
conflict with Maker’s obligations hereunder.  Without Holder’s prior written
consent, Maker shall not permit the inclusion in any material contract to which
it becomes a party of any provisions that could or might in any way result in
the creation of a security interest in any assets of Maker, including without
limitation any Collateral (as defined in Exhibit A hereto).

                             (e)          Disclosure of Material Adverse
Events.  Within three (3) business days of Maker obtaining knowledge thereof,
Maker will notify Holder in writing of any event that may have a material
adverse effect on the business, affairs, prospects, operations, properties,
assets, liabilities, structure or condition, financial or otherwise, of the
Company (as such business is presently conducted and/or as it is proposed to be
conducted), or on any material assets or any Intellectual Property or other
Collateral developed, owned, controlled, licensed, possessed, or used by Maker,
or to which Maker has any right, option, entitlement or claim.  Operating
expenditures in the ordinary course of business and in accordance with operating
budgets approved by Maker’s Board of Directors and fully disclosed to Holder
prior to the effective date hereof shall not be deemed to be material adverse
events solely because they weaken Maker’s financial condition in the absence of
new equity financing of Maker.

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                             (f)          Financial Information.  So long as any
principal and/or interest under this Note shall remain outstanding:

 

                                 (i)          Promptly after the end of each
fiscal year (but in any event prior to February 28 of each year) and at such
other times as Holder may reasonably request, Maker shall deliver to Holder a
written assessment, in form and substance satisfactory to Holder, of the
economic impact of such Holder’s financing hereunder, specifying the full-time
equivalent jobs created or retained in connection with such investment, and the
impact of the financing on Maker’s business in terms of revenues and profits and
on taxes paid by Maker and its employees.

 

 

 

                                (ii)         Maker shall provide on a timely
basis to Holder all financial information requested from time to time by Holder,
including without limitation its quarterly and annual balance sheet and income
statement.  Such financial information shall be certified by a member of Maker’s
senior management.  Financial information required shall also include such
information as is necessary for Holder to file form 468 with the SBA.

 

 

 

                                (iii)        In addition to the information
specified in Section 10.1(f)(i) and (ii) above, upon request, Maker agrees
promptly to provide Holder with sufficient additional information to permit
Holder to comply with (i) its obligations under the Small Business Investment
Act of 1958, as amended, and the regulations promulgated thereunder and related
thereto and (ii) provide any other information reasonably requested or required
by any governmental agency asserting jurisdiction over Holder. 

 

 

 

                                (iv)         Maker shall report its cash
position and all expenditures and agreements, commitments or undertakings for
expenditures to Holder on a bi-weekly basis.

                             (g)          Access.  So long as any principal
and/or interest under this Note shall remain outstanding, Maker shall permit
Holder and its agents or representatives to visit and inspect Maker’s
properties, to examine its books of account and records and to discuss Maker’s
affairs, finances and accounts with its officers, all at such times during
normal business hours as reasonably may be requested by Holder.  Maker shall
allow SBA Examiners access to its books and records, as reasonably required by
such Examiners in connection with their annual audits of Holder or for any other
legitimate purposes.

                             (h)          SBA Compliance.  Maker acknowledges
that Holder is a licensed Small Business Investment Corporation and thereby a
participant in the SBIC program of the U. S. Small Business Administration
(“SBA”), and as such is subject to the rules, regulations, guidance and
direction of the SBA on matters affecting its business and investment practices,
and that such rules and regulations affect the business activities and practices
of the companies in which Holder makes investments.  Maker shall promptly and
fully cooperate with Holder to facilitate both Maker’s and Holder’s compliance
with all such SBA rules, regulations, guidance and direction.

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                             (i)          Business Activity.  As long as this
Note shall remain outstanding, Maker shall make no change in its business
activity that would make it or any of its business activities non-compliant with
SBA regulations and guidelines.

          10.2            Negative Covenants.  So long as this Note shall remain
outstanding:

                             (a)          Indebtedness.  Maker shall not incur
additional indebtedness, beyond the indebtedness already existing as of the date
hereof, for borrowed money in excess of $10,000, in aggregate. 

                             (b)          Liens.  Maker shall not grant to any
person or entity a security interest, lien, license, or other encumbrance of any
kind, direct or indirect, contingent or otherwise, in, to or upon any assets of
Maker, including, without limitation, any intellectual property of any kind, as
defined in Exhibit A hereto (respectively, the “Intellectual Property” and the
“Collateral”).

                             (c)          Sale or License of Assets.  Maker
shall not sell, lease, transfer, assign or otherwise dispose of or encumber
(including, without limitation through licensing or partnering arrangements) or
abandon, conceal, injure or destroy any material assets (whether tangible or
intangible) of Maker (including, without limitation, any Collateral (as defined
in Section 11), other than with the prior written approval of Holder and in the
ordinary course of business.

                             (d)          Issuance of Capital Stock.  Except for
(a) any transaction pursuant to an Unsolicited Proposal that Maker accepts in
accordance with the fiduciary exception provided in Section 3.2 of the
Recapitalization Agreement or (b) shares of capital stock issuable upon exercise
or conversion of warrants or convertible securities outstanding prior to
February 1, 2004, Maker shall not without Holder’s prior written approval: (i)
issue any shares of capital stock or other securities, or any instruments
exercisable for or convertible into capital stock or other securities, or (ii)
make any promises, commitments, undertakings, agreements or letters of intent
for any of the issuances described in (i) hereof.

                             (e)          Distributions and Redemptions.  Maker
shall not declare or pay any dividends or make any distributions of cash,
property or securities of Maker with respect to any shares of its common stock,
preferred stock or any other class or series of its stock, or, directly or
indirectly (except for repurchases of common stock by Maker in accordance with
the terms of employee benefit plans or written agreement between Maker and any
of its employees approved by the Board of Directors of Maker prior to February
1, 2004), redeem, purchase, or otherwise acquire for any consideration any
shares of its common stock or any other class of its stock. 

                             (f)          Hiring.  Maker shall not hire, engage,
retain, or agree to hire, engage or retain, any Personnel, except with Holder’s
express prior written approval, on a case by case basis.

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                             (g)          Severance.  Maker shall not enter
into, increase, expand, extend, renew or reinstate any severance, separation,
retention, change of control or similar agreement with any Personnel, or agree,
promise, commit or undertake to do so, except with Holder’s prior written
approval, on a case by case basis.

                             (h)          Facilities.  Maker shall not purchase,
lease, hire, rent or otherwise acquire directly or indirectly any rights in or
to any asset or facility outside of the ordinary course of business in an amount
in excess of $10,000, in aggregate, or agree, promise or commit to do so, except
in accordance with the Maker’s budget that has been approved by the Maker’s
board of directors and the Investor.

                             (i)          Expenses.  Maker shall make no
expenditures in excess of $10,000 in aggregate other than in accordance with a
budget pre-approved by Holder. Maker shall not deviate, during the period
covered by such budget, more than $10,000 in aggregate from the budget included
in the Disclosure Schedule, nor take any action or make any promise, undertaking
or commitment that would result in Maker incurring or accumulating payables
and/or other financial obligations of any kind, whether current or deferred,
direct or indirect, for purposes other than as set forth in budgets expressly
agreed to by Holder, and/or in any amounts in excess of the amounts set forth in
such agreed budgets, which equal or exceed $10,000 in aggregate, and which have
not been approved in writing in advance by Holder.

                             (j)          Other Limitations.

                                           (i)          Maker shall not change
the nature of its business activity in a manner that would cause a violation of
13 C.F.R. Section 107.720 and/or Section 107.760(b) (including, without
limitation, by undertaking real estate, film production or oil and gas
exploration activities).  In the event that Maker changes the nature of its
business activity such that such change would render Maker ineligible for
financing pursuant to applicable SBA rules and regulations, Maker agrees to use
its best efforts to facilitate a transfer or redemption of any securities then
held by Holder.

                                           (ii)         Maker will at all times
comply with the non-discrimination requirements of 13 C.F.R. Parts 112, 113 and
117.

                                           (iii)        For a period of at least
one year after the date of this Note, Maker will locate no more than 49 percent
of the employees or tangible assets of Maker outside the United States.

          10.3            Additional Covenant.  Immediately after the effective
date of this Note, Maker shall recall all units of Maker’s Tangential Flow
Filtration (“TFF”) devices, and all specifications, diagrams, description or
other information relating to such TFF devices, or any similar device, from all
third parties who may currently have any of the foregoing.  Maker will take all
necessary steps to ensure that such recall is effective as quickly as possible,
and in no event later than fifteen (15) days after the effective date hereof.  
Until the later of the expiration of the Standstill Period (as defined in
Section 13 below) or the date on which this Note has been discharged in full,
Maker shall not sell, license, loan or otherwise in any way transfer or
distribute Maker’s Tangential Flow Filtration (“TFF”) devices or any similar
device, or any specifications, diagrams, description or other information about
the TFF devices, to any third party, or commit or promise or enter into any
understanding of any kind, direct or indirect, contingent or otherwise, to do
any of the foregoing in regard to Maker’s TFF devices or any similar device,
without the prior written consent of Holder in each case.

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SECTION 11.     SECURITY INTEREST.

          11.1            First Priority in All Collateral.  To secure its
obligations under this Note whether at stated maturity, by acceleration or
otherwise, Maker hereby grants and pledges to Holder a first priority senior
security interest in all of Maker’s right, title and interest in, to and under
all of Maker’s tangible and intangible property, whether now owned, licensed or
held or hereafter acquired, licensed, developed, held or arising, as described
in Exhibit A hereto (the “Collateral”), and all proceeds of any kind from any
disposition of any such Collateral. Such security interest shall be senior to
any security interest in the Collateral granted the holders of  the Management
Notes pursuant to any subordination agreement between Holder, the holders of the
Management Notes and Maker, and shall be senior to any other security interest
of any kind, direct or indirect, contingent or otherwise, in the Collateral
except for the security interests and liens described in items 2, 3 and 4 of
Schedule 14.11 of the Disclosure Schedule (only to the amounts set forth on such
schedule) and any other indebtedness or obligations of Maker to Holder.  If
certificates of title are now, or hereafter become, issued or outstanding with
respect to any of the Collateral, Maker promptly shall cause the senior security
interest of Holder to be properly noted thereon.  Maker agrees that the security
interest herein granted has attached and shall continue until Maker’s
obligations under this Note have been paid, performed and indefeasibly
discharged in full.

          11.2            Rights Cumulative.  The rights and remedies of Holder
with respect to the senior security interest granted hereby are in addition to
those which are now or may hereafter be available to Holder as a matter of law
or equity.  Each right, power and remedy of Holder provided for herein, or now
or hereafter existing at law or in equity, shall be cumulative and concurrent
and shall be in addition to every right, power and remedy provided for herein,
and the exercise by Holder of any one or more of the rights, powers and/or
remedies provided for in this Note, or now or hereafter existing at law or in
equity, shall not preclude the simultaneous or later exercise by any person,
including a grantee, of any or all other rights, powers and/or remedies.

          11.3            Documentation of Security Interest.  Maker shall
execute, deliver, file, amend, and re-file any financing statements, instruments
(including without limitation stock certificates), continuation statements,
assignments, or other security agreements that Holder may require from time to
time to confirm the liens arising out of this Note with respect to the
Collateral.  Maker agrees to pay all reasonable costs associated with filing
and/or re-filing of any financing statements, continuation statements or other
security agreements required to perfect and to continue perfection of Holder’s
security interest in the Collateral and all reasonable costs required to
evidence the first priority of the security interest, including, without
limitation, reasonable attorneys’ fees.  Maker authorizes Holder to file
financing statements under the UCC with respect to the security interest granted
hereby and agrees, upon request of Holder, to promptly and duly execute and
deliver any and all such further instruments and documents, and to take such
further action, as Holder may reasonably deem necessary or desirable to obtain
the full benefits of this grant of security interest.

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          11.4            No Conflicting Agreements.  Maker shall not enter into
any agreement on or after the effective date of this Note that would materially
impair or conflict with Maker’s obligations hereunder without Holder’s prior
written consent. Without Holder’s prior written consent, Maker shall not permit
the inclusion in any material contract to which it becomes a party on or after
the effective date of this Note, of any provisions that could or might in any
way prevent the creation, perfection and maintenance of a first priority
security interest in Maker’s rights and interest in any property included within
the definition of the Collateral acquired under such contracts. Maker represents
and warrants that, as of the effective date of this Note, there are no existing
agreements or undertakings that would materially impair or conflict with Maker’s
obligations hereunder or that could or might in any way prevent the creation,
perfection and maintenance of a first priority security interest in Maker’s
rights and interest in any property included within the definition of the
Collateral acquired under such contracts; except for existing equipment leases
described in item 2 of Schedule 14.11 and the statutory liens described in items
3 and 4 of the Disclosure Schedule.

          11.5            Notification Requirements.  Within two (2) business
days of  any officer, director or employee of Maker obtaining knowledge thereof,
Maker will promptly notify Holder in writing of any event that materially
adversely affects the value of any material Collateral, the ability of Maker to
dispose of any material Collateral, or the rights and remedies of Holder in
relation thereto, including the levy of any legal process against any of the
Collateral.

          11.6            Foreclosure Remedy.  Notwithstanding anything to the
contrary herein or in the Recapitalization Agreement or any other agreement or
document, in the event that Maker is unable to pay and discharge this Note in
full on the Maturity Date, subject to the compliance with the requirements of
the Delaware Uniform Commercial Code, nothing herein or in the Recapitalization
Agreement or any other agreement or document shall be deemed to preclude, limit
or restrict Holder from requiring the delivery of some or all of the Collateral
in full or partial satisfaction of Maker’s obligation under the Note. 
Alternatively, Holder may, in its sole discretion, elect to cause some or all of
the Collateral to be sold, and the sale proceeds to be used to pay and discharge
the Note in full. 

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SECTION 12.     CONVERSION.

          12.1            Holder’s Election.  Notwithstanding any other
provision of this Note or any applicable agreement or document, until, and/or in
the absence of, purchases for cash of a minimum of $15 million of Convertible
Preferred Stock, by Other Investors (as defined in the Recapitalization
Agreement), on the terms and conditions set forth in the Recapitalization
Agreement and the Convertible Preferred Stock Term Sheet, Holder may, in its
sole discretion, elect to convert any or all of the principal and/or interest
due under the Note into any Equity Security and/or Debt Security (each as
defined below) and/or any combination thereof, in each case that Holder shall
designate in Holder’s sole discretion (the securities so elected being the
“Holder Designated Securities”).  Holder may make such determinations from time
to time and at any time before this Note has been discharged in full, and, as
applicable, at any time on or before the expiration of the thirty (30) day
notice period required under this Note in the event the Maker wishes to prepay
this Note.  For purposes hereof, (i) the term “Equity Security” means any class
or series of equity security, or any combination of classes and/or series of
equity securities, of the Maker that have been authorized under the Maker’s
certificate of incorporation, as amended and/or restated, including by any
certificate of designation (the “Charter”), or any new class or series of equity
security, or any combination of new and/or existing classes and/or series of
equity securities, of the Maker for which the Maker has undertaken any
agreement, obligation, promise, commitment or letter of intent to obtain such
authorization and (ii) the term “Debt Security” means any evidence of
indebtedness of the Maker that the Maker has authorized, created or incurred, or
that the Maker has undertaken any agreement, obligation, promise, commitment or
letter of intent to authorize, create or incur.

          12.2            Automatic Conversion.  The principal amount of, and
accrued and unpaid interest on, this Note shall automatically convert into
Convertible Preferred Stock, upon the terms and conditions set forth herein and
in the Recapitalization Agreement, only in the event, and upon the closing of,
the purchase in cash (and not by conversion of debt, exercise of warrants or
options, or conversion or exercise of other securities or instruments), on the
terms and conditions set forth in the Convertible Preferred Stock Term Sheet, by
Other Investors, as defined in the Convertible Preferred Stock Term Sheet, of a
minimum of $15 million of Convertible Preferred Stock.  

          12.3            Information for Holder’s Election.  Maker shall
provide to Holder, within two (2) business days after notice of each request by
Holder, all information reasonably requested by Holder in connection with any
Equity Securities and/or Debt Securities, to enable Holder to make decisions
regarding one or more conversions.  In the event that Maker seeks to prepay this
Note, Maker shall deliver to Holder, simultaneously and together with the notice
required under Section 2 of this Note of Maker’s interest in prepaying the Note,
a summary of all material information, terms and conditions relating to all
Equity Securities and Debt Securities (including any “side” letters or
agreements or separate agreements).

          12.4            Conversion Price.  The conversion price for any
conversion pursuant to Section 12.2 shall be the lowest nominal or effective
price per share paid by the Other Investors who acquire such Convertible
Preferred Stock (with the exception of shares issuable upon exercise of the
Initial Bridge Warrants).  The conversion price for any conversion into any
equity or debt security pursuant to Section 12.1 shall be the lowest of (i) the
lowest nominal or effective price per share paid by any investor at any time on
or after the date one year prior to the Effective Date (with the exception of
(x) purchases of up to 35,000 shares of Common Stock pursuant to certain options
to purchase, at a purchase price of $0.0001, that were outstanding on the
Effective Date and held by members of the Board of Directors, as set forth in
Schedule 2.7(d) to the Recapitalization Agreement, and (y) shares issuable upon
the exercise of the Initial Bridge Warrants, each of which shall be excluded
from consideration under this section), (ii) the lowest nominal or effective
price at which any investor is entitled to acquire shares (including, without
limitation, through purchase, exchange, conversion or exercise) pursuant to any
other security, instrument, or promise, undertaking, commitment, agreement or
letter of intent of the Maker outstanding on or after the Effective Date or
granted, issued, extended or otherwise made available by the Maker at any time
on or after the date one year prior to the Effective Date (regardless of whether
currently exercisable or convertible) (with the exception of (x) certain options
to purchase up to 35,000 shares of Common Stock at a purchase price of $0.0001
that were outstanding on the Effective Date and held by members of the Board of
Directors as set forth in Schedule 2.7(d) to the Recapitalization Agreement, and
(y) the Initial Bridge Warrants, each of which shall be excluded from
consideration under this section); and (iii) the lesser of $0.10 per share or
35% discount to the average closing price per share of the Common Stock during
any twenty consecutive trading days (beginning with the twenty consecutive
trading days prior to the Effective Date); provided, however, that in no event
shall the price per share calculated pursuant to this clause (iii) be less than
$.04 per share.  The calculation required by clause (ii) hereof shall initially
be based upon Schedule 2.7(d) to the Recapitalization Agreement.  All other
rights, preferences, privileges, terms and conditions received by Holder in
connection with any conversion and/or any securities issued by the Maker to
Holder upon conversion, shall be no less favorable to Holder than the rights,
preferences, privileges, terms and conditions any other investor in the Maker
has received or is entitled to receive with respect to the security into which
Holder is converting pursuant to any other security, instrument, promise,
undertaking, commitment, agreement or letter of intent of the Maker, whether or
not such rights, preferences, privileges, terms and conditions for any other
investor are incorporated into the agreements or documents relating to any
conversion or any issuance of the security or other instrument to that investor
or are provided separately, at any time on or after one year prior to the
Effective Date.  In regard to each conversion hereunder, the Maker hereby agrees
to take and/or arrange for all necessary corporate and related action to enable
the execution of each such conversion elected by Holder.

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          12.5            No Impairment.  Maker shall not, by amendment of its
Charter or through a reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities, or any other voluntary action,
omission or agreement, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed by Maker under and/or in connection
with this Note, but shall at all times in good faith use best efforts to assist
in carrying out of all the provisions of and/or relating to this Note and in
taking all such action as may be necessary or appropriate to protect Holder’s
rights, preferences and privileges under and/or in connection with the Note
against impairment.  Holder’s rights, preferences and privileges granted under
and/or in connection with any Holder Designated Securities may not be amended,
modified or waived without the Holder’s prior written consent, and the
documentation providing for such rights, preferences and privileges will
specifically provide as such.

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SECTION 13.     STANDSTILL, EXCLUSIVITY AND CONFIDENTIALITY.

During the Bridge Period and the Equity Financing Period, as defined in the
Recapitalization Agreement and in the Convertible Preferred Stock Term Sheet,
but excluding the periods from February 18, 2004 through February 29, 2004 and
from March 16, 2004 through the Effective Date (collectively the “Standstill
Period”) the parties shall have worked together, and shall continue to work
together, in good faith with best efforts to implement the terms of the
Recapitalization Agreement, upon which the parties shall have reached binding
agreement and which the parties shall have executed as a condition precedent to
the execution and funding of this Note.  Except as provided in the fiduciary
exception set forth in Section 3.2 of the Recapitalization Agreement, during the
Standstill Period, the Maker and its officers, directors, employees, agents,
advisers, consultants, partners and collaborators shall work only with Holder
and its agents, advisers and consultants, and shall have had, and shall continue
to have, no discussions, negotiations and/or communications of any kind with any
other parties, regardless of which party initiates or attempts to initiate any
such contact or communication, in regard to any potential equity or debt
financing of the Maker by parties other than Holder, and/or any joint venture,
license, co-development or other business arrangement by or with parties other
than Holder.  Notwithstanding the fiduciary exception set forth in Section 3.2
of the Recapitalization Agreement, during the Standstill Period, the Maker and
its officers, directors, employees, agents, advisers, consultants, partners and
collaborators shall maintain confidentiality, and shall not have, and shall
continue not to provide copies, excerpts, summaries, descriptions, or
communicate in any way with any third parties, either directly or indirectly, as
to any aspects of the recapitalization of Maker and/or any financing by Holder,
including, without limitation, the identity of the parties involved, any terms
of the Recapitalization Agreement, this Note, the Related Recapitalization
Documents, the Convertible Preferred Stock or any other matter relating to the
recapitalization of Maker, or the progress or status of any activities or
processes relating to the recapitalization of Maker; provided, however, nothing
herein shall prohibit the Maker from filing this Note, the Recapitalization
Agreement and any Related Recapitalization Document with the Securities and
Exchange Commission (the “SEC”), if required by the regulations of the SEC
(subject to the covenant in Section 2.5(a) of the Recapitalization Agreement). 
During the Standstill Period, the Maker shall not make any sales of equipment or
other assets of any kind, including, without limitation, any non-essential
laboratory equipment, and the Maker shall comply with Section 10.3 in regard to
the TFF devices. 

SECTION 14.     REPRESENTATIONS AND WARRANTIES.

Except as expressly set forth (with reference to a section in this Note) in the
Disclosure Schedule attached hereto as Exhibit B (as updated as of each closing
contemplated by the Recapitalization Agreement and the Related Recapitalization
Documents), and only to the extent such exceptions are acceptable to Holder in
its sole discretion as of the date of this Note, and independently as of the
date upon which each additional Note is issued to Holder, and as of the date of
each closing, if any, of the Anticipated Equity Financing, Maker represents and
warrants to the following:

          14.1            Organization, Good Standing and Qualification.  Maker
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to carry on its business.  Maker is duly qualified to transact
business and is in good standing in each jurisdiction in which the failure so to
qualify would have a material adverse effect on its business, properties,
operations, prospects or condition (financial or otherwise).

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          14.2            Authorization of Note, Etc.  The execution, delivery
and performance by Maker of this Note has been duly authorized by all requisite
corporate action by Maker in accordance with Delaware law.  This Note is a valid
and binding obligation of Maker, enforceable against Maker in accordance with
its terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other laws of general application effecting
enforcements of creditors’ rights or general principles of equity.

          14.3            No Conflicts.  The execution, delivery, performance,
issuance, sale and delivery of this Note and the Related Recapitalization
Documents, and compliance with the provisions hereof by Maker, will not (a) to
the knowledge of Maker, violate any provision of any law, statute, rule or
regulation applicable to Maker or any ruling, writ, injunction, order, judgment
or decree of any court, arbitrator, administrative agency or other governmental
body applicable to Maker or any of its properties or assets or (b) conflict with
or result in any material breach of any of the terms, conditions or provisions
of, or constitute (with notice or lapse of time or both) a material default (or
give rise to any right of termination, cancellation or acceleration) under, or
result in the creation of, any encumbrance upon any of the material assets of
Maker under, the Charter or Bylaws of Maker (as they may be amended to date) or
any agreement or instrument to which Maker is a party.  As used herein,
“encumbrance” shall mean any liens, charges, encumbrances, equities, claims,
options, proxies, pledges, security interests, licenses or other similar rights
of any nature.                

          14.4            Compliance with Other Instruments.  Maker is not in
violation of any term of Maker’s Charter, as amended, including any certificate
of designation filed therewith, and/or Maker’s Bylaws.  Maker is not, in any
material respect, in violation of any term of any mortgage, indenture, contract,
agreement, instrument, judgment, decree, order, statute, rule or regulation to
which Maker or any of such Collateral is subject.  To the best of Maker’s
knowledge, no event has occurred which, with the passage of time or the giving
of notice, or both, would constitute a breach or violation, in any material
respect, under any applicable judgments, orders, writs, decrees, federal, state
and/or local laws, rules or regulations which would have a material adverse
affect on the condition, financial or otherwise, or operations of Maker (as it
is currently conducted and as it is proposed to be conducted) or on any material
assets or any Intellectual Property or other Collateral owned, controlled,
licensed, possessed, and/or used by Maker.  To the best of its knowledge, Maker
has avoided every condition, and has not performed any act, the occurrence of
which would result in Maker’s loss of any right granted under any license,
distribution agreement or other agreement or Maker’s loss of any rights in or to
any Collateral.

          14.5            Approvals.  Maker has obtained all necessary permits,
authorizations, waivers, consents and approvals of or by, and made all necessary
notifications of and/or filings with, all applicable persons (governmental and
private), in connection with the execution, delivery, performance, issuance,
sale and/or delivery of this Note, the Recapitalization Agreement and the
Related Recapitalization Documents, and consummation by Maker of the
transactions contemplated hereby and thereby, except as listed in Schedule 14.5

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          14.6            Capitalization.  The authorized capital stock of Maker
consists of 125,000,000 shares of Common Stock, par value $0.001 per share and
15,000,000 shares of Preferred Stock, par value of $0.001 per share.  As of the
date hereof, 19,028,779 shares of Common Stock are issued and outstanding and no
shares of preferred stock of any kind are issued and outstanding.  No other
shares of any class or series of Maker’s capital stock are authorized and/or
issued and outstanding.  All issued and outstanding shares of capital stock of
Maker have been duly authorized and validly issued, and are fully paid and
non-assessable, and have been offered, sold and delivered by Maker in compliance
with all applicable federal and state securities laws.  Except as set forth in
Schedule 14.6, no subscription, warrant, option, convertible security, or other
right (direct or indirect, contingent or otherwise) to purchase or otherwise
acquire any equity securities of Maker is authorized or outstanding, and there
is no agreement, promise, commitment, undertaking or letter of intent of any
kind (direct or indirect, contingent or otherwise) by Maker to issue any shares,
subscriptions, warrants, options, convertible securities, or other such rights,
or to distribute to holders of any of its equity securities any evidence of
indebtedness or asset.  Except as set forth in Schedule 14.6, Maker has no
obligation of any kind (direct or indirect, contingent or otherwise) to
purchase, redeem or otherwise acquire any of its equity securities or any
interest therein or to pay any dividend or make any other distribution in
respect thereof. Schedule 14.6 includes a true, accurate and complete statement
describing the total number of shares of Maker outstanding as of the date of
this Note (on a fully diluted basis, including, without limitation, all warrants
and options outstanding (whether or not currently exercisable), all convertible
instruments of any kind (whether or not currently convertible), shares of all
classes of stock, and any agreements, promises, commitments, undertakings or
letters of intent to issue any of the foregoing.

          14.7            Authorization of the Shares.  Maker has, or before the
first closing of the Anticipated Equity Financing hereunder will have,
authorized the issuance and sale of a sufficient number of shares of Convertible
Preferred Stock, par value $0.001 per share, and Common Stock of the Maker to
fully implement the Recapitalization Plan, while maintaining such additional
authorized but unissued shares as reasonably determined by Holder to be
appropriate. Of such authorized shares, a sufficient number of shares shall be
reserved for issuance upon any exercise of the Bridge Warrants and/or Preferred
Stock Warrants.  If at any time the number of authorized but unissued shares of
Convertible Preferred Stock and/or of Common Stock is not sufficient to effect
the conversion of all then outstanding convertible Notes and other instruments,
and the exercise of all then outstanding warrants, options and similar
instruments, then, in addition to such other remedies as may be available to
Holder, including, without limitation, the exercise of Holder’s right of first
refusal set forth in Section 2.7(f) of the Recapitalization Agreement, Maker
shall take such corporate action as may be necessary to increase its authorized
but unissued shares of Convertible Preferred Stock and/or Common Stock to such
number of shares as will be sufficient for such purposes.  Such corporate action
shall include, without limitation, obtaining all requisite regulatory approvals
and any requisite shareholder approval of any necessary amendment to Maker’s
Charter.

          14.8            Litigation.  Except as set forth in Schedule 14.8 of
the Disclosure Schedule, there is no action, suit, proceeding or investigation
pending or, to the knowledge of Maker, currently threatened against Maker,
and/or its directors, officers, advisers, agents, properties, assets or
business, in each case relating to Maker and/or its business, assets, operations
or properties.  Maker is not a party or subject to the provisions of any order,
writ, injunction, judgment or decree of any court or government agency or
instrumentality.  There is no action, suit, proceeding or investigation by Maker
currently pending or which Maker intends to initiate.

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          14.9            No Liens.  Except for liens for the benefit of Holder,
created by this Note, the Recapitalization Agreement and/or any of the Related
Recapitalization Documents, and except as set forth in Schedule 14.9 of the
Disclosure Schedule, none of the material assets of Maker, including the
Collateral, are subject to any existing lien, pledge, security interest or other
encumbrance of any kind, direct or indirect, contingent or otherwise.

          14.10           Full Disclosure.  Notwithstanding any other provision
of this Note, neither this Note, nor any exhibit hereto, nor any written report,
certificate, instrument or other information furnished to Holder in connection
with the transactions contemplated under and/or in connection with Note contain
any material misstatement (including, without limitation, any material
omission), or is misleading in any material respect.

          14.11           No Other Security Interests or Other Encumbrances. 
Except as set forth in Schedule 14.11 (and only to the amounts set forth on such
schedule), there are no existing security interests, pledges, liens or other
encumbrances of any kind, direct or indirect, contingent or otherwise (including
without limitation any licensing or partnering arrangements or agreements), in
or relating to any assets of Maker, including, without limitation, any
Intellectual Property (as defined herein) or other Collateral.  All existing
security interests, pledges, liens or other encumbrances of any kind, other than
those set forth in Schedule 14.11 hereto (and only to the amounts set forth on
such schedule), are subordinate to the security interest established pursuant to
Section 11 hereof, all necessary consents, subordination agreements and waivers,
if any, have been obtained, and all amended filings and/or re-filings shall be
made immediately upon execution of this Note.

          14.12           “Small Business”.

                              (a)          Small Business Status.  Maker
together with its “affiliates” (as that term is defined in Section 121.103 of
Title 13 of Code of Federal Regulations (the “Federal Regulations”)) is a “small
business concern” within the meaning of the Small Business Investment Act of
1958, as amended (the “Small Business Act” or “SBIA”), and the regulations
promulgated thereunder, including Section 121.301(c) of Title 13, Code of
Federal Regulations.

                              (b)          Information for SBA Reports.  Maker
has delivered and/or will deliver to Holder certain information, set forth by
and regarding the Maker and its affiliates in connection with this Note, on SBA
Forms 480, 652 and Part A and B of Form 1031.  This information delivered was
true, accurate, complete and correct, and any information yet to be delivered
will be true, accurate, complete and correct, and in form and substance
acceptable to Holder. 

                              (c)          Eligibility.  Maker is eligible for
financing by any Holder pursuant to Section 107.720 of Title 13 of the Federal
Regulations and any other SBA regulations.

          14.13           Intellectual Property. 

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                              (d)          Definitions. “Intellectual Property”
means all foreign and domestic intangible property and rights, owned, licensed,
sub-licensed or otherwise obtained by Maker, including, without limitation, (i)
inventions, discoveries and ideas, whether patentable or not, and all patents,
registrations and applications therefor, including divisions, continuations,
continuations-in-part, requests for continued examination, and renewal
applications, and including renewals, extensions and reissues (collectively,
“Patents”); (ii) confidential and proprietary information, trade secrets and
know-how, including without limitation processes, schematics, formulae,
drawings, prototypes, models, designs and customer lists (collectively, “Trade
Secrets”); (iii) all data, slides, observations, and laboratory results,
produced by, for or on behalf of Maker, or which Maker has rights to obtain
(collectively, “Data”); (iv) all FDA applications, registrations, filings and
other rights (collectively, “FDA Rights”) and all data and documentation
supporting or relating thereto; (iv) published and unpublished works of
authorship, whether copyrightable or not (including, without limitation,
databases and other compilations of information), copyrights therein and
thereto, and registrations and applications therefor, and all renewals,
extensions, restorations and reversions thereof (collectively, “Copyrights”);
(v) trademarks, service marks, brand names, certification marks, collective
marks, d/b/a’s, Internet domain names, logos, symbols, data, trade dress,
assumed names, fictitious names, trade names, and other indicia of origin, all
applications and registrations for the foregoing, and all goodwill associated
therewith and symbolized thereby, including all extensions, modifications and
renewals of same (collectively, “Trademarks”); (vi) all other intellectual
property or proprietary rights, including, without limitation, all claims or
causes of action arising out of or related to any infringement, misappropriation
or other violation of any of the foregoing, including rights to recover for
past, present and future violations thereof (collectively, “Other Proprietary
Rights”).

          “Intellectual Property Contracts” means all agreements involving,
relating to or affecting the Intellectual Property, including, without
limitation, agreements granting rights to use the Licensed or Sub-Licensed
Intellectual Property, agreements granting rights to use Owned Intellectual
Property, confidentiality agreements, Trademark coexistence agreements,
Trademark consent agreements and non-assertion agreements.

          “Licensed or Sub-Licensed Intellectual Property” means the
Intellectual Property that Maker is licensed, sub-licensed or otherwise
permitted by other persons or entities to use. 

          “Owned Intellectual Property” means the Intellectual Property owned by
Maker.

          “Registered” means issued, registered, renewed or the subject of a
pending application.

                              (e)          Schedule 14.13 (“Intellectual
Property”) sets forth a true and complete list and summary description of (A)
all Registered or material Owned Intellectual Property (each identified as a
Patent, Trademark, Trade Secret, Copyright or Other Proprietary Right, as the
case may be); (B) all Licensed or Sub Licensed Intellectual Property and (C) all
Intellectual Property Contracts.

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                              (f)          All Intellectual Property is valid,
subsisting and enforceable.  No Owned Intellectual Property has been canceled,
suspended, adjudicated invalid, not maintained, expired or lapsed, or is subject
to any outstanding order, judgment or decree restricting its use or adversely
affecting or reflecting Maker’s rights thereto.  No Licensed or Sub-Licensed
Intellectual Property has been canceled, suspended, not renewed or extended,
adjudicated invalid, not maintained, expired or lapsed, or is subject to any
outstanding order, judgment or decree restricting its use or adversely affecting
or reflecting Maker’s rights thereto.

                              (g)          The Owned Intellectual Property is
owned exclusively by Maker and has been used with all patent, trademark,
copyright, confidential, proprietary and other Intellectual Property notices and
legends prescribed by law or otherwise permitted.

                              (h)          No suit, action, reissue,
reexamination, public protest, interference, opposition, cancellation or other
proceeding (collectively, “Suit”) is pending or threatened concerning any claim
or position:

                                             (i)          that Maker, or another
person or entity, has violated any Intellectual Property rights.  To Maker’s
best knowledge, Maker is not violating and has not violated any intellectual
property rights of any other party.

                                             (ii)         that Maker, or another
person or entity, has breached any Intellectual Property Contract.  There exists
no event, condition or occurrence which, with the giving of notice or lapse of
time, or both, would constitute a breach or default by Maker, or a breach or
default by another person or entity, under any Intellectual Property Contract. 
No party to any Intellectual Property Contract has given Maker notice of its
intention to cancel, terminate or fail to renew any Intellectual Property
Contract.

                                             (iii)        that the Intellectual
Property has been violated or is invalid, unenforceable, unpatentable,
unregisterable, cancelable, not owned or not owned exclusively by Maker.  No
such claim has been threatened or asserted. To Maker’s best knowledge, no valid
basis for any such Suits or claims exists.

                              (i)          To Maker’s best knowledge, no other
person or entity is violating, infringing upon or claiming rights incompatible
with Maker’s rights to any Intellectual Property.  Maker has provided to Holder
copies of all information reasonably available to it relevant to intellectual
property rights claimed by third parties and possible infringement thereof
including, without limitation, any freedom to practice or freedom to operate
opinions.

                              (j)          Except as set forth on Schedule
14.13(j), Maker owns or otherwise holds valid rights to use all Intellectual
Property used in its business.

                              (k)          Maker has timely made all filings and
payments with the appropriate foreign and domestic agencies and other parties
required to maintain in full force and effect all Intellectual Property.  Except
as set forth on Schedule 14.13, no due dates for filings or payments concerning
the Intellectual Property (including, without limitation, office action
responses, affidavits of use, affidavits of continuing use, renewals, requests
for extension of time, maintenance fees, application fees and foreign convention
priority filings) fall due within ninety (90) days prior to or after the
closing, whether or not such due dates are extendable.  Maker is in compliance
with all applicable rules and regulations of such agencies and other parties
with respect to the Intellectual Property.  All documentation necessary to
confirm and effect the Intellectual Property, if acquired from other persons or
entities, has been recorded in the United States Patent and Trademark Office,
the United States Copyright Office and other official offices.

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                              (l)          Maker has undertaken and consistently
implemented best efforts to protect the secrecy, confidentiality and value of
all non-public Intellectual Property used in its business (including, without
limitation, entering into appropriate confidentiality agreements with all
officers, directors, employees and other persons or entities with access to such
non-public Intellectual Property).  Maker management has not disclosed any such
non-public Intellectual Property to any persons or entities other than (i) Maker
employees or Maker contractors who had a need to know and use such non-public
Intellectual Property in the ordinary course of employment or contract
performance, or (ii) prospective customers, and in each case who executed
appropriate confidentiality agreements.

                              (m)          Maker has taken all reasonable
measures to confirm that no current or former Maker employee is or was a party
to any confidentiality agreement or agreement not to compete that restricts or
forbids, or restricted or forbade at any time during such employee’s employment
by Maker, such employee’s performance of Maker’s business, or any other activity
that such employee was hired to perform or otherwise performed on behalf of or
in connection with such employee’s employment by Maker.

          14.14           SEC Filings; Financial Statements.

                              (a)          Maker has delivered or made available
to Holder accurate and complete copies of all registration statements, proxy
statements and other statements, reports, schedules, forms and other documents
filed by the Maker with the SEC since January 1, 2003, and all amendments
thereto (the “Maker SEC Documents”).  Except as set forth on Schedule 14.14(a),
all statements, reports, schedules, forms and other documents required to have
been filed by Maker with the SEC have been so filed on a timely basis.   As of
the time it was filed with the SEC (or, if amended or superseded by a filing
prior to the date of this Note, then on the date of such filing):  (i) each of
the Maker SEC Documents complied in all material respects with the applicable
requirements of the Securities Act or the Exchange Act (as the case may be); and
(ii) none of the Maker SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. 

                              (b)          The financial statements (including
any related notes) contained in the Maker SEC Documents:  (i) complied as to
form in all material respects with the published rules and regulations of the
SEC applicable thereto; (ii) were prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
covered (except as may be indicated in the notes to such financial statements
or, in the case of unaudited statements, as permitted by Form 10-Q of the SEC,
and except that the unaudited financial statements may not contain footnotes and
are subject to normal and recurring year-end adjustments that will not,
individually or in the aggregate, be material in amount), and (iii) fairly
present the consolidated financial position of Maker and its consolidated
subsidiaries as of the respective dates thereof and the consolidated results of
operations and cash flows of Maker and its consolidated subsidiaries for the
periods covered thereby.

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          14.15           Liabilities.  Other than (i) tax liabilities to the
State of Washington in the maximum amount of $492,000, (ii) amounts payable to
Cognate Therapeutics and (iii) future lease payments to Benaroya Capital Co. LLC
for Maker’s premises lease not yet due, Maker’s aggregate accrued, contingent
and/or other liabilities of any nature, either mature or immature, as of the
Amendment Date, do not exceed $400,000, of which (X) $276,000 are currently due
payables (including $204,966 for attorney and auditor fees), (Y) $65,000 are the
aggregate balances of capital leases payable in monthly installments in the
amounts set forth in the budget included in the Schedule of Exceptions through
the first calendar quarter of 2006, decreasing thereafter, the last of which is
fully amortized in May 2007, and (Z) $59,000 are accrued vacation and sick pay.

          14.16           Compliance with All Standstill Provisions.  Maker has
complied in all respects with all standstill, exclusivity and confidentiality
provisions of (a) this Note, the Recapitalization Agreement and the Related
Recapitalization Documents, (b) Section 13 of that certain 10% Convertible,
Secured Promissory Note by and between Maker and Holder dated as of February 2,
2004 and (c) Section 13 of that certain 10% Convertible, Secured Promissory Note
by and between Maker and Holder dated as of March 1, 2004.

SECTION 15.      INDEMNIFICATION

          15.1             Indemnification Agreement.

                              (a)          In addition to all rights and
remedies available to Holder at law or in equity, Maker shall indemnify Holder
and each subsequent holder of this Note, and their respective affiliates,
stockholders, limited partners, general partners, officers, directors, managers,
employees, agents, representatives, successors and assigns (collectively, the
“Indemnified Persons”) and save and hold each of them harmless against and pay
on behalf of or reimburse such party as and when incurred for any loss,
liability, demand, claim, action, cause of action, cost, damage, deficiency,
tax, penalty, fine or expense (other than any demand, claim, action or cause of
action instituted by Maker), including interest, penalties, reasonable
attorneys’ fees and expenses, and all amounts paid in investigation, defense or
settlement of any of the foregoing (collectively, “Losses) which any such party
may suffer, sustain or become subject to, as a result of, in connection with,
relating or incidental to or by virtue of:

                                             (i)          any material
misrepresentation in, or material omission from, or breach of any of the
representations, warranties, statements, schedules and/or exhibits hereto,
certificates or other instruments or documents furnished to Holder by Maker in
connection with this  Note; or

A-22

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                                             (ii)         any material
nonfulfillment or material breach of any covenant or agreement on the part of
Maker under this Note. 

                              (b)          Notwithstanding the foregoing, Maker
shall not be liable for any portion of Losses resulting from the gross
negligence or willful misconduct of Holder or a subsequent holder of this Note. 

                              (c)          Within twenty (20) days after receipt
of notice of commencement of any action or the assertion of any claim by a third
party, Holder shall give Maker written notice thereof together with a copy of
such claim, process or other legal pleading of such claim.  Maker shall have the
right to assist in the defense thereof by representation of its own choosing.

          15.2             Survival.  All indemnification rights hereunder shall
survive the execution and delivery of this Note and the consummation of the
transactions contemplated hereby (i) for a period of two years with respect to
representations and warranties made by Maker, and (ii) until fully performed
with respect to covenants and agreements made by Maker, regardless of any
investigation, inquiry or examination made for or on behalf of, or any knowledge
of Holder and/or any of the Indemnified Persons, or the acceptance by Holder of
any certificate or opinion. 

          15.3             Payment.  Any indemnification of Holder or any other
Indemnified Person by Maker pursuant to this Section 15 shall be effected by
wire transfer of immediately available funds from Maker to an account designated
by Holder or such other Indemnified Person within fifteen (15) days after the
determination thereof.

SECTION 16.      INTEGRATION WITH RECAPITALIZATION PLAN

Maker acknowledges and agrees that the funding provided by Holder pursuant to
this Note is only being provided as part of an integrated Recapitalization Plan,
as set forth in the Recapitalization Agreement.  Maker further acknowledges and
agrees that this Note is subject to all terms and conditions set forth in the
Recapitalization Agreement.

A-23

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SECTION 17.      MISCELLANEOUS.

          17.1             Notices.  All notices, demands and requests of any
kind to be delivered to any party in connection with this Note shall be in
writing and shall be deemed to be effective upon delivery if (i) personally
delivered, (ii) sent by confirmed facsimile with a copy sent by nationally
recognized overnight courier, (iii) sent by nationally recognized overnight
courier, or (iv) sent by registered or certified mail, return receipt requested
and postage prepaid, addressed as follows:

          if to Maker:         Northwest Biotherapeutics, Inc.
                                       22322 20th Ave SE, Suite 150
                                       Bothell, WA  98021
                                       Fax: (425) 608 3146
                                       Attn: Alton Boynton

          if to Holder:          Toucan Capital Fund II, LP
                                       7600 Wisconsin Avenue
                                       Suite 700
                                       Bethesda, MD 20814
                                       Fax: (240) 497-4060
                                       Attention: Linda F. Powers

or to such other address as the party to whom notice is to be given may have
furnished to the other parties hereto in writing in accordance with the
provisions of this Section.

          17.2             Parties In Interest.  This Note shall bind and inure
to the benefit of Holder, Maker and their respective successors and permitted
assigns.  Maker shall not transfer or assign this Note without the prior written
consent of Holder.  Holder may transfer and assign this note without the prior
consent of Maker.

          17.3              Entire Agreement.  This Note together with the
Disclosure Schedule and the Recapitalization Agreement contains the entire
understanding of the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings among the parties with
respect thereto.

          17.4              Governing Law.  This Note shall be governed by and
construed in accordance with the laws of the State of Delaware (without giving
effect to principles of conflicts of laws of the State of Delaware or any other
state).

          17.5              Headings.  The section and paragraph headings
contained in this Note are for reference purposes only and shall not affect in
any way the meaning or interpretation of this Note. 

          17.6              Amendments.  No provision of this Note may be
amended or waived without the express written consent of both Maker and Holder,
provided, however, that Holder may waive any provision hereof that inures to the
benefit of Holder without the prior written consent of Maker. Also
notwithstanding anything to the contrary, this Note shall be amended as and to
the extent necessary to comply with the Small Business Investment Act and all
regulations, advice, direction and guidance applicable to SBIC’s. 

          17.7              Nature of Obligation.  This Note is being made for
business and investment purposes, and not for household or other purposes.

A-24

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          17.8              Expenses.  Maker shall pay, reimburse or otherwise
satisfy, upon demand of Holder, all fees, costs and expenses incurred and/or
undertaken, and to be incurred and/or undertaken, by Holder relating to the
preparation for, development of and implementation of the Recapitalization Plan
set forth in the Recapitalization Agreement, including, without limitation, all
due diligence expenses and all expenses relating to the Bridge Funding, the
Anticipated Equity Financing and the transactions contemplated thereby and the
documentation of the foregoing (including, without limitation all legal fees and
expenses and costs incurred and to be incurred in connection with any SBA
filings), which shall be satisfied by Maker upon Holder’s demand, including but
without limitation upon each closing of the Bridge Funding or Anticipated Equity
Financing.  This obligation shall apply regardless of whether or not all of the
transactions contemplated in the Recapitalization Agreement close.  At each
closing of Bridge Funding and/or Anticipated Equity Financing, at Holder’s sole
discretion, and with respect to any or all of such fees, costs and expenses
accrued through such closing, Maker shall (a) pay Holder in cash concurrently
with such closing (or at Holder’s sole discretion, Investor may withhold such
amount from the wire of investment proceeds), (b) issue a Note in the form
hereof in principal amount equal to such fees, costs and expenses (which at
Holder’s option may instead be evidenced as an increase in the principal amount
of any Note issued in connection with such closing); or (c) treat such fees,
costs and expenses as an unsecured payable.  At any time following such closing,
Holder may require any amounts that it elected to have Maker treat as unsecured
amounts payable to be paid in cash or satisfied by issuance of a Note in the
principal amount of some or all of such unsecured obligation.

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          IN WITNESS WHEREOF, Maker has caused this Note to be duly executed by
its duly authorized person(s) as of the date first written above.

 

NORTHWEST BIOTHERAPEUTICS, INC.

 

 

 

 

 

By

 

 

--------------------------------------------------------------------------------

 

 

 

 

Name: Alton Boynton

 

 

 

Title: President

Consent and Agreement

          Toucan Capital Fund II, L.P. consents to the loan and security
interest granted by Maker in the foregoing Note.

 

TOUCAN CAPITAL FUND II, LP

 

 

 

 

 

By

 

 

--------------------------------------------------------------------------------

 

 

 

 

Name: Linda Powers

 

 

 

Title: Managing Director

A-26

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EXHIBIT A

DESCRIPTION OF COLLATERAL

          The “Collateral” consists of all of Maker’s right, title and interest
(in each case, whether now owned or hereafter acquired) in and to the following:

          (a)          All intellectual property of any kind, whether owned,
licensed or otherwise permitted to be used, and whether now held or hereafter
acquired or developed (the “Intellectual Property”).  Such Intellectual Property
shall include, without limitation, all foreign and domestic intangible property
and rights, owned, licensed or otherwise obtained by Maker, including, without
limitation, (i) trademarks, service marks, brand names, certification marks,
collective marks, d/b/a’s, Internet domain names, logos, symbols, trade dress,
assumed names, fictitious names, trade names, and other indicia of origin, all
applications and registration for the foregoing, and all goodwill associated
therewith and symbolized thereby, including all extensions, modifications and
renewals of same, including without limitation those items reference on Appendix
1 hereto (collectively, “Trademarks”); (ii) inventions, discoveries and ideas,
whether patentable or not, and all patents, registrations and applications
therefor, including divisions, continuations, continuations-in-part, requests
for continued examination, and renewal applications, and including renewals,
extensions and reissues, including without limitation those items reference on
Appendix 2 hereto (collectively, “Patents”); (iii) confidential and proprietary
information, trade secrets and know-how, including, without limitation,
processes, schematics, formulae, drawings, prototypes, models, designs and
customer lists (collectively, “Trade Secrets”); (iv) published and unpublished
works of authorship, whether copyrightable or not (including, without
limitation, databases and other compilations of information), copyrights therein
and thereto, and registrations and applications therefor, and all renewals,
extensions, restorations and reversions thereof (collectively, “Copyrights”);
(v) all FDA applications, registrations, filings and other rights (collectively,
“FDA Rights and Materials”); (vi) all results, information and data arising
from, or obtained in connection with, research, development, pre-clinical work
and/or clinical trials (collectively, “Data”); and (vii) all other intellectual
property or proprietary rights and claims or causes of action arising out of or
related to any infringement, misappropriation or other violation of any of the
foregoing, including rights to recover for past, present and future violations
thereof (collectively, “Other Proprietary Rights”).

          (b)          All goods and equipment now owned or hereafter acquired,
including, without limitation, all machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located. 

          (c)          All inventory, now owned or hereafter acquired,
including, without limitation, all merchandise, raw materials, parts, supplies,
packing and shipping materials, work in process and finished products including
such inventory as is temporarily out of Maker’s custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing an any documents of title representing any of the above. 

A-27

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          (d)          All contract rights, general intangibles and intellectual
property, now owned or hereafter acquired, including, without limitation,
goodwill, trademarks, service marks, trade styles, trade names, patents, patent
applications, leases, license agreements, franchise agreements, blueprints,
drawings, purchase orders, customer lists, route lists, infringements, claims,
computer programs, computer discs, computer tapes, computer code, copyrights,
literature, reports, catalogs, design rights, income tax refunds, payments of
insurance and rights to payment of any kind.

          (e)          All now existing and hereafter arising accounts, contract
rights, royalties, license rights and all other forms of obligations owing to
Maker arising out of the sale or lease of goods, the licensing of technology or
the rendering of services by Maker, whether or not earned by performance, and
any and all credit insurance, guaranties, and other security therefore, as well
as all merchandise returned to or reclaimed by Maker. 

          (f)          All documents, cash, deposit accounts, securities,
securities entitlements, securities accounts, investment property, financial
assets, letters of credit, certificates of deposit, instruments and chattel
paper now owned or hereafter acquired and Maker’s books relating to the
foregoing. 

          (g)          Each item of equipment, or personal property whether now
owned or hereafter acquired, together with all substitutions, renewals or
replacements of and additions, improvements, and accessions to any and all of
the foregoing, and all proceeds from sales, renewals, releases or other
dispositions thereof. 

          (h)          All Maker’s books relating to the foregoing and any and
all claims, rights and interests in any of the above, whether now owned or
hereafter acquired, and all substitutions for, additions and accessions to and
proceeds thereof.

Notwithstanding the foregoing, to the extent any of Maker’s licensed
Intellectual Property prohibits the transfer or encumbrance of such licensed
Intellectual Property (the “Restricted Intellectual Property”) without prior
consent of the owner or licensor thereof, such Restricted Intellectual Property
is hereby conditionally included within the definition of Collateral, subject to
receipt, by or on behalf of Maker, of any required consents.  If requested by
Holder, Maker shall use its best efforts to obtain the required consents under
any Restricted Intellectual Property within thirty (30) days of such request.

A-28

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Appendix 1
Trademarks

A-29

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Appendix 2
Patents

A-30

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EXHIBIT B

DISCLOSURE SCHEDULE

A-31

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Exhibit B

AMENDED AND RESTATED BINDING TERM SHEET
CONVERTIBLE PREFERRED STOCK
Northwest Biotherapeutics, Inc.
October 22, 2004

This Amended and Restated Binding Convertible Preferred Stock Term Sheet amends
and restates that certain Binding Convertible Preferred Stock Term Sheet by and
between the parties hereto dated as of April 26, 2004.

Issuer:

Northwest Biotherapeutics, Inc. (the “Company”), a Delaware corporation.

 

 

Purchasers:

Toucan Capital Fund II, L.P and/or its designee(s) (collectively, “Investor”),
and such other investors as may subsequently be identified (the “Other
Investors”).

 

 

Election to lead
equity financing:

At Investor’s election on or before the end of the Bridge Funding Period,
Investor shall have the right to lead the equity financing and assemble the
syndicate of Other Investors. 

 

 

Securities to be
Issued:

10% Cumulative Convertible Preferred Stock (“Convertible Preferred” or
“Convertible Preferred Stock”), convertible into common stock of the Company
(“Common” or “Common Stock”).

 

 

Share price:

The price per share shall be the lesser of $0.10 per share or 35% discount to
the average closing price during the twenty trading days prior to closing;
provided, however, that in no event will the price per share be less than $.04. 
The share price provided herein is subject to adjustment for dividends, splits,
etc.

 

 

Amount of Issuance:

Up to $40 million (including any shares issuable upon conversion of Bridge
Funding, but not including any shares issuable upon exercise of warrants,
options, and similar instruments or obligations) (the “Maximum Issuance”), in
one or more tranches.

 

 

First Closing:

First closing (“First Closing”) to occur upon completion of Bridge Period,
documentation and fulfillment of conditions to closing. 

 

 

Subsequent Closings:

Additional closings of the Convertible Preferred Stock after the First Closing
(“Subsequent Closings”) may take place at any time on or before 12 months after
the First Closing (the “Equity Financing Period”), so long as the aggregate
amount raised does not exceed the Maximum Issuance.  All subsequent closings of
the Convertible Preferred Stock shall be on the same terms and conditions as in
the First Closing and shall use the same documentation as in the First Closing.

B-1

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Warrants:

The Company shall issue $7 million (or, in the event that the November Bridge
Funding is not provided, $7.5 million) in warrant coverage on the first $7
million (or, in the event that the November Bridge Funding is not provided, $7.5
million) Convertible Preferred Stock purchased for cash (the “Preferred Stock
Warrants”).  Preferred Stock Warrants shall not be issued upon conversion of
notes, exercise of warrants, or other conversion or exercise.  The number of
warrants to be so issued shall be determined on the basis of $0.10 per share. If
the total of $7 million (or, in the event that the November Bridge Funding is
not provided, $7.5 million) is invested in Convertible Preferred Stock, the
number of warrants issued shall be exercisable for 70 million (or, in the event
that the November Bridge Funding is not provided, 75 million) shares of
Convertible Preferred Stock.  The exercise price of such Preferred Stock
Warrants shall be the lesser of $0.10 per share (subject to adjustment for stock
splits, stock dividends and the like) and 35% discount to the average closing
price during the twenty trading days prior to the First Closing; provided,
however, that in no event will the exercise price be less than $.04 per share
(subject to adjustment for stock splits, stock dividends and the like).  The
exercise period shall commence upon issuance of the Preferred Stock Warrants,
and shall continue for a period of seven (7) years after their respective
issuance dates.

 

 

Tax Treatment of
Warrants:

The Company and the purchasers of the Convertible Preferred Stock shall agree
upon the fair market value of the Preferred Stock Warrants, and the Company
shall make all of its tax filings on this basis, and instruct its accountants
and other tax-preparation professionals to prepare all tax filings and returns
on the basis of the foregoing.

 

 

Right of First
Refusal:

Investor shall have a right of first refusal to purchase up to $15 million of
the Convertible Preferred Stock.  This right of first refusal shall apply at
each closing during the Equity Financing Period, until the $15 million amount is
reached.  Such purchases shall be determined in addition to, and shall not be
deemed to include, any purchases of Convertible Preferred Stock by Investor
(including its designees) through conversion of Bridge Funding, or exercise of
any warrants or similar instruments.  Such right of first refusal shall apply
regardless of whether or not Investor leads the financing during any part of the
Equity Financing Period.

 

 

Conditions to
Closings:

The following conditions shall apply to each closing for the purchase and sale
of Convertible Preferred Stock. Each such condition must be satisfied or waived,
and such satisfaction and/or waiver of each such condition shall be determined
by Investor and,as applicable, Other Investors in their respective sole
discretion, individually and not jointly.

 

 

 

 

•

The Company shall have in all material respects performed, and be in compliance
with, all obligations, agreements, covenants, closing conditions and other
provisions contained in the Amended and Restated Recapitalization Agreement by
and between the parties hereto dated July 30, 2004, as amended on October 22,
2004 (the “Recapitalization Agreement”), the Notes evidencing Bridge Funding (to
the extent any such notes remain outstanding), and the other Related
Recapitalization Documents including, without limitation, the financing
documents associated with the issuance of the Convertible Preferred Stock (the
“Financing Documents”), required to be performed or fulfilled on or before the
applicable closing date.

B-2

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•

All representations and warranties set forth in the Recapitalization Agreement,
the Notes evidencing Bridge Funding (to the extent any such notes remain
outstanding), and the other Related Recapitalization Documents shall be true and
complete as of each closing.

 

 

 

 

 

 

•

There shall have been no change that has had or is reasonably likely to have a
material adverse effect on the business, affairs, prospects, operations,
properties, assets, liabilities, structure or condition, financial or otherwise,
of the Company (as such business is presently conducted and/or as it is proposed
to be conducted) between the date of the Recapitalization Agreement and each
closing of purchases of Convertible Preferred Stock. 

 

 

 

 

 

 

•

All corporate and other proceedings, and all documents relating to the issuance
and sale of Convertible Preferred Stock pursuant to the Recapitalization
Agreement shall be satisfactory in substance and form to Investor and Other
Investors, as applicable.  Investor’s counsel and each Other Investors’ counsel
(if applicable) shall have received all such counterpart originals or certified
or other copies of such documents as they may have requested including, without
limitation: 

 

 

 

 

 

•

The resolutions of the Board of Directors of the Company, authorizing and
approving all matters in connection with the sale of the Convertible Preferred
Stock certified by the Secretary of the Company as of the Closing Date.

 

 

 

 

 

 

•

All stockholder consents, votes or other approval required by applicable state
or federal law (including any and all SEC rules and regulations) and any
consents required by applicable securities exchanges or markets or corporate
partners required to authorize and approve all matters in connection with the
sale of Convertible Preferred Stock as contemplated by this term sheet.

 

 

 

 

 

 

•

The Company shall have executed, delivered and maintained in force (i) a
Convertible Preferred Stock purchase agreement, (ii) an Investors’ Rights
Agreement, (iii) an amended and restated certificate of incorporation (or if
appropriate, a certificate of designation), (iv) a voting agreement, if
applicable, and (v) such other documents as may be necessary or desirable in the
determination of Investor and Other Investors, as applicable. 

B-3

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•

The Investor and Other Investors shall have received from counsel to the Company
an opinion letter containing opinions customary for transactions similar to the
Proposed Equity Financing in the form reasonably acceptable to Investor and
Other Investors (including, but not limited to, an opinion that the issuance of
the Convertible Preferred Stock, the Preferred Stock Warrants and the securities
issuable upon conversion and/or exercise thereof pursuant to the Proposed Equity
Financing are exempt from the registration provisions of the federal and state
securities laws).

 

 

 

 

 

 

•

The Company shall have taken all necessary steps to set the number of directors
on the Company’s board of directors at seven (7) and elect directors according
to the “Board of Directors” section below, including, without limitation,
execution of a Voting Agreement if necessary or desirable in the determination
of Investor and Other Investors, as applicable.

 

 

 

 

 

 

 

•

The Company shall have delivered a certificate of its Chief Executive Officer,
or other authorized and responsible officer of the Company acceptable to
Investor and Other Investors, as applicable, in their respective sole
discretion, certifying that all closing conditions have been fulfilled and that
all representations and warranties are applicable and true as of the date of
such closing. 

 

 

 

 

 

 

•

The Company shall have provided prior to the applicable closing date all due
diligence information requested by any investor, and/or necessary to enable such
investor to complete a thorough due diligence review and obtain a complete and
accurate understanding of the business, operations, prospects, assets,
liabilities, structure, legal aspects and condition, financial or otherwise, of
the Company.

 

 

 

 

 

 

•

Within the six month period prior to any closing of Convertible Preferred Stock,
the Company shall not have entered into, increased, expanded, extended, renewed
or reinstated (or agreed, promised, committed or undertaken to do so), any
severance, separation, retention, change of control or similar agreement with
any employee, other than such agreements entered into with the prior written
approval of Investor and Other Investors, as applicable.

 

 

 

 

 

 

•

Within the six month period prior to any closing of Convertible Preferred Stock,
the Company shall not have hired, or agreed to hire, any employee or engaged, or
agreed to engage, any consultant, independent contractor or any other
non-employee personnel, except in accordance with the Company’s budget that has
been approved by the Company’s board of directors and the Investor and Other
Investors, as applicable;

B-4

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•

Within the six month period prior to any closing of Convertible Preferred Stock,
the Company shall not have purchased, leased, hired, rented or otherwise
acquired directly or indirectly any rights in or to any asset or facility in an
amount in excess of $10,000, or agreed, promised or committed to do so, except
in accordance with the Company’s budget that has been approved by the Company’s
board of directors and the Investor and Other Investors, as applicable.

 

 

 

 

 

 

•

[***]*

 

 

 

 

 

 

•

All Intellectual Property licenses, agreements, patent applications and filings
shall be current and in good standing.

 

 

 

 

 

 

•

The Company shall have obtained the approval of the required number of its
stockholders (the Company shall be obligated to use its best efforts in good
faith comply with these terms and conditions to obtain stockholder consent and,
in the event that it uses its best efforts in good faith to do so and fails to
achieve stockholder approval, the Company shall not be required to sell the
Convertible Preferred Stock).

 

 

 

 

 

 

•

The satisfaction of other customary conditions of transactions of this sort that
Investor may reasonably require.

 

 

 

Conversion:

The Convertible Preferred Stock shall be convertible at any time, in whole or in
part, at the option of the holder (without any further payment by the holder)
into Common Stock of the Company.  The initial conversion ratio shall be one
share of Common Stock for each share of Convertible Preferred Stock (the
“Conversion Ratio”).  The Conversion Ratio shall be subject to appropriate
adjustment in the event of (i) any subdivision or combination of the Company’s
outstanding Common Stock, (ii) any distribution by the Company of a stock
dividend or assets, (iii) any capital reorganization or reclassification of the
Company affecting the conversion price, or other similar transactions, as
applicable.  The Conversion Ratio shall also be subject to adjustment pursuant
to the anti-dilution provisions (below).

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     * Confidential Treatment Requested

B-5

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Rights,
Preferences,
Privileges and
Restrictions:

(1)     Dividends:  A cumulative dividend shall accrue at the rate of 10% per
annum, compounding quarterly on the Convertible Preferred Stock.  No dividends
shall be paid on the Common or any other securities issued by the Company other
than the Convertible Preferred Stock.  Dividends shall be payable as and when
determined by the Board of Directors, and upon the occurrence of a liquidation. 
A liquidation shall be deemed to include, without limitation, a merger resulting
in a change in control of the Company, sale of all or substantially all of the
assets of the Company, or transfer of control (not including any transfer of
control that is the result of the sale and issuance of the Convertible Preferred
Stock contemplated hereunder, the conversion of any of the Bridge Funding or
exercise of any Bridge Warrants or Preferred Stock Warrants).

 

 

 

 

 

(2)     Liquidation Preference:  In the event of liquidation or winding up of
the Company, the holders of shares of Convertible Preferred shall be entitled
(at such holders’ option) to convert such shares to Common Stock or to receive,
in preference to the holders of Common, (i) an amount equal to the original
purchase price with respect to such Convertible Preferred Stock, plus (ii) (to
the extent of current and/or retained earnings) any dividends accrued but not
paid on such Convertible Preferred Stock, or such lesser amount as is the
maximum amount acceptable under applicable SBA and SEC  rules and regulations. 
Thereafter, all remaining assets shall be distributed pro-rata to the holders of
Common Stock and all Convertible Preferred Stock on an as converted basis.  A
liquidation shall be deemed to include, without limitation, a merger resulting
in a change in control of the Company, sale of all or substantially all of the
assets of the Company, or transfer of control (not including any transfer of
control that is the result of the sale and issuance of the Convertible Preferred
Stock contemplated hereunder, the conversion of any of the Bridge Funding or
exercise of any Bridge Warrants or Preferred Stock Warrants).

 

 

 

(3)     Anti-dilution:  Notwithstanding anything herein to the contrary, except
for issuances to management and employees, which must be approved by the Board
pursuant to written benefit plans, and except for issuances relating to the
Bridge Funding under the Recapitalization Agreement, if the Company issues (or,
directly or indirectly promises, commits, or undertakes to issue) any additional
securities or instruments at a nominal or effective purchase price less than the
price resulting from the application of the Conversion Ratio, calculated on a
fully diluted basis with respect to the Convertible Preferred Stock, then the
Conversion Ratio of such Convertible Preferred Stock shall be reduced on a full
ratchet basis to eliminate the effect of such dilutive issuance on such
Convertible Preferred Stock. 

B-6

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(4)     Protective Provisions:  Until fewer than 1,000,000 shares of Convertible
Preferred Stock are outstanding (as adjusted for stock splits, stock dividends
and the like), the Company shall not, without the approval of the Board of
Directors and the affirmative vote or written consent of the holders of a
majority of the then outstanding shares of Convertible Preferred Stock: (i)
authorize or issue (including, without limitation, by way of recapitalization),
or obligate itself to authorize or issue, any equity security of the
Corporation, or any other security exercisable for or convertible into an equity
security of the Corporation, that has redemption rights or that is senior to or
on parity with the Convertible Preferred Stock as to dividend rights, voting
rights, liquidation preferences or any other rights, preferences or privileges;
(ii) increase or decrease  (other than by conversion) the total number of
authorized shares of Convertible Preferred Stock or Common Stock; (iii) effect
any sale, lease, assignment, transfer or other conveyance or encumbrance of all
or substantially all of the assets of the Corporation or any of its subsidiaries
in one or more related transactions, or any consolidation or merger resulting in
a change in control of the Company, or any reclassification, recapitalization or
other change of any capital stock of the Corporation; (iv) change the authorized
number of directors of the Corporation; (v) amend or repeal the Certificate
(including by way of any Certificate of Designation) or the Corporation’s
Bylaws; (vi) redeem, purchase or otherwise acquire (or pay into or set aside for
a sinking fund for such purpose) any of the Common Stock or common stock
equivalents; provided, however, that this restriction shall not apply to the
repurchase of up to a maximum of $100,000 of Common Stock per year from
employees, officers, directors, consultants, advisors or other persons
performing services for the Corporation, pursuant to agreements under which the
Corporation has the option to repurchase such shares at cost upon the occurrence
of certain events, such as the termination of employment;  (vii) effect the
liquidation, dissolution or winding up of the Corporation; or  (viii) agree,
promise, commit or undertake to do any of the foregoing.

 

 

 

(5)     Voting Rights: The holders of Convertible Preferred will have the right
to that number of votes equal to the number of shares of Common Stock issuable
upon conversion of such Preferred Stock. 

 

 

 

 

Private Placement:

The Convertible Preferred Stock shall not be registered under the Securities Act
of 1933, as amended (the “Act”) and may not be resold without such registration
or an exemption under the provisions of the Act.  The Convertible Preferred
Stock shall be sold only to “accredited investors,” as defined in Regulation D
under the Act.

 

 

 

 

Registration Rights

At the request of Investor, the Company will use its best efforts to prepare and
file, within 60 days following the First Closing and each Subsequent Closing, a
registration statement on Form SB-2  or Form S-1 (or if Form S-3 is available,
on Form S-3) (the “Registration Statement”) for the resale of the shares of
Common Stock issuable to the Investor and Other Investors upon conversion of the
Convertible Preferred Stock and upon exercise of the Warrants, and use its
commercially reasonable efforts to cause the Registration Statement to become
effective within 120 days after such closing.  The Company agrees to make such
filings as are necessary to keep the Registration Statement effective until the
earlier of (A) the date that the investors have completed the distribution
related to the Common Stock, or (B) such time that all Common Stock then held by
the investors (including shares of Common Stock issuable upon conversion of
Preferred Stock held by the investors) can be sold without compliance with the
registration requirements of the Securities Act pursuant to Rule 144(k) under
the Securities Act.

B-7

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Liquidated Damages:  In the event that the Company shall fail to cause the
Registration Statement to be timely filed, timely declared effective, or to be
kept effective (other than pursuant to customary permissible suspension
periods), the Company shall pay as liquidated damages the amount of 1% per month
of the aggregate purchase price for the securities remaining to be sold pursuant
to the Registration Statement or such lesser amount that is the maximum
permitted under applicable SBA rules and regulations.

 

 

 

In the event that the Company’s Common Stock is no longer registered under the
Securities Exchange Act of 1934, as amended following completion of the First
Closing, or for any reason the Company does not register for resale all shares
of Common into which the Convertible Preferred converts, as provided for above,
Investor and each Other Investor shall have the following registration rights
with respect to the Common Stock into which such investor’s Convertible
Preferred converts:

 

 

(1)     Demand Registration Rights.  If, at any time after the initial purchase
of the Convertible Preferred Stock, holders of at least 20% of the Common Stock
issued or issuable upon conversion of the Convertible Preferred Stock request
that the Company file a Registration Statement covering at least 10% of the
Common issued or issuable upon conversion of the Convertible Preferred (or any
lesser percentage if the anticipated aggregate offering price would exceed
$2,000,000), the Company shall cause the shares attributable to the Convertible
Preferred Stock to be registered.  The Company shall not be obligated to effect
more than two registrations per year under these demand right provisions.

 

 

 

 

 

(2)     Registration on Form S-3:  Holders of Common issued or issuable upon
conversion of the Convertible Preferred Stock shall have the right to require
the Company to file unlimited Registration Statements on Form S-3 (or any
equivalent successor form), provided the Company is otherwise eligible to use
Form S-3 for such a registration and the anticipated aggregate offering price in
each registration on Form S-3 exceeds $1,000,000.

 

 

 

 

 

(3)     Piggy-Back Registration: Holders of Common issued or issuable upon
conversion of the Convertible Preferred Stock shall be entitled to unlimited
“piggy-back” registration rights on all registrations of the Company. 

B-8

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(4)     Transfer of Registration Rights: The registration rights may be
transferred to any transferee permitted under applicable Federal and state
securities laws, provided that the Company is given written notice thereof and
provided that the transferee agrees in writing to be bound by the terms of the
stock purchase agreement and other agreements relating to this transaction.

 

 

 

 

 

 

(5)     Costs: The Company shall bear all expenses relating to all such
preparation and filings. 

 

 

 

 

 

(6)     Indemnification:  The Company shall provide the Investors with the
maximum indemnification allowed under applicable law with regard to the
registration rights.

 

 

 

Regulatory Costs

The Company shall be responsible for completing and shall bear all costs
associated with all regulatory filings that are necessary in connection with the
transactions described herein, including, without limitation, U.S. Securities
and Exchange Commission filings (whether these filings are made by the Company,
the purchasers of the Convertible Preferred Stock or their affiliates), blue sky
filings and/or other necessary filings under applicable securities market or
exchange rules and regulations.

 

 

Board of Directors:

The authorized number of directors shall be seven (7).  Four (4) of the seven
directors shall be designated by the holders of a majority of the Convertible
Preferred Stock, two (2) of the directors shall be outsiders with significant
industry experience who are reasonably acceptable to the holders of a majority
of the Convertible Preferred Stock, and one (1) of the directors shall be the
CEO of the Company. 

 

 

D&O Insurance:

As promptly as practicable after the First Closing, the Company shall use best
efforts to obtain and maintain in force $10 million in director and officer
liability insurance coverage. 

 

 

SBA Provisions:

The Company shall make such representations, warranties and covenants, and shall
provide such documentation and information rights as may be necessary (e.g.,
certification that at the time of Investor’s investment the Company is a “small”
business, has the majority of its operations in the US, and is not engaged in
oil and gas exploration, movie production or certain other prohibited
activities), to satisfy the requirements of the SBA in regard to investment by
Investor in the Company.

B-9

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Documentation:

The purchase of the Convertible Preferred Stock shall be made pursuant to a
Stock Purchase Agreement, Investor Rights Agreement, Voting Agreement (if
applicable) and Amended and Restated Certificate of Incorporation (or if
appropriate, certificate of designation) to be drafted by counsel to the
Investor. Such agreements and other documents shall contain, among other things,
appropriate representations and warranties (including, without limitation, reps
and warranties concerning the Intellectual Property, the financial condition of
the Company, the absence of litigation or threats thereof, and full disclosure
of all material information), covenants, protective provisions, and conditions
of closing including those noted above.

 

 

 

 

Miscellaneous:

Customary provisions, including applicable law (Delaware), severability,
assignment (except as provided under the rights of first refusal above, holders
of Convertible Preferred Stock shall be free to assign or transfer their
Convertible Preferred Stock or rights hereunder to any party permitted under
applicable federal and state securities laws, as long as transferee agrees to
the terms and obligations of the Convertible Preferred Stock, respectively),
etc.

 

 

 

 

Transaction
Expenses:

The Company shall pay, reimburse or otherwise satisfy, upon demand of Investor,
all fees, costs and expenses incurred and/or undertaken by Investor relating to
the preparation for, development of and implementation of the Recapitalization
Plan set forth in the Recapitalization Agreement, including, without limitation,
all due diligence expenses and all expenses relating to the Bridge Funding and
the Anticipated Equity Financing  and the transactions contemplated hereby and
by the Recapitalization Agreement and the documentation of all of the foregoing
(including, without limitation all legal fees and expenses).  This obligation
shall apply regardless of whether or not all of the transactions contemplated in
the Recapitalization Agreement close. At each closing of the Anticipated Equity
Financing, at Investor’s sole discretion, and with respect to any or all of such
fees, costs and expenses accrued through such closing, the Company shall (a) pay
Investor in cash concurrently with such closing (or at Investor’s sole
discretion, Investor may withhold such amount from the wire of investments
proceeds), (b) issue a promissory note in the form of the Notes in principal
amount equal to such fees, costs and expenses; or (c) treat such fees, costs and
expenses as an unsecured payable.  At any time following such closing, Investor
may require any amounts that it elected to have the Company treat as unsecured
amounts payable to be paid in cash or satisfied by issuance of a Note in the
principal amount of some or all of such unsecured obligation.

 

 

 

 

Cross-default:

The Company acknowledges that the financing contemplated by this term sheet is
part of an integrated Recapitalization Plan, as set forth in the
Recapitalization Agreement.  The Company further acknowledges and agrees that
this term sheet is subject to all terms and conditions set forth in the
Recapitalization Agreement and the other Related Recapitalization Documents and
that the Recapitalization Agreement and the other Related Recapitalization
Documents are subject to all terms and conditions set forth in this Term Sheet.
The Company agrees that any default by the Company under any provision of this
Term Sheet, the Recapitalization Agreement or any of the other Related
Recapitalization Documents will constitute a default under this Term Sheet, each
other Related Recapitalization Document and the Recapitalization Agreement.

B-10

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Standstill/exclusivity:

The standstill/exclusivity provision in the Recapitalization Agreement shall
remain in full force and effect during the Equity Financing Period.

 

 

 

 

Termination

The Company’s obligations to issue any securities in connection with the
Anticipated Equity Financing may terminate only in accordance with Section 3.2
of the Recapitalization Agreement; however, such termination shall not have any
impact on the other rights and obligations of the parties under the
Recapitalization Agreement or the Related Recapitalization Documents, except as
explicitly set forth in Section 3.2 of the Recapitalization Agreement.

 

 

 

 

No Offer

For purposes of applicable securities laws, this Term Sheet does not constitute
an offer to sell or the solicitation of an offer to buy any of the securities
described herein. 

 

 

 

 

Binding Agreement

This Term Sheet constitutes a binding commitment on the part of the Company. 
The obligations of Investor and Other Investors under this Term Sheet are
subject to the conditions contained herein and in the Related Recapitalization
Documents.

 

 

 

Agreed and Accepted:

 

 

 

 

 

 

 

TOUCAN CAPITAL FUND II, LP

 

NORTHWEST BIOTHERAPEUTICS,
INC.

 

 

 

 

 

 

 

By:

 

By:

 

 

 

--------------------------------------------------------------------------------

 

 

--------------------------------------------------------------------------------

 

 

Name:

 

Name:

 

 

 

 

 

 

 

Title:

 

Title:

 

 

 

 

 

 

 

Date:

 

     Date:

 

 

 

--------------------------------------------------------------------------------

 

 

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B-11

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Exhibit K-1

Form of October 22 Bridge Warrant

(Filed herewith as Exhibit 10.3)

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Exhibit K-2

Form of November Bridge Warrant

THIS WARRANT AND THE UNDERLYING SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”).  THEY MAY NOT BE SOLD, OFFERED
FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO SUCH SECURITIES UNDER THE ACT OR UNLESS SUCH TRANSACTION IS IN
COMPLIANCE WITH APPLICABLE FEDERAL AND STATE SECURITIES LAWS.

NORTHWEST BIOTHERAPEUTICS, INC.

WARRANT

No. BW-

2004

          THIS CERTIFIES THAT, for value received, TOUCAN CAPITAL FUND II, L.P.,
with its principal office at 7600 Wisconsin Avenue, Suite 700, Bethesda, MD
20814, and/or its designees or assigns (collectively, the “Holder”), is entitled
to subscribe for and purchase from NORTHWEST BIOTHERAPEUTICS, INC., a Delaware
corporation, with its principal office at 22322 20th Avenue SE, Suite 150,
Bothell, Washington 98021 (the “Company”), such number of Exercise Shares as
provided herein at the Exercise Price (each subject to adjustment as provided
herein).  This Warrant is being issued pursuant to the terms of the Amended and
Restated Recapitalization Agreement, dated July 30, 2004, as amended on October
22, 2004, by and among the Company and the Holder (the “Recapitalization
Agreement”).

          1.          DEFINITIONS.  Capitalized terms used but not defined
herein shall have the meanings set forth in the Recapitalization Agreement or
Related Recapitalization Document, as applicable.  As used herein, the following
terms shall have the following respective meanings:

                       (a)           “Capital Stock” shall mean the securities
for which this Warrant is exercisable as provided in Section 2.2 hereof.

                       (b)           “Denominator Share Price” shall mean $0.10.

                       (c)           “Exercise Period” shall mean the period
commencing on the date of issuance of this Warrant and ending seven (7) years
after the date of issuance of this Warrant.

                       (d)           “Exercise Price” shall mean the lesser of
(i) $0.10 per share (subject to adjustment as provided in Section 5) or (ii) a
35% discount to the average closing price during the twenty trading days prior
to the first closing of the sale by the Company of Preferred Stock as
contemplated by the Recapitalization Agreement; provided, however, that in no
event will the Exercise Price be less than $0.04 per share (subject to
adjustment pursuant to Section 5).

K-1

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                       (e)           “Exercise Shares” shall mean a number of
shares of Capital Stock equal to the quotient of (i) 100% (i.e., 1.0) multiplied
by the Note Amount, divided by (ii) the Denominator Share Price, which in this
case equals 5,000,000 shares of Capital Stock, subject to adjustment pursuant to
the terms herein.

                       (f)          “Note Amount” shall mean $500,000.

          2.          EXERCISE OF WARRANT The rights represented by this Warrant
may be exercised in whole or in part at any time or times during the Exercise
Period, by delivery of the following to the Company at its address set forth
above (or at such other address as it may designate by notice in writing to the
Holder):

                        (a)          An executed Notice of Exercise in the form
attached hereto;

                        (b)          Payment of the Exercise Price either (i) in
cash or by check, or (ii) by cancellation of indebtedness; and

                        (c)          This Warrant.

          Upon the exercise of the rights represented by this Warrant, a
certificate or certificates for the Exercise Shares so purchased, registered in
the name of the Holder or persons affiliated with the Holder, if the Holder so
designates, shall be issued and delivered to the Holder within a reasonable time
after the rights represented by this Warrant shall have been so exercised.  In
the event that this Warrant is being exercised for less than all of the
then-current number of Exercise Shares purchasable hereunder, the Company shall,
concurrently with the issuance by the Company of the number of Exercise Shares
for which this Warrant is then being exercised, issue a new Warrant exercisable
for the remaining number of Exercise Shares purchasable hereunder.

          The person in whose name any certificate or certificates for Exercise
Shares are to be issued upon exercise of this Warrant shall be deemed to have
become the holder of record of such shares on the date on which this Warrant was
surrendered and payment of the Exercise Price was made, irrespective of the date
of delivery of such certificate or certificates, except that, if the date of
such surrender and payment is a date when the stock transfer books of the
Company are closed, such person shall be deemed to have become the holder of
such shares at the close of business on the next succeeding date on which the
stock transfer books are open.
          2.1          Net Exercise.  Notwithstanding any provisions herein to
the contrary, if the fair market value of one Exercise Share is greater than the
Exercise Price (at the date of calculation as set forth below), in lieu of
exercising this Warrant by payment of cash, the Holder may elect to receive
shares equal to the value (as determined below) of this Warrant (or the portion
thereof being canceled) by surrender of this Warrant at the principal office of
the Company together with the properly endorsed Notice of Exercise in which
event the Company shall issue to the Holder a number of Exercise Shares computed
using the following formula:

K-2

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X = Y (A-B)

 

 

--------------------------------------------------------------------------------

 

 

 

A

 

 

Where

X =

the number of Exercise Shares to be issued to the Holder

 

 

 

 

 

 

 

Y =

 

the number of Exercise Shares purchasable under the Warrant or, if only a
portion of the Warrant is being exercised, that portion of the Warrant being
canceled (at the date of such calculation)

 

 

 

 

 

 

 

A =

 

the fair market value of one Exercise Share (at the date of such calculation)

 

 

 

 

 

 

 

B =

 

Exercise Price (as adjusted to the date of such calculation)

          For purposes of the above calculation, the fair market value of one
Exercise Share shall be determined by the Company’s Board of Directors in good
faith; provided, however, that in the event that this Warrant is exercised
pursuant to this Section 2.1 in connection with the Company’s initial public
offering of its Common Stock, the fair market value per share shall be the
product of (i) the per share offering price to the public of the Company’s
initial public offering, and (ii) the number of shares of Common Stock into
which each Exercise Share is convertible at the time of such exercise.

          2.2          Securities for Which Warrant is Exercisable.  In the
event the Convertible Preferred Stock is approved and authorized, and the terms
and conditions are the same as set forth in the Recapitalization Agreement and
in the Convertible Preferred Stock Term Sheet, and Other Investors have
purchased in cash (and not by conversion of debt, exercise of warrants or
options, or conversion or exercise of other securities or instruments) a minimum
of $15 million of such Convertible Preferred Stock, on the terms and conditions
set forth in the Recapitalization Agreement and in the Convertible Preferred
Stock Term Sheet, then, subject to Section 5 hereof, this Warrant shall be
exercisable solely for such Convertible Preferred Stock.  However, if, for any
reason, such Convertible Preferred Stock is not approved or authorized, and/or
is approved or authorized on any terms different than any terms set forth in the
Recapitalization Agreement and in the Convertible Preferred Stock Term Sheet,
and/or if Other Investors have not purchased in cash (and not by conversion of
debt, exercise of warrants or options, or conversion or exercise of other
securities or instruments) a minimum of $15 million of such Convertible
Preferred Stock, on the terms and conditions set forth in the Recapitalization
Agreement and in the Convertible Preferred Stock Term Sheet, this Warrant shall
be exercisable for any Equity Security and/or Debt Security and/or any
combination thereof, in each case that Holder shall designate in Holder’s sole
discretion.

K-3

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          3.          COVENANTS OF THE COMPANY.

                       3.1          Covenants as to Exercise Shares.  The
Company covenants and agrees that all Exercise Shares that may be issued upon
the exercise of the rights represented by this Warrant will, upon issuance, be
validly issued and outstanding, fully paid and nonassessable, and free from all
taxes, liens and charges with respect to the issuance thereof.  The Company
further covenants and agrees that the Company will at all times during the
Exercise Period, have authorized and reserved, free from preemptive rights, a
sufficient number of shares of the series of equity securities comprising the
Exercise Shares and the Company’s Common Stock to provide for the exercise of
the rights represented by this Warrant and the subsequent conversion of the
Exercise Shares.  If at any time during the Exercise Period the number of
authorized but unissued shares of such series of the Company’s equity securities
or the Company’s Common Stock shall not be sufficient to permit exercise of this
Warrant or the subsequent conversion of the Exercise Shares, then, in addition
to such other remedies as may be available to Holder, including, without
limitation, the exercise of Holder’s right of first refusal set forth in Section
2.7(f) of the Recapitalization Agreement, the Company will take such corporate
action as shall be necessary to increase its authorized but unissued shares of
such series of the Company’s equity securities or the Company’s Common Stock, as
appropriate, to such number of shares as shall be sufficient for such purposes.

                       3.2          Notices of Record Date.  In the event of any
taking by the Company of a record of the holders of any class of securities for
the purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, the Company shall mail to the Holder, at least
ten (10) days prior to the date specified herein, a notice specifying the date
on which any such record is to be taken for the purpose of such dividend or
distribution.

                       3.3          No Impairment.  The Company shall not, by
amendment of its Charter or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
voluntary action, omission or agreement, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed by the Company
under and/or in connection with this Warrant, but shall at all times in good
faith use best efforts to assist in carrying out of all the provisions of and/or
relating to this Warrant and in taking all such action as may be necessary or
appropriate to protect Holder’s rights, preferences and privileges under and/or
in connection with this Warrant against impairment.   The Holder’s rights,
preferences and privileges granted under and/or in connection with this Warrant
may not be amended, modified or waived without the Holder’s prior written
consent, and the documentation providing for such rights, preferences and
privileges will specifically provide as such.

                       3.4          Registration Rights.  The Company agrees
that the Underlying Shares (as defined below) shall be “registrable securities”
(or terms of similar impact) under any agreement executed by the Company as part
of the Anticipated Equity Financing, or any other agreement executed by the
Company in lieu of, and/or in addition to, the Anticipated Equity Financing, in
each case, for purposes of providing registration rights under the Act to
holders of shares of Capital Stock, and the Company shall ensure that any such
agreement conforms with the requirements of this Section 3.4.  Such registration
rights may not be amended, modified or waived without the prior written consent
of the Holder.

K-4

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          4.          REPRESENTATIONS OF HOLDER.

                       4.1          Acquisition of Warrant for Personal
Account.  The Holder represents and warrants that it is acquiring the Warrant,
the Exercise Shares and the shares of Common Stock issuable upon conversion of
the Exercise Shares (the “Underlying Shares”) solely for its account for
investment and not with a view to or for sale or distribution of said Warrant,
Exercise Shares or Underlying Shares, or any part thereof except in compliance
with applicable federal and state securities laws.  The Holder also represents
that the entire legal and beneficial interests of the Warrant, the Exercise
Shares and the Underlying Shares the Holder is acquiring is being acquired for,
and will be held for, its account only.

                       4.2          Securities Are Not Registered.

                                       (a)          The Holder understands that
the Warrant, the Exercise Shares and the Underlying Shares have not been
registered under the Securities Act of 1933, as amended (the “Act”) on the basis
that no distribution or public offering of the stock of the Company is to be
effected by the Holder.  The Holder realizes that the basis for the exemption
may not be present if, notwithstanding its representations, the Holder 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.  The
Holder has no such present intention.

                                       (b)          The Holder recognizes that
the Warrant, the Exercise Shares and the Underlying Shares must be held
indefinitely unless they are subsequently registered under the Act or an
exemption from such registration is available; provided, however, the parties
acknowledge and agree that the Company has an obligation to register the
Underlying Shares as provided in the Recapitalization Agreement and the
Convertible Preferred Stock Term Sheet.

                                       (c)          The Holder is aware that
neither the Warrant, the Exercise Shares nor the Underlying Shares may be sold
pursuant to Rule 144 adopted under the 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 Company, 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
limitations.

                       4.3          Disposition of Warrant, Exercise Shares and
Underlying Shares.

                                       (a)          The Holder further agrees
not to make any disposition of all or any part of the Warrant, the Exercise
Shares or the Underlying Shares in any event unless and until:

K-5

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                                                      (i)          The Company
shall have received a letter secured by the Holder from the Securities and
Exchange Commission stating that no action will be recommended to the Commission
with respect to the proposed disposition;

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

                                                      (iii)          The Holder
shall have notified the Company of the proposed disposition and shall have
furnished the Company with a detailed statement of the circumstances surrounding
the proposed disposition, and such disposition shall not be contrary to any
applicable federal and/or state securities laws.

                                       (b)          The Holder understands and
agrees that all certificates evidencing the shares to be issued to the Holder
may bear the following legend:

 

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “ACT”).  THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE
SECURITIES UNDER THE ACT OR UNLESS SUCH TRANSACTION IS IN COMPLIANCE WITH
APPLICABLE FEDERAL AND STATE SECURITIES LAWS.

                       4.4          Accredited Investor Status.  The Holder is
an “accredited investor” as defined in Regulation D promulgated under the Act.

          5.          ADJUSTMENT OF EXERCISE PRICE AND EXERCISE SHARES.

                       5.1          Changes in Securities.  In the event of
changes in the series of equity securities of the Company comprising the
Exercise Shares by reason of stock dividends, splits, recapitalizations,
reclassifications, combinations or exchanges of shares, separations,
reorganizations, liquidations, or the like, the number and class of Exercise
Shares available under the Warrant in the aggregate and the Exercise Price shall
be correspondingly adjusted to give the Holder of the Warrant, on exercise for
the same aggregate Exercise Price, the total number, class, and kind of shares
as the Holder would have owned had the Warrant been exercised prior to the event
and had the Holder continued to hold such shares until after the event requiring
adjustment.  For purposes of this Section 5, the “Aggregate Exercise Price”
shall mean the aggregate Exercise Price payable in connection with the exercise
in full of this Warrant.  The form of this Warrant need not be changed because
of any adjustment in the number of Exercise Shares subject to this Warrant.

K-6

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                       5.2          Automatic Conversion.  Upon the automatic
conversion of all outstanding shares of the series of equity securities
comprising the Exercise Shares into Common Stock, if applicable, this Warrant
shall become exercisable for that number of shares of Common Stock of the
Company into which the Exercise Shares would then be convertible, so long as
such shares, if this Warrant had been exercised prior to such offering, would
have been converted into shares of the Company’s Common Stock pursuant to the
Company’s Certificate of Incorporation.  In such case, all references to
“Exercise Shares” shall mean shares of the Company’s Common Stock issuable upon
exercise of this Warrant, as appropriate.

                       5.3          Dilutive Issuances.  If at any time prior to
exercise of this Warrant, the Company issues or sells, or is deemed to have
issued or sold, additional shares of Capital Stock for a nominal or effective
price less than the then effective Exercise Price (a “Dilutive Issuance”), then
and in each such case, the then existing Exercise Price shall be reduced, as of
the opening of business on the date of such issue or sale, to the price at which
such shares are issued or sold, or deemed to be issued or sold.  For purposes of
this Section 5.3, the Company will be deemed to have issued or sold additional
shares of Capital Stock if it issues any security or instrument convertible,
exercisable or exchangeable for Capital Stock, or if it promises, undertakes,
commits, agrees or enters into any letter of intent to do so.  Notwithstanding
the foregoing, (i) no further adjustment of the Exercise Price shall be made as
a result of the actual issuance of shares of Capital Stock upon the conversion,
exercise or exchange of any such instrument or in satisfaction of any such
undertaking, commitment, agreement or letter of intent, and (ii) no adjustment
of the Exercise Price shall be made as a result of the actual issuance of any
shares of Common Stock pursuant to either (X) the exercise of those certain
options to purchase up to 35,000 shares of Common Stock at a purchase price of
$0.0001 per share that were outstanding on April 26, 2004 and held by members of
the Board of Directors of the Company; or (Y) the exercise of the Initial Bridge
Warrants.

                       5.4          Certificate of Adjustments.  Upon each
adjustment of the Exercise Price and/or Exercise Shares, the Company shall
promptly notify the Holder in writing and furnish the Holder with a certificate
of its Chief Financial Officer setting forth such adjustment and the facts upon
which such adjustment is based.

          6.          FRACTIONAL SHARES.  No fractional shares shall be issued
upon the exercise of this Warrant as a consequence of any adjustment pursuant
hereto.  All Exercise Shares (including fractions) to be issued upon exercise of
this Warrant shall be aggregated for purposes of determining whether the
exercise would result in the issuance of any fractional share.  If, after
aggregation, the exercise would result in the issuance of a fractional share,
the Company shall, in lieu of issuance of any fractional share, pay the Holder
otherwise entitled to such fraction a sum in cash equal to the product resulting
from multiplying the then current fair market value of one Exercise Share by
such fraction.

          7.          TRANSFER OF WARRANT.  Subject to applicable laws, this
Warrant and all rights hereunder are transferable, in whole or in part, at any
time or times by the Holder, upon delivery of this Warrant and the form of
assignment attached hereto to any transferee designated by Holder.  The
transferee shall sign a customary investment letter in form and substance
reasonably satisfactory to the Company.

K-7

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          8.          LOST, STOLEN, MUTILATED OR DESTROYED WARRANT.  If this
Warrant is lost, stolen, mutilated or destroyed, the Company may, on such terms
as to indemnity or otherwise as it may reasonably impose (which shall, in the
case of a mutilated Warrant, include the surrender thereof), issue a new Warrant
of like denomination and tenor as the Warrant so lost, stolen, mutilated or
destroyed.  Any such new Warrant shall constitute an original contractual
obligation of the Company, whether or not the allegedly lost, stolen, mutilated
or destroyed Warrant shall be at any time enforceable by anyone.

          9.          AMENDMENT.  Any term of this Warrant may be amended or
waived only with the written consent of the Company and the Holder.

          10.         NOTICES, ETC.  All notices required or permitted hereunder
shall be in writing and shall be deemed effectively given upon actual delivery
to the recipient.   All communications shall be sent to the Company and to the
Holder at the addresses listed on the signature page hereof or at such other
address as the Company or Holder may designate by ten (10) days advance written
notice to the other parties hereto.

          11.         GOVERNING LAW.  This Warrant and all rights, obligations
and liabilities hereunder shall be governed by and construed under the laws of
the State of Delaware as applied to agreements among Delaware residents, made
and to be performed entirely within the State of Delaware without giving effect
to conflicts of laws principles.

[Signature Page Follows]

K-8

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          IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
by its duly authorized officer as of the date first written above.

 

 

NORTHWEST BIOTHERAPEUTICS, INC.

 

 

 

 

 

By

 

 

 

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Name:  Alton Boynton

 

 

 

 

 

Title:  President

 

 

 

 

 

Address:

22322 20th Avenue SE

 

 

 

Suite 150

 

 

 

Bothell, WA  98021

 

 

 

Fax:  (425) 608-3146

 

 

 

ACKNOWLEDGED AND AGREED:

 

 

 

 

 

TOUCAN CAPITAL FUND II, LP

 

 

 

 

 

By

 

 

 

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Name:  Linda Powers

 

 

 

 

 

Title:  Managing Director

 

 

 

 

 

Address:

7600 Wisconsin Avenue

 

 

 

Suite 700

 

 

 

Bethesda, MD  20814

 

 

 

Fax:  (240) 497-4060

 

 

[Signature Page to Warrant No. BW-__]

K-9

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NOTICE OF EXERCISE

TO:     NORTHWEST BIOTHERAPEUTICS, INC.

            (1)          o          The undersigned hereby elects to purchase
________ shares of ___________ (the “Exercise Shares”) of NORTHWEST
BIOTHERAPEUTICS, INC. (the “Company”) pursuant to the terms of the attached
Warrant, and tenders herewith payment of the exercise price in full, together
with all applicable transfer taxes, if any.

                           o          The undersigned hereby elects to purchase
________ shares of __________ (the “Exercise Shares”) of NORTHWEST
BIOTHERAPEUTICS, INC. (the “Company”) pursuant to the terms of the net exercise
provisions set forth in Section 2.1 of the attached Warrant, and shall tender
payment of all applicable transfer taxes, if any.

            (2)          Please issue a certificate or certificates representing
said Exercise Shares in the name of the undersigned or in such other name as is
specified below:

 

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(Name)

 

 

 

 

 

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(Address)

 

          (3)          The undersigned represents that (i) the aforesaid
Exercise Shares are being acquired for the account of the undersigned for
investment and not with a view to, or for resale in connection with, the
distribution thereof and that the undersigned has no present intention of
distributing or reselling such shares, except in accordance with applicable
federal and state securities laws; (ii) the undersigned is aware of the
Company’s business affairs and financial condition and has acquired sufficient
information about the Company to reach an informed and knowledgeable decision
regarding its investment in the Company; (iii) the undersigned is experienced in
making investments of this type and has such knowledge and background in
financial and business matters that the undersigned is capable of evaluating the
merits and risks of this investment and protecting the undersigned’s own
interests; (iv) the undersigned understands that Exercise Shares issuable upon
exercise of this Warrant have not been registered under the Securities Act of
1933, as amended (the “Securities Act”), by reason of a specific exemption from
the registration provisions of the Securities Act, which exemption depends upon,
among other things, the bona fide nature of the investment intent as expressed
herein, and, because such securities have not been registered under the
Securities Act, they must be held indefinitely unless subsequently registered
under the Securities Act or an exemption from such registration is available;
(v) the undersigned is aware that the aforesaid Exercise Shares may not be sold
pursuant to Rule 144 adopted under the Securities Act unless certain conditions
are met and until the undersigned has held the shares for the number of years
prescribed by Rule 144, that among the conditions for use of the Rule is the
availability of current information to the public about the Company; and (vi)
the undersigned agrees not to make any disposition of all or any part of the
aforesaid shares of Exercise Shares unless and until there is then in effect a
registration statement under the Securities Act covering such proposed
disposition or unless such transaction is in compliance with applicable federal
and state securities laws.

K-10

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          (Date)

 

(Signature)

 

 

 

 

 

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(Print name)

K-11

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ASSIGNMENT FORM

(To assign the foregoing Warrant, execute this form
and supply required information.  Do not use this
form to purchase shares.)

          FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced
thereby are hereby assigned to

Name:

 

 

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(Please Print)

 

 

Address:

 

 

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(Please Print)

 

Dated:

__________, 20__

 

 

Holder’s
Signature:

 

 

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Holder’s
Address:

 

 

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NOTE:  The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatever.  Officers of corporations and those acting in a fiduciary or
other representative capacity should file proper evidence of authority to assign
the foregoing Warrant.

K-12

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