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          “Affected Secured Party” means (i) with respect to the occurrence of an Event ofDefault of the type specified in Section 7(a) hereof, Gonda, (ii) with respect to theoccurrence of an Event of Default of the type specified in Section 7(b) hereof, Grimes and(iii) with respect to the occurrence of an Event of Default of the type specified in Section7(c) hereof, Pecota.          “Code” means the Internal Revenue Code of 1986, asamended.          “Collateral” has the meaning set forth inSection 2 hereof.          “Controlled Foreign Corporation” means a “controlled foreign corporation” as definedin the Internal Revenue Code of 1986.          “Documents” means this Agreement, the Gonda Change of Control Agreement, the GrimesChange of Control Agreement, the Pecota Change of Control Agreement and the Executive OfficerSeverance Benefit Plan.          “Event of Default” has the meaning set forth in Section 7 hereof, and shallinclude each Gonda Event of Default, each Grimes Event of Default and each Pecota Event ofDefault.          “Executive Officer Severance Benefit Plan” has the meaning ascribed to such term inthe Recitals to this Agreement.          “Future Lender” means any lender or other Person who provides financing to Debtor ona secured basis from and after the date hereof.          “Gonda Change of Control Agreement” has the meaning ascribed to such term in theRecitals to this Agreement.          “Gonda Event of Default ” has the meaning ascribed to such term in Section 7(a)hereof.          “Gonda Secured Obligations” means, collectively, (i) the obligation of Debtor to makeseverance-related payments to Gonda, whether absolute or contingent, due or to become due, nowexisting or hereafter arising, under the Gonda Change of Control Agreement in accordance with theterms and provisions thereof and (ii) the obligation of Debtor to make severance-related paymentsto Gonda, whether absolute or contingent, due or to become due, now existing or hereafter arising,under the Executive Officer Severance Benefit Plan in accordance with the terms and provisionsthereof; provided, however, to the extent that any severance payment (or portionthereof) payable to Gonda pursuant to the Gonda Change of Control Agreement or the ExecutiveOfficer Severance Benefit Plan is not exempt from Section 409A of the Code, such severance payment(or portion thereof) shall not constitute a Gonda Secured Obligation hereunder.          “Grimes Change of Control Agreement” has the meaning ascribed to such term in theRecitals to this Agreement.          “Grimes Event of Default ” has the meaning ascribed to such term in Section 7(b)hereof.
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          “Grimes Secured Obligations” means, collectively, (i) the obligation of Debtor tomake severance-related payments to Grimes, whether absolute or contingent, due or to become due,now existing or hereafter arising, under the Grimes Change of Control Agreement in accordance withthe terms and provisions thereof and (ii) the obligation of Debtor to make severance-relatedpayments to Grimes, whether absolute or contingent, due or to become due, now existing orhereafter arising, under the Executive Officer Severance Benefit Plan in accordance with the termsand provisions thereof; provided, however, to the extent that any severancepayment (or portion thereof) payable to Grimes pursuant to the Grimes Change of Control Agreementor the Executive Officer Severance Benefit Plan is not exempt from Section 409A of the Code, suchseverance payment (or portion thereof) shall not constitute a Grimes Secured Obligation hereunder.          “Incurred Costs” has the meaning specified in Section 8(b) hereof.          “Lien” means any mortgage, deed of trust, pledge, security interest, assignment,deposit arrangement, charge or encumbrance, lien, or other type of preferential arrangement.          “Pecota Change of Control Agreement” has the meaning ascribed to such term in theRecitals to this Agreement.          “Pecota Event of Default ” has the meaning ascribed to such term in Section 7(c)hereof.          “Pecota Secured Obligations” means, collectively, (i) the obligation of Debtor to makeseverance-related payments to Pecota, whether absolute or contingent, due or to become due, nowexisting or hereafter arising, under the Pecota Change of Control Agreement in accordance with theterms and provisions thereof and (ii) the obligation of Debtor to make severance-related paymentsto Pecota, whether absolute or contingent, due or to become due, now existing or hereafter arising,under the Executive Officer Severance Benefit Plan in accordance with the terms and provisionsthereof; provided, however, to the extent that any severance payment (or portionthereof) payable to Pecota pursuant to the Pecota Change of Control Agreement or the ExecutiveOfficer Severance Benefit Plan is not exempt from Section 409A of the Code, such severance payment(or portion thereof) shall not constitute a Pecota Secured Obligation hereunder.          “Person” means an individual, corporation, partnership, joint venture, trust,unincorporated organization, governmental agency or authority, or any other entity of whatevernature.          “Pro Rata Share” means, with respect to any Affected Secured Party at any time, thequotient (expressed as a percentage) obtained by dividing (i) the aggregate amount of all SecuredObligations owed to such Affected Secured Party at such time by (ii) the aggregate amount of allSecured Obligations owed to all Affected Secured Parties at such time.          “Releasing Secured Party” has the meaning specified in Section 18hereof.          “Secured Obligations” means, collectively, the Gonda Secured Obligations, the GrimesSecured Obligations and the Pecota Secured Obligations.
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          “UCC” means the Uniform Commercial Code as the same may, from time to time, be ineffect in the State of California.          (b) Where applicable and except as otherwise defined herein, terms used in this Agreementshall have the meanings assigned to them in the UCC.          (c) In this Agreement, (i) the meaning of defined terms shall be equally applicable to both thesingular and plural forms of the terms defined; and (ii) the captions and headings are forconvenience of reference only and shall not affect the construction of this Agreement.          SECTION 2 Security Interest. As security for the payment and performance of theSecured Obligations, Debtor hereby grants to each Secured Party a security interest in all ofDebtor’s right, title and interest in, to and under all of its personal property, wherever locatedand whether now existing or owned or hereafter acquired or arising, including all accounts,chattel paper, commercial tort claims, deposit accounts, documents, equipment (including allfixtures), general intangibles, instruments, inventory, investment property, letter-of-creditrights, other goods, money and all products, proceeds and supporting obligations of any and all ofthe foregoing (collectively, the “Collateral”). This Agreement shall create a continuingsecurity interest in the Collateral which shall remain in effect until terminated in accordancewith Section 18 hereof. Anything herein to the contrary notwithstanding, in no event shallthe Collateral include, and Debtor shall not be deemed to have granted a security interest in, anyof Debtor’s right, title or interest in any of the outstanding voting capital stock or otherownership interests of a Controlled Foreign Corporation (as defined below) in excess of 65% of thevoting power of all classes of capital stock or other ownership interests of such ControlledForeign Corporation entitled to vote.          SECTION 3 Financing Statements and other Action. Debtor hereby authorizes each SecuredParty to file at any time and from time to time any financing statements describing the Collateral,and Debtor shall execute and deliver to each Secured Party, and Debtor hereby authorizes eachSecured Party to file (with or without Debtor’s signature), at any time and from time to time, allamendments to financing statements, assignments, continuation financing statements, terminationstatements, account control agreements, and other documents and instruments, in form reasonablysatisfactory to such Secured Party, as such Secured Party may reasonably request, to perfect andcontinue perfected, maintain the priority of or provide notice of the security interest of suchSecured Party in the Collateral and to accomplish the purposes of this Agreement. Without limitingthe generality of the foregoing, Debtor ratifies and authorizes the filing by each Secured Party ofany financing statements filed prior to the date hereof.          SECTION 4 Representations and Warranties. Debtor represents and warrants to eachSecured Party that:          (a) Debtor is duly organized, validly existing and in good standing under the law of thejurisdiction of its organization and has all requisite power and authority to execute, deliver andperform its obligations under this Agreement.
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          (b) The execution, delivery and performance by Debtor of this Agreement have been dulyauthorized by all necessary action of Debtor, and this Agreement constitutes the legal, valid andbinding obligation of Debtor, enforceable against Debtor in accordance with its terms, except asenforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization,moratorium or similar law relating to or affecting creditors’ rights generally.          (c) No authorization, consent, approval, license, exemption of, or filing or registrationwith, any governmental authority or agency, or approval or consent of any other Person, is requiredfor the due execution, delivery or performance by Debtor of this Agreement, except for any filingsnecessary to perfect any Liens on any Collateral.          (d) Debtor’s chief executive office and principal place of business (as of the date of thisAgreement) is located at the address set forth in Schedule 1; Debtor’s jurisdiction oforganization and organizational identification number are set forth in Schedule 1; Debtor’sexact legal name is as set forth in the first paragraph of this Agreement; and all other locationswhere Debtor conducts business or Collateral is kept (as of the date of this Agreement) are setforth in Schedule 1.          (e) Debtor has rights in or the power to transfer the Collateral and Debtor is the sole andcomplete owner of the Collateral.          SECTION 5 Covenants. So long as any of the Secured Obligations remain unsatisfied,Debtor agrees that:          (a) Debtor shall appear in and defend any action, suit or proceeding which may affect to amaterial extent any applicable Secured Party’s right or interest in, the Collateral.          (b) Debtor shall give prompt written notice to each Secured Party (and in any event not laterthan 30 days following any change described below in this subsection) of: (i) any change in thelocation of Debtor’s chief executive office or principal place of business; (ii) any change in thelocations set forth in Schedule 1; (iii) any change in its name; (iv) any changes in itsidentity or structure in any manner which might make any financing statement filed hereunderincorrect or misleading; (v) any change in its registration as an organization (or any new suchregistration); or (vi) any change in its jurisdiction of organization.          (c) Debtor shall pay and discharge all taxes, fees, assessments andgovernmental charges or levies imposed upon it with respect to the Collateral prior to the date onwhich penalties attach thereto, except to the extent such taxes, fees, assessments or governmentalcharges or levies are being contested in good faith by appropriate proceedings.          SECTION 6 Rights of Secured Party; Authorization; Appointment. Each Secured Partyshall have the right to, in the name of Debtor, or in the name of such Secured Party or otherwise,upon notice to but without the requirement of assent by Debtor, and Debtor hereby constitutes andappoints such Secured Party (and any of such Secured Party’s agents designated by such SecuredParty) as Debtor’s true and lawful attorney-in-fact, with full power and authority to sign and fileany of the financing statements and other documents and instruments which must be executed or filedto perfect or continue perfected, maintain the
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priority of or provide notice of such Secured Party’s security interest in the Collateral, executeany and all such other documents and instruments, and do any and all acts and things for and onbehalf of Debtor, which such Secured Party may deem reasonably necessary or advisable to maintain,protect, realize upon and preserve the Collateral and such Secured Party’s security interesttherein and to accomplish the purposes of this Agreement. The foregoing power of attorney iscoupled with an interest and irrevocable so long as the Secured Obligations have not been paid andperformed in full. Debtor hereby ratifies, to the extent permitted by law, all that any SecuredParty shall lawfully and in good faith do or cause to be done by virtue of and in compliance withthis Section 6.          SECTION 7 Events of Default. Any of the following events which shall occurand be continuing shall constitute an “Event of Default”:          (a) Debtor shall fail to satisfy any of the Gonda Secured Obligations and such failure shallcontinue uncured for 30 days after the date on which such Gonda Secured Obligation is to be paid orperformed by Debtor (a “Gonda Event of Default”); or          (b) Debtor shall fail to satisfy any of the Grimes Secured Obligations and such failure shallcontinue uncured for 30 days after the date on which such Grimes Secured Obligation is to be paidor performed by Debtor (a “Grimes Event of Default”); or          (c) Debtor shall fail to satisfy any of the Pecota Secured Obligations and such failure shallcontinue uncured for 30 days after the date on which such Pecota Secured Obligation is to be paidor performed by Debtor (a “P Event of Default”).          SECTION 8 Remedies.          (a) Upon the occurrence and during the continuance of one or more Events of Default, eachAffected Secured Party shall have, in addition to all other rights and remedies granted to it inthis Agreement or any other Document, all rights and remedies of a secured party under the UCC andother applicable laws.          (b) The cash proceeds actually received by any Affected Secured Party from the sale or otherdisposition or collection of Collateral undertaken as a result of the occurrence of an Event ofDefault, the application of which is not otherwise provided for herein, shall be applied (i)first, to the payment of the reasonable costs and expenses of such Affected Secured Partyincurred in connection with such sale or other disposition or collection of Collateral(“Incurred Costs”) and (ii) second, to the payment of the Secured Obligations thenowing to such Affected Secured Party; provided that where such cash proceeds are receivedby an Affected Secured Party during the existence of more than one Event of Default, such proceedsshall be distributed among each Affected Secured Party then extant for application (y)first, to the Incurred Costs of such Affected Secured Parties in accordance with theirrespective Pro Rata Shares and (z) second, to the payment of the Secured Obligations thenowing to such Affected Secured Parties in accordance with their respective Pro Rata Shares. Anysurplus of such proceeds which exists after the payment and performance in full of the IncurredCosts and Secured Obligations owing to such Affected Secured Party or Affected Secured Parties, asthe case may be, shall be promptly paid over to Debtor or otherwise disposed of in accordance with
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the UCC or other applicable law. Without affecting the generality of the foregoing, Debtor shallremain liable to any applicable Affected Secured Party for any deficiency which exists after anysuch sale or other disposition or collection of Collateral.          SECTION 9 Subordination. Each Secured Party hereby agrees that the Lien and securityinterest in favor of such Secured Party created hereby shall be subject, subordinate and junior inall respects and at all times to any Liens and security interests granted by Debtor after the datehereof in favor of any Future Lender, regardless of the time or order of attachment or perfectionof any such Liens and security interests, the time or order of the filing of financing statementsby any such Future Lender in connection therewith or any other circumstances whatsoever. EachSecured Party further covenants and agrees that it will promptly execute and deliver to or for thebenefit of Debtor or any such Future Lender any subordination agreements or other agreements,documents or instruments reasonably requested by Debtor or such Future Lender for the purpose ofeffecting the subordination of the Lien and security interest of the Secured Parties granted byDebtor hereunder.          SECTION 10 Relationship Among Secured Parties.          (a) The provisions of this Section 10 are solely for the benefit of the SecuredParties, and Debtor shall have no rights as a third party beneficiary with respect to any of theprovisions contained in this Section 10.          (b) Notwithstanding any provision to the contrary contained elsewhere in this Agreement, noSecured Party shall have any duties or responsibilities, except those expressly set forth herein,nor shall any Secured Party have or be deemed to have any fiduciary relationship with any otherSecured Party. Except as expressly otherwise provided in this Agreement, each Secured Party shallhave and may use its sole discretion with respect to exercising or refraining from exercising anydiscretionary rights or taking or refraining from taking any actions which such Secured Party isexpressly entitled to take or assert under this Agreement.          (c) Gonda shall promptly notify the other Secured Parties of the occurrence of a Gonda Eventof Default, Grimes shall promptly notify the other Secured Parties of the occurrence of a GrimesEvent of Default and Pecota shall promptly notify the other Secured Parties of the occurrence of aPecota Event of Default.          (d) Each of the Secured Parties covenants and agrees that during the existence of an Event ofDefault, (i) any Affected Secured Party may, upon 5 days prior notice delivered each other SecuredParty, proceed to exercise remedies in accordance with Section 8 hereof without the consentof any other Secured Party, subject to the Collateral proceeds sharing provisions set forth inSection 8(b) hereof, and (ii) no such other Secured Party not then constituting an AffectedSecured Party shall take any action to hinder or delay such Affected Secured Party in connectionwith the exercise by such Affected Secured Party of remedies as contemplated in the foregoingclause (i).          (e) Subject to Section 18 hereof, no Secured Party (whether or not any such SecuredParty then constitutes an Affected Secured Party) shall agree to release any Collateral except withthe prior written consent of the other Secured Parties.
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          (f) Each Secured Party acknowledges that the other Secured Parties have not made anyrepresentation or warranty to it, and that no act by any Secured Party hereinafter taken,including any review of the affairs of Debtor, shall be deemed to constitute any representation orwarranty by such Secured Party to any other Secured Party. Each Secured Party also represents thatit will, independently and without reliance upon the other Secured Parties and based on suchdocuments and information as it shall deem appropriate at the time, continue to make its owndecisions in taking or not taking action under this Agreement and the other Documents, and to makesuch investigations as it deems necessary to inform itself as to the business, prospects,operations, property, financial and other condition and creditworthiness of Debtor.          SECTION 11 Notices. All notices or other communications hereunder shall be in writing(including by facsimile transmission or by email) and mailed (by certified or registered mail),sent or delivered to the respective parties hereto at or to their respective addresses, facsimilenumbers or email addresses set forth below their names on the signature pages hereof, or at or tosuch other address, facsimile number or email address as shall be designated by any party in awritten notice to the other parties hereto. All such notices and communications shall be effective(i) if delivered by hand, sent by certified or registered mail or sent by an overnight courierservice, when received; and (ii) if sent by facsimile transmission or electronic mail, when sent.          SECTION 12 No Waiver; Cumulative Remedies. No failure on the part of any SecuredParty to exercise, and no delay in exercising, any right, remedy, power or privilege hereundershall operate as a waiver thereof with respect to such Secured Party, nor shall any single orpartial exercise of any such right, remedy, power or privilege by such Secured Party preclude anyother or further exercise thereof or the exercise of any other right, remedy, power or privilegeby such Secured Party. The rights and remedies under this Agreement are cumulative and notexclusive of any rights, remedies, powers and privileges that may otherwise be available to anySecured Party.          SECTION 13 Binding Effect. This Agreement shall be binding upon, inure to the benefitof and be enforceable by Debtor, each Secured Party and their respective successors and assigns.          SECTION 14 Governing Law. This Agreement shall be governed by, and construed inaccordance with, the law of the State of California, except as required by mandatory provisions oflaw and to the extent the validity or perfection of the security interests hereunder, or theremedies hereunder, in respect of any Collateral are governed by the law of a jurisdiction otherthan California.          SECTION 15 Entire Agreement; Amendment. This Agreement, together with the Documents,contains the entire agreement of the parties with respect to the subject matter hereof and shallnot be amended nor shall any waiver of any term or provision hereof be granted, except by thewritten agreement of Debtor and each Secured Party whose interests are affected by any suchamendment or waiver, as applicable; provided, however, that a Secured Party mayterminate the Lien and security interest created hereunder in favor of such Secured Party pursuantto Section 18(c) hereof.
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          SECTION 16 Severability. Whenever possible, each provision of this Agreement shall beinterpreted in such manner as to be effective and valid under all applicable laws and regulations.If, however, any provision of this Agreement shall be prohibited by or invalid under any such lawor regulation in any jurisdiction, it shall, as to such jurisdiction, be deemed modified toconform to the minimum requirements of such law or regulation, or, if for any reason it is notdeemed so modified, it shall be ineffective and invalid only to the extent of such prohibition orinvalidity without affecting the remaining provisions of this Agreement, or the validity oreffectiveness of such provision in any other jurisdiction.          SECTION 17 Counterparts. This Agreement may be executed in any number of counterpartsand by different parties hereto in separate counterparts, each of which when so executed shall bedeemed to be an original and all of which taken together shall constitute but one and the sameagreement.          SECTION 18 Termination. A Secured Party shall no longer be a party to this Agreementand the Lien and security interest created under this Agreement in favor of such Secured Partyshall terminate (and such Secured Party (a “Releasing Secured Party”) shall promptlyexecute and deliver to Debtor such documents and instruments reasonably requested by Debtor asshall be necessary to evidence the termination of such Lien and security interest) upon the earlierof: (a) the payment and performance in full of all Secured Obligations owing to such Secured Party,(b) all Secured Obligations owing to such Releasing Secured Party having ceased to exist pursuantto the terms of the Documents to which such Releasing Secured Party is a party and (c) suchReleasing Secured Party’s delivery of written notice to Debtor that such Releasing Secured Partydesires to terminate the Lien and security interest created hereunder in favor of such ReleasingSecured Party; provided, however, that, in the case of clauses (a), (b) or (c)above, the Lien and security interest created hereunder in favor of any other Secured Party shallnot be affected by any termination of the Lien and security interest in favor of such ReleasingSecured Party.*[Remainder of page intentionally left blank]*
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     IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, as of the date firstabove written.         **DEBTOR:**           **ARADIGM CORPORATION**           By: