(ii) the Prepayment Fee and the Growth Capital Final Payment, plus (iii) all other sums, ifany, that shall have become due and payable, including interest at the Default Rate with respect toany past due amounts.     **2.2 Payment of Interest on the Credit Extensions.**          (a) Interest Rate. Subject to Section 2.2(b), the principal amountoutstanding for each Growth Capital Advance shall accrue interest, which interest shall be payablemonthly in arrears, at a fixed per annum rate equal to the greater of (i) 12.00% and (ii) 795 basispoints (7.95%) above the 3-month LIBOR as of the date that the Notes for such Growth CapitalAdvance are prepared.          (b) Default Rate. Immediately upon the occurrence and during the continuance of anEvent of Default, Obligations shall bear interest at a rate per annum which is five percentagepoints above the rate effective immediately before the Event of Default (the **“Default Rate”**).Payment or acceptance of the increased interest rate provided in this Section 2.2(b) is nota permitted alternative to timely payment and shall not constitute a waiver of any Event of Defaultor otherwise prejudice or limit any rights or remedies of Lenders.          (c) 360-Day Year. Interest shall be computed on the basis of a 360-day year of twelve30-day months.          (d) Debit of Accounts. Collateral Agent, or (but without duplication) Bank, for thebenefit of the Lenders, may debit any of Borrower’s deposit accounts, including the DesignatedDeposit Account, for principal and interest payments or any other amounts Borrower owes Lenderswhen due. These debits shall not constitute a set-off.          (e) Payments. Unless otherwise provided, interest is payable monthly on the firstcalendar day of each month. Payments of principal and/or interest received after 12:00 p.m.Pacific time are considered received at the opening of business on the next Business Day. When apayment is due on a day that is not a Business Day, the payment is due the next Business Day andadditional fees or interest, as applicable, shall continue to accrue.     **2.3 Fees.**Borrower shall pay to Collateral Agent:          (a) Loan Fee. A fully earned, non-refundable loan fee of Eighty Thousand Dollars($80,000) ((to be shared between Bank ($30,000) and Oxford ($50,000)), receipt of which hereby isacknowledged;          (b) Prepayment Fee. The Prepayment Fee, when due hereunder;          (c) Growth Capital Final Payment. The Growth Capital Final Payment, when duehereunder; and          (d) Lenders’ Expenses. All documented Lenders’ Expenses (including reasonableattorneys’ fees and expenses incurred in connection with the documentation and negotiation of thisAgreement) incurred through and after the Effective Date, when due.     **3****CONDITIONS OF LOANS**     **3.1 Conditions Precedent to Initial Credit Extension.**Lenders’ obligation to make the initialCredit Extension is subject to the condition precedent that Lenders shall have received, in formand substance satisfactory to Lenders, such documents, and completion of such other matters, asLenders may reasonably deem necessary or appropriate, including, without limitation:          (a) duly executed original signatures to the Loan Documents to which it is a party;          (b) a duly executed original signature to the Warrant to be issued to Oxford and a dulyexecuted original signature to the Warrant to be issued to Bank;
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          (c) duly executed original signatures to the Control Agreement[s];          (d) its Operating Documents and a good standing certificate of Borrower certified by theSecretary of State of the States of Delaware and California as of a date no earlier than thirty(30) days prior to the Effective Date;          (e) duly executed original signatures to the completed Borrowing Resolutions for Borrower (oneset for each Lender);          (f) certified copies, dated as of a recent date, of financing statement searches, as Lendersshall request, accompanied by written evidence (including any UCC termination statements) that theLiens indicated in any such financing statements either constitute Permitted Liens or have been or,in connection with the initial Credit Extension, will be terminated or released;          (g) a legal opinion of Borrower’s counsel dated as of the Effective Date together with theduly executed original signatures thereto;          (h) two Perfection Certificate(s) executed by Borrower (one for each Lender);          (i) evidence satisfactory to Lenders that the insurance policies required by Section6.4 hereof are in full force and effect, together with appropriate evidence showing losspayable and/or additional insured clauses or endorsements in favor of each Lender; and          (j) payment of the fees and Lenders’ Expenses then due as specified in Section 2.3hereof.     **3.2 Conditions Precedent to all Credit Extensions.**Lenders’ obligations to make each CreditExtension, including the initial Credit Extension, are subject to the following:          (a) Borrower shall have duly executed and delivered to Collateral Agent a Payment/AdvanceForm;          (b) Borrower shall have duly executed and delivered to each Lender a Note in the amount ofsuch Lender’s pro rata portion of such Growth Capital Advance;          (c) the representations and warranties in Section 5 shall be true in all materialrespects on the date of the Payment/Advance Form and on the Funding Date of each Credit Extension;provided, however, that such materiality qualifier shall not be applicable to any representationsand warranties that already are qualified or modified by materiality in the text thereof; andprovided, further that those representations and warranties expressly referring to a specific dateshall be true, accurate and complete in all material respects as of such date, and no Default orEvent of Default shall have occurred and be continuing or result from the Credit Extension. EachCredit Extension is Borrower’s representation and warranty on that date that the representationsand warranties in Section 5 remain true in all material respects; provided, however, thatsuch materiality qualifier shall not be applicable to any representations and warranties thatalready are qualified or modified by materiality in the text thereof; and provided, further thatthose representations and warranties expressly referring to a specific date shall be true, accurateand complete in all material respects as of such date; and          (d) in Lenders’ reasonable discretion, there has not been a Material Adverse Change.     **3.3 Covenant to Deliver.**     Borrower agrees to deliver to Lenders each item required to be delivered to any Lender underthis Agreement as a condition to any Credit Extension. Borrower expressly agrees that theextension of a Credit Extension prior to the receipt by Lenders of any such item shall notconstitute a waiver by Lenders of Borrower’s obligation to deliver such item, and any suchextension in the absence of a required item shall be in Lenders’ sole discretion.
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     **3.4 Procedures for Borrowing.**To obtain a Growth Capital Advance, Borrower must notifyCollateral Agent by facsimile or telephone by 12:00 p.m. Pacific Time five (5) Business Days priorto the date the Growth Capital Advance is to be made (except in the case of the Growth CapitalAdvances to be made on or about the Effective Date, notice of which shall be provided theCollateral Agent on or prior to the Effective Date). If such notification is by telephone,Borrower must promptly confirm the notification by delivering to Collateral Agent a completedPayment/Advance Form in the form attached as Exhibit B. Upon receipt of a Payment/AdvanceForm, Collateral Agent shall promptly provide a copy of the same to each Lender. On the GrowthCapital Funding Date, each Lender shall credit and/or transfer (as applicable) to Borrower’sdeposit account, an amount equal to its Growth Capital Commitment Percentage multiplied by theamount of the Growth Capital Advance. Each Lender may rely on any telephone notice given by aperson whom such Lender reasonably believes is a Responsible Officer. Borrower shall indemnifyeach Lender for any loss Lender suffers due to such reliance.     **4****CREATION OF SECURITY INTEREST**     **4.1 Grant of Security Interest.**Borrower hereby grants Collateral Agent, for the benefit ofthe Lenders, to secure the payment and performance in full of all of the Obligations, a continuingsecurity interest in the Collateral, wherever located, whether now owned or hereafter acquired orarising, and all proceeds and products thereof. Borrower represents, warrants, and covenants thatthe security interest granted herein is and shall at all times continue to be a first priorityperfected security interest in the Collateral (subject only to Permitted Liens that may havesuperior priority pursuant to the terms of this Agreement). If Borrower shall acquire a commercialtort claim (as defined in the Code), Borrower shall promptly notify Collateral Agent in a writingsigned by Borrower of the general details thereof (and further details as may be required byCollateral Agent) and grant to Collateral Agent, for the benefit of the Lenders, in such writing asecurity interest therein and in the proceeds thereof, all upon the terms of this Agreement, withsuch writing to be in form and substance reasonably satisfactory to Collateral Agent.     If this Agreement is terminated, Collateral Agent’s Lien in the Collateral shall continueuntil the Obligations (other than inchoate indemnity obligations) are repaid in full in cash. Uponpayment in full in cash of the Obligations (other than inchoate indemnity obligations) and at suchtime as the Lenders’ obligation to make Credit Extensions has terminated, Collateral Agent shall,at Borrower’s sole cost and expense, release its Lien in the Collateral and all rights thereinshall revert to Borrower.     **4.2 Authorization to File Financing Statements.**Borrower hereby authorizes Collateral Agentto file financing statements, without notice to Borrower, with all appropriate jurisdictions toperfect or protect Collateral Agents’ interest or rights hereunder, including a notice that anydisposition of the Collateral, by either Borrower or any other Person, other than in accordancewith this Agreement shall be deemed to violate the rights of Collateral Agent under the Code.     **5****REPRESENTATIONS AND WARRANTIES**          Borrower represents and warrants as follows:     **5.1 Due Organization and Authorization.**Borrower and each of its Subsidiaries, if any, areduly existing and in good standing, as Registered Organizations in their respective jurisdictionsof formation and are qualified and licensed to do business and are in good standing in anyjurisdiction in which the conduct of their business or their ownership of property requires thatthey be qualified except where the failure to do so could not reasonably be expected to have amaterial adverse effect on Borrower’s business. In connection with this Agreement, Borrower hasdelivered to Collateral Agent a completed perfection certificate signed by Borrower (the**“Perfection Certificate”**). Borrower represents and warrants that (a) Borrower’s exact legal nameis that indicated on the Perfection Certificate and on the signature page hereof; (b) Borrower isan organization of the type and is organized in the jurisdiction set forth in the PerfectionCertificate; (c) the Perfection Certificate accurately sets forth Borrower’s organizationalidentification number or accurately states that Borrower has none; (d) the Perfection Certificateaccurately sets forth Borrower’s place of business, or, if more than one, its chief executiveoffice as well as Borrower’s mailing address (if different than its chief executive office); (e)Borrower (and each of its predecessors) has not, in the past five (5) years, changed itsjurisdiction of formation, organizational structure or type, or any organizational number assignedby its jurisdiction; and (f) all other information set forth on the
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Perfection Certificate pertaining to Borrower and each of its Subsidiaries is accurate andcomplete. If Borrower is not now a Registered Organization but later becomes one, Borrower shallpromptly notify Collateral Agent of such occurrence and provide Collateral Agent with Borrower’sorganizational identification number.     The execution, delivery and performance by Borrower of the Loan Documents to which it is aparty have been duly authorized, and do not (i) conflict with any of Borrower’s OperatingDocuments, (ii) contravene, conflict with, constitute a default under or violate any materialRequirement of Law, (iii) contravene, conflict or violate any applicable order, writ, judgment,injunction, decree, determination or award of any Governmental Authority by which Borrower or anyof its Subsidiaries or any of their property or assets may be bound or affected, (iv) require anyaction by, filing, registration, or qualification with, or Governmental Approval from, anyGovernmental Authority (except such Governmental Approvals which have already been obtained and arein full force and effect) or are being obtained pursuant to Section 6.1(b), or (v) constitute anevent of default under any material agreement by which Borrower is bound. Borrower is not indefault under any agreement to which it is a party or by which it is bound in which the defaultcould reasonably be expected to have a material adverse effect on Borrower’s business.     **5.2 Collateral.**Borrower has good title to, has rights in, and the power to transfer eachitem of the Collateral upon which it purports to grant a Lien hereunder, free and clear of any andall Liens except Permitted Liens. Borrower has no deposit accounts other than the deposit accountswith Bank, the deposit accounts, if any, described in the Perfection Certificate delivered toCollateral Agent in connection herewith, or of which Borrower has given Lenders notice and takensuch actions as are necessary to give Collateral Agent a perfected security interest therein.     No Collateral in excess of $50,000 in the aggregate is in the possession of any third-partybailee (such as a warehouse) except as otherwise provided in the Perfection Certificate. None ofthe components of the Collateral in excess of $50,000 in the aggregate shall be maintained atlocations other than as provided in the Perfection Certificate or as Borrower has given Lendersnotice pursuant to Section 7.2. In the event that Borrower, after the date hereof, intendsto store or otherwise deliver any portion of the Collateral in excess of $50,000 in the aggregateto a bailee, then Borrower will first receive the written consent of Lenders and such bailee mustexecute and deliver a bailee agreement in form and substance reasonably satisfactory to CollateralAgent in its sole discretion.     All Inventory is in all material respects of good and marketable quality, free from materialdefects, normal wear and tear excepted.     Borrower is the sole owner of its intellectual property, except for licenses granted to itscustomers in the ordinary course of business which do not result in a legal transfer of title ofthe licensed property but that may be exclusive in respects other than territory and that may beexclusive as to territory only as to discreet geographical areas outside of the United States.Each patent is valid and enforceable, and no part of the intellectual property has been judgedinvalid or unenforceable, in whole or in part, and to Borrower’s knowledge, no claim has been madethat any part of the intellectual property violates the rights of any third party except to theextent such claim could not reasonably be expected to have a material adverse effect on Borrower’sbusiness. Except as noted on the Perfection Certificate, Borrower is not a party to, nor is boundby, any material license or other agreement with respect to which Borrower is the licensee (a) thatprohibits or otherwise restricts Borrower from granting a security interest in Borrower’s interestin such license or agreement or any other property, or (b) for which a default under or terminationof could interfere with Collateral Agent’s right to sell any Collateral. Borrower shall providewritten notice to Collateral Agent within ten (10) days of entering or becoming bound by any suchlicense or agreement (other than over-the-counter software that is commercially available to thepublic). Borrower shall take such steps as Collateral Agent reasonably requests to obtain theconsent of, or waiver by, any person whose consent or waiver is necessary for (x) all such licensesor agreements to be deemed “Collateral” and for Bank to have a security interest in it that mightotherwise be restricted or prohibited by law or by the terms of any such license or agreement,whether now existing or entered into in the future, and (y) Collateral Agent to have the ability inthe event of a liquidation of any Collateral to dispose of such Collateral in accordance withCollateral Agent’s rights and remedies under this Agreement and the other Loan Documents.     **5.3 Litigation.**There are no actions or proceedings pending or, to the knowledge of theResponsible Officers, threatened in writing by or against Borrower or any of its Subsidiariesinvolving more than $250,000.
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     **5.4 No Material Deviation in Financial Statements.**All consolidated financial statements forBorrower and any of its Subsidiaries delivered to Lenders fairly present in all material respectsBorrower’s consolidated financial condition and Borrower’s consolidated results of operations.There has not been any material deterioration in Borrower’s consolidated financial condition sincethe date of the most recent financial statements submitted to Lenders.     **5.5 Solvency.**The fair salable value of Borrower’s assets (including goodwill minusdisposition costs) exceeds the fair value of its liabilities; Borrower is not left withunreasonably small capital after the transactions in this Agreement; and Borrower is able to payits debts (including trade debts) as they mature.     **5.6 Regulatory Compliance.**Borrower is not an “investment company” or a company “controlled”by an “investment company” under the Investment Company Act of 1940, as amended. Borrower is notengaged as one of its important activities in extending credit for margin stock (under RegulationsT and U of the Federal Reserve Board of Governors). Borrower has complied in all material respectswith the Federal Fair Labor Standards Act. Neither Borrower nor any of its Subsidiaries is a“holding company” or an “affiliate” of a “holding company” or a “subsidiary company” of a “holdingcompany” as each term is defined and used in the Public Utility Holding Company Act of 2005.Borrower has not violated any laws, ordinances or rules, the violation of which could reasonably beexpected to have a material adverse effect on its business. None of Borrower’s or any of itsSubsidiaries’ properties or assets has been used by Borrower or any Subsidiary or, to the best ofBorrower’s knowledge, by previous Persons, in disposing, producing, storing, treating, ortransporting any hazardous substance other than legally. Borrower and each of its Subsidiarieshave obtained all consents, approvals and authorizations of, made all declarations or filings with,and given all notices to, all Governmental Authorities that are necessary to continue theirrespective businesses as currently conducted.     **5.7 Subsidiaries; Investments.**Borrower does not own any stock, partnership interest or otherequity securities except for Permitted Investments.     **5.8 Tax Returns and Payments; Pension Contributions.**Borrower has timely filed all requiredtax returns and reports, and Borrower and its Subsidiaries have timely paid all foreign, federal,state and local taxes, assessments, deposits and contributions owed by Borrower; provided thatBorrower may defer payment of any contested taxes, provided that Borrower (a) in good faithcontests its obligation to pay the taxes by appropriate proceedings promptly and diligentlyinstituted and conducted, (b) notifies Lenders in writing of the commencement of, and any materialdevelopment in, the proceedings, (c) posts bonds or takes any other steps required to prevent thegovernmental authority levying such contested taxes from obtaining a Lien upon any of theCollateral that is other than a “Permitted Lien”. Borrower is unaware of any claims or adjustmentsproposed for any of Borrower’s prior tax years which could result in additional taxes becoming dueand payable by Borrower. Borrower has paid all amounts necessary to fund all present pension,profit sharing and deferred compensation plans in accordance with their terms, and Borrower has notwithdrawn from participation in, and has not permitted partial or complete termination of, orpermitted the occurrence of any other event with respect to, any such plan which could reasonablybe expected to result in any liability of Borrower, including any liability to the Pension BenefitGuaranty Corporation or its successors or any other governmental agency.     **5.9 Use of Proceeds.**Borrower shall use the proceeds of the Credit Extensions solely asworking capital and to fund its general business requirements and not for personal, family,household or agricultural purposes.     **5.10 Full Disclosure.**No written representation, warranty or other statement of Borrower inany certificate or written statement given to Collateral Agent or any Lender, as of the date suchrepresentation, warranty, or other statement was made, taken together with all such writtencertificates and written statements given to Collateral Agent or any Lender, contains any untruestatement of a material fact or omits to state a material fact necessary to make the statementscontained in the certificates or statements not misleading (it being recognized that theprojections and forecasts provided by Borrower in good faith and based upon reasonable assumptionsare not viewed as facts and that actual results during the period or periods covered by suchprojections and forecasts may differ from the projected or forecasted results).
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     **6****AFFIRMATIVE COVENANTS**     Borrower shall do all of the following:     **6.1 Government Compliance.**          (a) Maintain its and all its Subsidiaries’ legal existence and good standing in theirrespective jurisdictions of formation and maintain qualification in each jurisdiction in which thefailure to so qualify would reasonably be expected to have a material adverse effect on Borrower’sbusiness or operations. Borrower shall comply, and have each Subsidiary comply, with all laws,ordinances and regulations to which it is subject, noncompliance with which could reasonably beexpected to have a material adverse effect on Borrower’s business.          (b) Obtain all of the Governmental Approvals necessary for the performance by Borrower of itsobligations under the Loan Documents to which it is a party and the grant of a security interest toCollateral Agent for the ratable benefit of the Lenders, in all of its property. Borrower shallpromptly provide copies of any such obtained Governmental Approvals to Collateral Agent.     **6.2 Financial Statements, Reports, Certificates.**          (a) Deliver to each Lender: (i) within five (5) days of delivery, copies of all statements,reports and notices made available to all of Borrower’s security holders or to any holders ofSubordinated Debt; and (ii) within five (5) days of filing, all reports on Form 10-K, 10-Q and 8-Kfiled with the Securities and Exchange Commission or a link thereto on Borrower’s or anotherwebsite on the Internet; (iii) a prompt report of any legal actions pending or threatened againstBorrower or any of its Subsidiaries that could result in damages or costs to Borrower or any of itsSubsidiaries of $250,000 or more; and (iv) other financial information reasonably requested byCollateral Agent.          (b) Within forty-five (45) days after the last day of each calendar quarter, deliver to eachLender, a duly completed Compliance Certificate signed by a Responsible Officer.          (c) Within five (5) days prior to the execution of any license contemplated by Section 7.1(e)hereof, deliver to each Lender a duly completed Compliance Certificate signed by a ResponsibleOfficer certifying, among other things, that such license satisfies the requirements of Section7.1(e).          (d) Allow Lenders to audit or inspect Borrower’s Collateral at Borrower’s expense. Suchaudits or inspections shall be conducted no more often than once every twelve (12) months unless aDefault or an Event of Default has occurred and is continuing.     **6.3 Taxes; Pensions.**Timely file, and require each of its Subsidiaries to timely file, allrequired tax returns and reports and timely pay, and require each of its Subsidiaries to timelyfile, all foreign, federal, state and local taxes, assessments, deposits and contributions owed byBorrower and each of its Subsidiaries, except for deferred payment of any taxes contested pursuantto the terms of Section 5.8 hereof, and shall deliver to Lenders, on demand, appropriatecertificates attesting to such payments, and pay all amounts necessary to fund all present pension,profit sharing and deferred compensation plans in accordance with their terms.     **6.4 Insurance.**Keep its business and the Collateral insured for risks (other than earthquakeand flood) and in amounts standard for companies in Borrower’s industry and location and as Lendersmay reasonably request. Insurance policies shall be in a form, with companies (with an AM BestRating of A7 or better), and in amounts that are reasonably satisfactory to Lenders. All propertypolicies shall have a lender’s loss payable endorsement showing Collateral Agent, and/or itsassigns, as an additional lender loss payee and waive subrogation against Lenders, and all generalliability (product liability being excluded) and excess liability policies shall show, or haveendorsements showing, Collateral Agent, and/or its assigns, as an additional insured. All policiesinsuring the Collateral (or the loss payable and additional insured endorsements) shall providethat the insurer will endeavor to give Collateral Agent at least twenty (20) days notice beforecanceling, amending, or declining to renew its policy. At Collateral Agent’s and any Lenders’request, Borrower shall deliver Certificates of Insurance and such
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other evidence of all premium payments as Collateral Agent and or Lenders may reasonablyrequest. Proceeds payable under any policy insuring the Collateral shall, at Lenders’ option, bepayable to Lenders on account of the Obligations. Notwithstanding the foregoing, (a) so long as noEvent of Default has occurred and is continuing, Borrower shall have the option of applying theproceeds of any property policy up to $100,000, in the aggregate, toward the replacement or repairof destroyed or damaged property; provided that any such replaced or repaired property (i) shall beof equal or like value as the replaced or repaired Collateral and (ii) shall be deemed Collateralin which Collateral Agent and Lenders have been granted a first priority security interest (subjectto Permitted Liens), and (b) after the occurrence and during the continuance of an Event ofDefault, all proceeds payable under such casualty policy shall, at the option of Collateral Agent,be payable to Collateral Agent, for the ratable benefit of the Lenders, on account of theObligations. If Borrower fails to obtain insurance as required under this Section 6.4 orto pay any amount or furnish any required proof of payment to third persons and Collateral Agent,Collateral Agent may make all or part of such payment or obtain such insurance policies required inthis Section 6.4, and take any action under the policies Collateral Agent deems prudent.     **6.5 Operating Accounts.**          (a) Within 60 days of the Effective Date, transfer (if applicable) and maintain its primarydepository, operating and securities accounts with Bank or Bank’s Affiliates, which accounts shallrepresent at least 85% of the dollar value of Borrower’s and Borrower’s Subsidiaries’ accounts atall financial institutions; provided that the Growth Capital Advances shall be credited to andmaintained in the Designated Deposit Account until such time as 85% of the dollar value ofBorrower’s and Borrower’s Subsidiaries’ accounts at all financial institutions are maintained withBank or Bank’s Affiliates.          (b) Provide Collateral Agent five (5) days prior written notice before establishing anyCollateral Account at or with any bank or financial institution other than Bank or Bank’sAffiliates. In addition, for each Collateral Account that Borrower at any time maintains, Borrowershall cause the applicable bank or financial institution (other than Bank) at or with which anyCollateral Account is maintained to execute and deliver a Control Agreement or other appropriateinstrument with respect to such Collateral Account to perfect Collateral Agent’s Lien in suchCollateral Account in accordance with the terms hereunder, which Control Agreement may not beterminated without prior written consent of the Lenders. The provisions of the previous sentenceshall not apply to deposit accounts exclusively used for payroll, payroll taxes and other employeewage and benefit payments to or for the benefit of Borrower’s employees and identified toCollateral Agent by Borrower as such.     **6.6 Protection of Intellectual Property Rights.**Borrower shall: (a) use commerciallyreasonable efforts to protect, defend and maintain the validity and enforceability of itsintellectual property; (b) promptly advise Lenders in writing of material infringements of itsintellectual property; and (c) not allow any intellectual property material to Borrower’s businessto be abandoned, forfeited or dedicated to the public without Lenders’ written consent.     **6.7 Litigation Cooperation.**From the date hereof and continuing through the termination ofthis Agreement, make available to Collateral Agent, without expense to Collateral Agent, Borrowerand its officers, employees and agents and Borrower’s books and records, to the extent thatCollateral Agent may deem them reasonably necessary to prosecute or defend any third-party suit orproceeding instituted by or against Collateral Agent with respect to any Collateral or relating toBorrower.     **6.8 Notices of Litigation and Default.**Borrower will give prompt written notice to CollateralAgent of any litigation or governmental proceedings pending or threatened (in writing) againstBorrower which would reasonably be expected to have a material adverse effect with respect toBorrower. Without limiting or contradicting any other more specific provision of this Agreement,promptly (and in any event within three (3) Business Days) upon Borrower becoming aware of theexistence of any Event of Default or event which, with the giving of notice or passage of time, orboth, would constitute an Event of Default, Borrower shall give written notice to Collateral Agentof such occurrence, which such notice shall include a reasonably detailed description of such Eventof Default or event which, with the giving of notice or passage of time, or both, would constitutean Event of Default.
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     **6.9 Creation/Acquisition of Subsidiaries.**In the event Borrower or any Subsidiary creates oracquires any Subsidiary, Borrower and such Subsidiary shall promptly notify Lenders of the creationor acquisition of such new Subsidiary and take all such action as may be reasonably required byLenders to cause each such domestic Subsidiary to guarantee the Obligations of Borrower under theLoan Documents and grant a continuing pledge and security interest in and to the assets of suchSubsidiary (substantially as described on Exhibit A hereto); and Borrower shall grant and pledge toLenders a perfected security interest in the stock, units or other evidence of ownership of eachSubsidiary (not to exceed 65% of such stock units or other evidence of ownership in the case of aforeign Subsidiary).     **6.10 Right to Invest.**Grant to each Lender (or its Affiliates) a right (but not anobligation) to invest up to its pro rata share (based on its Growth Capital Commitment Percentage)of the aggregate amount of One Million Five Hundred Thousand Dollars ($1,500,000) in Borrower’sfirst round of private equity financing occurring after the Effective Date on the same terms,conditions and pricing offered to the lead investors in such financing. Borrower shall giveLenders no less than five (5) Business Days’ (or such greater or lesser notice as is providedprospective investors in such financing) prior written notice of the private equity financing whichnotice shall (a) identify the principal investors participating in such private equity financingand contain the material terms, conditions and pricing of the private equity financing, and (b) bedelivered to Lenders’ addresses set forth in Section 10 hereof. For the avoidance ofdoubt, the right granted hereunder shall not apply to equity investments made solely in connectionwith corporate collaborations. The right granted hereunder shall survive the termination of thisAgreement. Lenders’ costs and expenses in connection with their exercise of the rights grantedpursuant to this Section 6.10 shall not constitute “Lender’s Expenses” and shall not bereimbursable by Borrower.     **6.11 Further Assurances.**Execute any further instruments and take further action asCollateral Agent reasonably requests to perfect or continue Lenders’ Lien in the Collateral or toeffect the purposes of this Agreement. Deliver to Collateral Agent, within ten (10) days after thesame are sent or received, copies of all correspondence, reports, documents and other filings withany Governmental Authority regarding compliance with or maintenance of Governmental Approvals orRequirements of Law or that could reasonably be expected to have a material adverse effect on anyof the Governmental Approvals or otherwise on the operations of Borrower or any of itsSubsidiaries. Without limiting the foregoing, Borrower shall cause to be delivered to CollateralAgent, within ten (10) days’ of the Effective Date, a landlord’s consent, in form and contentreasonably acceptable to Lenders, executed by Borrower’s master lessor and sublessor.     **7****NEGATIVE COVENANTS**     Borrower shall not do any of the following without Collateral Agent’s prior written consent:     **7.1 Dispositions.**Convey, sell, lease, transfer or otherwise dispose of (collectively,“Transfer”), or permit any of its Subsidiaries to Transfer, all or any part of its business orproperty, except for Transfers (a) of Inventory in the ordinary course of business; (b) of worn-outor obsolete Equipment; (c) in connection with Permitted Liens and Permitted Investments; (d) ofnon-exclusive licenses of Borrower’s intellectual property in the ordinary course of business, or(e) of exclusive licenses of Borrower’s intellectual property, so long as, with respect to eachsuch exclusive license (other than the Valeant Rights and the Valeant Option, except as set forthbelow), (i) no Default or Event of Default exists at the time of such Transfer, (ii) the licenseconstitutes an arms-length negotiated transaction made in connection with a corporate licensing orcollaborative arrangement the terms of which, on their face, do not provide for a sale orassignment of any material intellectual property, (iii) Borrower delivers to each Lender, withinfive (5) days prior to execution thereof, a duly completed Compliance Certificate signed by aResponsible Officer certifying, among other things, that such license satisfies the requirements ofthis Section 7.1(e), (iv) Borrower delivers to Collateral Agent copies of the final executeddocuments in connection with the licensing or collaborative arrangement upon filing thereof and asfiled with the Securities and Exchange Commission and (v) all royalties, milestone payments orother proceeds arising from any licensing or collaborative arrangement (including, withoutlimitation, in connection with the Valeant Rights and the Valeant Option) are paid to a depositaccount that is governed by an Account Control Agreement.     **7.2 Changes in Business, Management, Ownership, or Business Locations.**(a) Engage in orpermit any of its Subsidiaries to engage in any business other than the businesses currentlyengaged in by Borrower and such Subsidiary, as applicable, or reasonably related thereto; (b)liquidate or dissolve; or (c) (i) replace its Chief
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Executive Officer or Chief Financial Officer without thirty (30) days prior writtennotification to Lenders (unless any such officer voluntarily resigns or cause exists for (andresults in) immediate termination, in which case Borrower shall promptly notify Lenders uponreceipt of such resignation or upon such termination) or (ii) enter into any transaction or seriesof related transactions in which the stockholders of Borrower immediately prior to the first suchtransaction own less than 65% of the voting stock of Borrower immediately after giving effect tosuch transaction or related series of such transactions (other than by the sale of Borrower’sequity securities in a public offering or to private investors). Borrower shall not, without atleast thirty (30) days prior written notice to Lenders: (1) add any new offices or businesslocations, including warehouses (unless such new offices or business locations contain in theaggregate less than Fifty Thousand Dollars ($50,000) in Borrower’s assets or property), (2) changeits jurisdiction of organization, (3) change its organizational structure or type, (4) change itslegal name, or (5) change any organizational number (if any) assigned by its jurisdiction oforganization.     **7.3 Mergers or Acquisitions.**Merge or consolidate, or permit any of its Subsidiaries to mergeor consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire,all or substantially all of the capital stock or property of another Person. Notwithstanding theforegoing, a Subsidiary may merge or consolidate into another Subsidiary or into Borrower.     **7.4 Indebtedness.**Create, incur, assume, or be liable for any Indebtedness, or permit anySubsidiary to do so, other than Permitted Indebtedness.     **7.5 Encumbrance.**Create, incur, or allow any Lien on any of its property, or assign or conveyany right to receive income, including the sale of any Accounts, or permit any of its Subsidiariesto do so, except for Permitted Liens, or permit any Collateral not to be subject to the firstpriority security interest granted herein (subject to Permitted Liens). Borrower shall not sell,transfer, assign, mortgage, pledge, lease, grant a security interest in, or encumber, or enter intoany agreement, document, instrument or other arrangement (except with or in favor of CollateralAgent) with any Person which directly or indirectly prohibits or has the effect of prohibitingBorrower or any Subsidiary from selling, transferring, assigning, mortgaging, pledging, leasing,granting a security interest in or upon, or encumbering any of Borrower’s or any Subsidiary’sintellectual property, except as is otherwise permitted in Section 7.1 hereof and the definition of“Permitted Liens” herein.     **7.6 Maintenance of Collateral Accounts.**Maintain any Collateral Account except pursuant tothe terms of Section 6.5(b) hereof.     **7.7 Distributions; Investments.**(a) Directly or indirectly make any Investment other thanPermitted Investments, or permit any of its Subsidiaries to do so; or (b) pay any dividends or makeany distribution or payment or redeem, retire or purchase any capital stock provided that (i)Borrower may pay dividends solely in common stock; and (ii) Borrower may repurchase the stock offormer employees or consultants pursuant to stock repurchase agreements so long as an Event ofDefault does not exist at the time of such repurchase and would not exist after giving effect tosuch repurchase, provided such repurchase does not exceed in the aggregate of $100,000 per fiscalyear.     **7.8 Transactions with Affiliates.**Directly or indirectly enter into or permit to exist anymaterial transaction with any Affiliate of Borrower, except for sales of equity securities andother transactions that are in the ordinary course of Borrower’s business, upon fair and reasonableterms that are no less favorable to Borrower than would be obtained in an arm’s length transactionwith a non-affiliated Person.     **7.9 Subordinated Debt.**(a) Make or permit any payment on any Subordinated Debt, except underthe terms of the subordination, intercreditor, or other similar agreement to which suchSubordinated Debt is subject, or (b) amend any provision in any document relating to theSubordinated Debt which would increase the amount thereof or adversely affect the subordinationthereof to Obligations owed to the Lenders.     **7.10 Compliance.**Become an “investment company” or a company controlled by an “investmentcompany”, under the Investment Company Act of 1940 or undertake as one of its important activitiesextending credit to purchase or carry margin stock (as defined in Regulation U of the Board ofGovernors of the Federal Reserve System), or use the proceeds of any Credit Extension for thatpurpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event orProhibited Transaction, as defined in ERISA, to occur; fail to
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comply with the Federal Fair Labor Standards Act or violate any other law or regulation, ifthe violation could reasonably be expected to have a material adverse effect on Borrower’sbusiness, or permit any of its Subsidiaries to do so; withdraw or permit any Subsidiary to withdrawfrom participation in, permit partial or complete termination of, or permit the occurrence of anyother event with respect to, any present pension, profit sharing and deferred compensation planwhich could reasonably be expected to result in any liability of Borrower, including any liabilityto the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.     **7.11 Indebtedness Payments.**          (i) Prepay, redeem, purchase, defease or otherwise satisfy in any manner prior to thescheduled repayment thereof any Indebtedness for borrowed money or lease obligations (other thanamounts due under this Agreement or due any Lender, or otherwise consented to in writing byLenders), (ii) amend, modify or otherwise change the terms of any Indebtedness for borrowed moneyor lease obligations so as to accelerate the scheduled repayment thereof or (iii) repay any notesto officers, directors or shareholders.     **8****EVENTS OF DEFAULT**     Any one of the following shall constitute an event of default (an **“Event of Default”**) underthis Agreement:     **8.1 Payment Default.**Borrower fails to (a) make any payment of principal or interest on anyCredit Extension on its due date, or (b) pay any other Obligations within three (3) Business Daysafter such Obligations are due and payable (which three (3) day grace period shall not apply topayments due on the Growth Capital Maturity Date). No Event of Default shall be deemed to haveoccurred and no interest at the Default Rate shall be charged in the event that a Lender shall failto debit Borrower’s Designated Deposit Account while amounts necessary to make full payment of theamounts then due hereunder are available in such account. During the cure period, the failure tocure the payment default is not an Event of Default (but no Credit Extension will be made duringthe cure period);     **8.2 Covenant Default.**          (a) Borrower fails or neglects to perform any obligation in Sections 6.2, 6.3,6.4, 6.5, or 6.10, or violates any covenant in Section 7; or          (b) Borrower fails or neglects to perform, keep, or observe any other term, provision,condition, covenant or agreement contained in this Agreement or any Loan Documents, and as to anydefault (other than those specified in this Section 8) under such other term, provision,condition, covenant or agreement that can be cured, has failed to cure the default within ten (10)days after the occurrence thereof; provided, however, that if the default cannot by its nature becured within the ten (10) day period or cannot after diligent attempts by Borrower be cured withinsuch ten (10) day period, and such default is likely to be cured within a reasonable time, thenBorrower shall have an additional period (which shall not in any case exceed thirty (30) days) toattempt to cure such default, and within such reasonable time period the failure to cure thedefault shall not be deemed an Event of Default (but no Credit Extensions shall be made during suchcure period). Grace periods provided under this Section shall not apply, among other things, tofinancial covenants or any other covenants set forth in subsection (a) above;     **8.3 Material Adverse Change.**A Material Adverse Change occurs;     **8.4 Attachment.**          (a) (i) The service of process seeking to attach, by trustee or similar process, any funds ofBorrower or of any entity under control of Borrower (including a Subsidiary) on deposit with Bankor any Bank Affiliate, or (ii) a notice of lien, levy, or assessment is filed against any ofBorrower’s assets by any government agency, and the same under subclauses (i) and (ii) hereof arenot, within ten (10) days after the occurrence thereof, discharged or stayed (whether through theposting of a bond or otherwise); provided, however, no Credit Extensions shall be made during anyten (10) day cure period; and
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          (b) (i) any material portion of Borrower’s assets is attached, seized, levied on, or comesinto possession of a trustee or receiver, or (ii) any court order enjoins, restrains, or preventsBorrower from conducting any part of its business;     **8.5 Insolvency.**(a) Borrower is unable to pay its debts (including trade debts) as theybecome due or otherwise becomes insolvent; (b) Borrower begins an Insolvency Proceeding; or (c) anInsolvency Proceeding is begun against Borrower and not dismissed or stayed within forty five (45)days (but no Credit Extensions shall be made while of any of the conditions described in clause (a)exist and/or until any Insolvency Proceeding is dismissed);     **8.6 Other Agreements.**There is a default in any agreement to which Borrower is a party with athird party or parties resulting in a right by such third party or parties, whether or notexercised, to accelerate the maturity of any Indebtedness in an amount in excess of Two HundredFifty Thousand Dollars ($250,000) or that could reasonably be expected to have a material adverseeffect on Borrower’s business;     **8.7 Judgments.**A judgment or judgments for the payment of money in an amount, individually orin the aggregate, of at least Two Hundred Fifty Thousand Dollars ($250,000) (not covered byindependent third-party insurance) shall be rendered against Borrower and shall remain unsatisfiedand unstayed for a period of ten (10) days after the entry thereof (provided that no CreditExtensions will be made prior to the satisfaction or stay of such judgment);     **8.8 Misrepresentations.**Borrower or any Person acting for Borrower makes any representation,warranty, or other statement now or later in this Agreement, any Loan Document or in any writingdelivered to Collateral Agent and/or any Lender or to induce Collateral Agent and/or Lenders toenter this Agreement or any Loan Document, and such representation, warranty, or other statement isincorrect in any material respect when made;     **8.9 Subordinated Debt.**A default or breach occurs under any agreement between Borrower andany creditor of Borrower that signed a subordination, intercreditor, or other similar agreementwith Lenders, or any creditor that has signed such an agreement with Lenders breaches any terms ofsuch agreement;     **8.10 Governmental Approvals.**Any Governmental Approval shall have been (a) revoked,rescinded, suspended, modified in an adverse manner or not renewed in the ordinary course for afull term or (b) subject to any decision by a Governmental Authority that designates a hearing withrespect to any applications for renewal of any of such Governmental Approval or that could resultin the Governmental Authority taking any of the actions described in clause (a) above, and suchdecision or such revocation, rescission, suspension, modification or non-renewal (i) has, or couldreasonably be expected to have, a Material Adverse Change, or (ii) adversely affects the legalqualifications of Borrower or any of its Subsidiaries to hold such Governmental Approval in anyapplicable jurisdiction and such revocation, rescission, suspension, modification or non-renewalcould reasonably be expected to affect the status of or legal qualifications of Borrower or any ofits Subsidiaries to hold any Governmental Approval in any other jurisdiction.     **9****RIGHTS AND REMEDIES**     **9.1 Rights and Remedies.**While an Event of Default occurs and continues Collateral Agent may,without notice or demand, do any or all of the following:          (a) declare all Obligations immediately due and payable (but if an Event of Default describedin Section 8.5 occurs all Obligations are immediately due and payable without any action byCollateral Agent or Lenders);          (b) stop advancing money or extending credit for Borrower’s benefit under this Agreement orunder any other agreement between Borrower and Collateral Agent and/or Lenders;
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          (c) demand that Borrower (i) deposits cash with Bank in an amount equal to the aggregateamount of any Letters of Credit remaining undrawn, as collateral security for the repayment of anyfuture drawings under such Letters of Credit, and Borrower shall forthwith deposit and pay suchamounts, and (ii) pay in advance all Letter of Credit fees scheduled to be paid or payable over theremaining term of any Letters of Credit;          (d) settle or adjust disputes and claims directly with Account Debtors for amounts on termsand in any order that Collateral Agent considers advisable, notify any Person owing Borrower moneyof Lenders’ security interest in such funds, and verify the amount of such account;          (e) make any payments and do any acts it considers necessary or reasonable to protect theCollateral and/or its security interest in the Collateral. Borrower shall assemble the Collateralif Collateral Agent requests and make it available as Collateral Agent designates. CollateralAgent may enter premises where the Collateral is located, take and maintain possession of any partof the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior orsuperior to its security interest and pay all expenses incurred. Borrower grants Collateral Agent alicense to enter and occupy any of its premises, without charge, to exercise any of CollateralAgent’s rights or remedies;          (f) apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) anyamount held by Collateral Agent or Lenders owing to or for the credit or the account of Borrower;          (g) ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise forsale, and sell the Collateral. Collateral Agent is hereby granted a non-exclusive, royalty-freelicense or other right to use, without charge, Borrower’s labels, patents, copyrights, mask works,rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertisingmatter, or any similar property as it pertains to the Collateral, in completing production of,advertising for sale, and selling any Collateral and, in connection with Collateral Agent’sexercise of its rights under this Section, Borrower’s rights under all licenses and all franchiseagreements inure to Collateral Agent for the benefit of the Lenders;          (h) place a “hold” on any account maintained with Collateral Agent or Lenders and/or deliver anotice of exclusive control, any entitlement order, or other directions or instructions pursuant toany Control Agreement or similar agreements providing control of any Collateral;          (i) demand and receive possession of Borrower’s Books; and          (j) exercise all rights and remedies available to Collateral Agent under the Loan Documents orat law or equity, including all remedies provided under the Code (including disposal of theCollateral pursuant to the terms thereof).     **9.2 Power of Attorney.**Borrower hereby irrevocably appoints Collateral Agent as its lawfulattorney-in-fact, exercisable only upon the occurrence and during the continuance of an Event ofDefault, to: (a) endorse Borrower’s name on any checks or other forms of payment or security; (b)sign Borrower’s name on any invoice or bill of lading for any Account or drafts against AccountDebtors; (c) settle and adjust disputes and claims about the Accounts directly with AccountDebtors, for amounts and on terms Collateral Agent determines reasonable; (d) make, settle, andadjust all claims under Borrower’s insurance policies; (e) pay, contest or settle any Lien, charge,encumbrance, security interest, and adverse claim in or to the Collateral, or any judgment basedthereon, or otherwise take any action to terminate or discharge the same; and (f) transfer theCollateral into the name of Collateral Agent or a third party as the Code permits. Borrower herebyappoints Collateral Agent as its lawful attorney-in-fact to sign Borrower’s name on any documentsnecessary to perfect or continue the perfection of Lenders’ security interest in the Collateralregardless of whether an Event of Default has occurred until all Obligations (other than inchoateindemnity obligations) have been satisfied in full and Collateral Agent and Lenders are under nofurther obligation to make Credit Extensions hereunder. Collateral Agent’s foregoing appointmentas Borrower’s attorney in fact, and all of Collateral Agent’s rights and powers, coupled with aninterest, are irrevocable until all Obligations (other than inchoate indemnity obligations) havebeen fully repaid and performed and Collateral Agent’s and Lenders’ obligation to provide CreditExtensions terminates.
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     **9.3 Protective Payments.**If Borrower fails to obtain the insurance called for by Section 6.4or fails to pay any premium thereon or fails to pay any other amount which Borrower is obligated topay under this Agreement or any other Loan Document, Collateral Agent may obtain such insurance ormake such payment, and all amounts so paid by Collateral Agent are Lenders’ Expenses andimmediately due and payable, bearing interest at the then highest applicable rate, and secured bythe Collateral. Collateral Agent will make reasonable efforts to provide Borrower with notice ofCollateral Agent obtaining such insurance at the time it is obtained or within a reasonable timethereafter. No payments by Collateral Agent are deemed an agreement to make similar payments inthe future or Collateral Agent’s waiver of any Event of Default.     **9.4 Application of Payments and Proceeds.**Unless an Event of Default has occurred and iscontinuing, Lenders shall apply any funds in their possession, whether from Borrower accountbalances, payments, or proceeds realized as the result of any collection of Accounts or otherdisposition of the Collateral, first, to Lenders’ Expenses, including without limitation, thereasonable costs, expenses, liabilities, obligations and attorneys’ fees incurred by Lenders in theexercise of their rights under this Agreement; second, to the interest due upon any of theObligations; and third, to the principal of the Obligations and any applicable fees and othercharges, in such order as Lenders shall determine in their sole discretion. Any surplus shall bepaid to Borrower or other Persons legally entitled thereto; Borrower shall remain liable to Lendersfor any deficiency. If an Event of Default has occurred and is continuing, Lenders may apply anyfunds in their possession, whether from Borrower account balances, payments, proceeds realized asthe result of any collection of Accounts or other disposition of the Collateral, or otherwise, tothe Obligations in such order as Collateral Agent and Lenders shall determine in their solediscretion. Any surplus shall be paid to Borrower or other Persons legally entitled thereto;Borrower shall remain liable to Lenders for any deficiency. If Collateral Agent, in its good faithbusiness judgment, directly or indirectly enters into a deferred payment or other credittransaction with any purchaser at any sale of Collateral, Collateral Agent shall have the option,exercisable at any time, of either reducing the Obligations by the principal amount of the purchaseprice or deferring the reduction of the Obligations until the actual receipt by Collateral Agent ofcash therefor.     **9.5 Liability for Collateral.**So long as the Collateral Agent and Lenders comply withreasonable banking practices regarding the safekeeping of the Collateral in the possession or underthe control of the Collateral Agent and Lenders, the Collateral Agent and Lenders shall not beliable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage to theCollateral; (c) any diminution in the value of the Collateral; or (d) any act or default of anycarrier, warehouseman, bailee, or other Person. Borrower bears all risk of loss, damage ordestruction of the Collateral.     **9.6 No Waiver; Remedies Cumulative.**Collateral Agent’s failure, at any time or times, torequire strict performance by Borrower of any provision of this Agreement or any other LoanDocument shall not waive, affect, or diminish any right of Collateral Agent thereafter to demandstrict performance and compliance herewith or therewith. No waiver hereunder shall be effectiveunless signed by Collateral Agent and then is only effective for the specific instance and purposefor which it is given. Collateral Agent’s rights and remedies under this Agreement and the otherLoan Documents are cumulative. Collateral Agent has all rights and remedies provided under theCode, by law, or in equity. Collateral Agent’s exercise of one right or remedy is not an election,and Collateral Agent’s waiver of any Event of Default is not a continuing waiver. CollateralAgent’s delay in exercising any remedy is not a waiver, election, or acquiescence.     **9.7 Demand Waiver.**Borrower waives demand, notice of default or dishonor, notice of paymentand nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement,extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held byCollateral Agent on which Borrower is liable.     **10****NOTICES**     All notices, consents, requests, approvals, demands, or other communication by any party tothis Agreement or any other Loan Document must be in writing and shall be deemed to have beenvalidly served, given, or delivered: (a) upon the earlier of actual receipt and three (3) BusinessDays after deposit in the U.S. mail, first class, registered or certified mail return receiptrequested, with proper postage prepaid; (b) upon transmission, when sent by facsimile transmission;(c) one (1) Business Day after deposit with a reputable overnight courier with all
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charges prepaid; or (d) when delivered, if hand-delivered by messenger, all of which shall beaddressed to the party to be notified and sent to the address, facsimile number indicated below.Each party may change its address or facsimile number by giving the other parties written noticethereof in accordance with the terms of this Section 10.   If to Borrower: ARDEA BIOSCIENCES, INC.  4939 Directors Place  San Diego, CA 92121  Attn: Chief Financial Officer  Tel.: (858) 652-6500  Fax: (858) 625-0760   If to Bank: Silicon Valley Bank  4370 La Jolla Village Drive, Suite 860  San Diego, CA 92122  Attn: Mike White  Tel.: (858) 784-3310  Fax: (858) 622-1424   If to Collateral Agent: Oxford Finance Corporation  133 N. Fairfax Street  Alexandria, VA 22314  Attn: Tim A. Lex, Chief Operating Officer  Tel.: (703) 519-4900  Fax: (703) 519-5225     **11****CHOICE OF LAW, VENUE, JURY TRIAL WAIVER AND JUDICIAL REFERENCE**     California law governs the Loan Documents without regard to principles of conflicts of law.Borrower, Collateral Agent and Lenders each submit to the exclusive jurisdiction of the State andFederal courts in Santa Clara County, California; provided, however, that nothing in this Agreementshall be deemed to operate to preclude Collateral Agent from bringing suit or taking other legalaction in any other jurisdiction to realize on the Collateral or any other security for theObligations, or to enforce a judgment or other court order in favor of Collateral Agent andLenders. Borrower expressly submits and consents in advance to such jurisdiction in any action orsuit commenced in any such court, and Borrower hereby waives any objection that it may have basedupon lack of personal jurisdiction, improper venue, or forum non conveniens and hereby consents tothe granting of such legal or equitable relief as is deemed appropriate by such court. Borrowerhereby waives personal service of the summons, complaints, and other process issued in such actionor suit and agrees that service of such summons, complaints, and other process may be made byregistered or certified mail addressed to Borrower at the address set forth in Section 10of this Agreement and that service so made shall be deemed completed upon the earlier to occur ofBorrower’s actual receipt thereof or three (3) days after deposit in the U.S. mails, proper postageprepaid.     **TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER, COLLATERAL AGENT AND LENDERS EACHWAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THISAGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OFDUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR THE PARTIES TO ENTER INTO THISAGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.**     WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR RESPECTIVE RIGHTTO A TRIAL BY JURY, if the above waiver of the right to a trial by jury is not enforceable, theparties hereto agree that any and all disputes or controversies of any nature between them arisingat any time shall be decided by a reference to a private judge, mutually selected by the parties(or, if they cannot agree, by the Presiding Judge of the Santa Clara County, California SuperiorCourt) appointed in accordance with California Code
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of Civil Procedure Section 638 (or pursuant to comparable provisions of federal law if thedispute falls within the exclusive jurisdiction of the federal courts), sitting without a jury, inSanta Clara County, California; and the parties hereby submit to the jurisdiction of such court.The reference proceedings shall be conducted pursuant to and in accordance with the provisions ofCalifornia Code of Civil Procedure §§ 638 through 645.1, inclusive. The private judge shall havethe power, among others, to grant provisional relief, including without limitation, enteringtemporary restraining orders, issuing preliminary and permanent injunctions and appointingreceivers. All such proceedings shall be closed to the public and confidential and all recordsrelating thereto shall be permanently sealed. If during the course of any dispute, a party desiresto seek provisional relief, but a judge has not been appointed at that point pursuant to thejudicial reference procedures, then such party may apply to the Santa Clara County, CaliforniaSuperior Court for such relief. The proceeding before the private judge shall be conducted in thesame manner as it would be before a court under the rules of evidence applicable to judicialproceedings. The parties shall be entitled to discovery which shall be conducted in the samemanner as it would be before a court under the rules of discovery applicable to judicialproceedings. The private judge shall oversee discovery and may enforce all discovery rules andorder applicable to judicial proceedings in the same manner as a trial court judge. The partiesagree that the selected or appointed private judge shall have the power to decide all issues in theaction or proceeding, whether of fact or of law, and shall report a statement of decision thereonpursuant to the California Code of Civil Procedure § 644(a). Nothing in this paragraph shall limitthe right of any party at any time to exercise self-help remedies, foreclose against collateral, orobtain provisional remedies. The private judge shall also determine all issues relating to theapplicability, interpretation, and enforceability of this paragraph.     **12****GENERAL PROVISIONS**     **12.1 Successors and Assigns.**This Agreement binds and is for the benefit of the successorsand permitted assigns of each party. Borrower may not assign this Agreement or any rights orobligations under it without Collateral Agent’s prior written consent (which may be granted orwithheld in Collateral Agent’s discretion). Lenders have the right, without the consent of ornotice to Borrower, to sell, transfer, assign, negotiate, or grant participation in all or any partof, or any interest in, Lenders’ obligations, rights, and benefits under this Agreement and theother Loan Documents.     **12.2 Indemnification; Expenses.**Borrower agrees to indemnify, defend and hold CollateralAgent and the Lenders and their respective directors, officers, employees, agents, attorneys, orany other Person affiliated with or representing Collateral Agent or the Lenders (each, an**“Indemnified Person”**) harmless against: (a) all obligations, demands, claims, and liabilities(collectively, **“Claims”**) asserted by any other party in connection with the transactionscontemplated by the Loan Documents; and (b) all losses or Lenders’ Expenses incurred, or paid bysuch Indemnified Person from, following, or arising from transactions between Collateral Agent,and/or Lenders and Borrower (including reasonable attorneys’ fees and expenses), except for Claims,Lenders’ Expenses and/or losses directly caused by an Indemnified Person’s gross negligence orwillful misconduct.     **12.3 Time of Essence.**Time is of the essence for the performance of all Obligations in thisAgreement.     **12.4 Severability of Provisions.**Each provision of this Agreement is severable from everyother provision in determining the enforceability of any provision.     **12.5 Correction of Loan Documents**. Lenders may fill in any blanks in this Agreement and theother Loan Documents consistent with the agreement of the parties after consultation with Borrower,and may correct patent errors.     **12.6 Amendments in Writing; Integration.**All amendments to this Agreement must be in writingsigned by Collateral Agent, Lenders and Borrower. This Agreement and the Loan Documents representthe entire agreement about this subject matter and supersede prior negotiations or agreements. Allprior agreements, understandings, representations, warranties, and negotiations between the partiesabout the subject matter of this Agreement and the Loan Documents merge into this Agreement and theLoan Documents.
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     **12.7 Counterparts.**This Agreement may be executed in any number of counterparts and bydifferent parties on separate counterparts, each of which, when executed and delivered, are anoriginal, and all taken together, constitute one Agreement.     **12.8 Survival.**All covenants, representations and warranties made in this Agreement continuein full force until this Agreement has terminated pursuant to its terms and all Obligations (otherthan inchoate indemnity obligations and any other obligations which, by their terms, are to survivethe termination of this Agreement) have been satisfied. The obligation of Borrower in Section12.2 to indemnify Collateral Agent and each Lender shall survive until the statute oflimitations with respect to such claim or cause of action shall have run.     **12.9 Confidentiality.**In handling any confidential or proprietary information of Borrower,Collateral Agent and each Lender shall exercise the same degree of care that it exercises for itsown proprietary information. Collateral Agent and each Lender shall hold in strict confidence andwill not disclose to any third party any confidential information of Borrower, except as approvedin writing by Borrower. Notwithstanding the foregoing, disclosure of information may be made: (a)to Lenders’ and Collateral Agent’s Subsidiaries or Affiliates; (b) to prospective transferees orpurchasers of any interest in the Credit Extensions (provided, however, Lenders and CollateralAgent shall, except upon the occurrence or during the continuance of an Event of Default, obtainsuch prospective transferee’s or purchaser’s agreement to the terms of this provision); (c) asrequired by law, regulation, subpoena, or other order; (d) to regulators or as otherwise requiredin connection with an examination or audit; and (e) as is reasonably necessary for Collateral Agentor the Lenders to exercise remedies under the Loan Documents. Confidential information does notinclude information that either: (i) is in the public domain or in Lenders’ and/or CollateralAgent’s possession when disclosed to Lenders and/or Collateral Agent, or becomes part of the publicdomain after disclosure to Lenders and/or Collateral Agent through no act or inaction by CollateralAgent or any Lender; or (ii) is disclosed to Lenders and/or Collateral Agent by a third party thatis not prohibited from disclosing the information, if Lenders and/or Collateral Agent does not knowthat the third party is prohibited from disclosing the information and does not otherwise have anobligation of non-disclosure with respect to such information.     Lenders and Collateral Agent may use confidential information for the development of clientdatabases, reporting purposes, and market analysis, so long as Lenders and the Collateral Agent donot disclose Borrower’s identity or the identity of any person associated with Borrower unlessotherwise expressly permitted by this Agreement. The provisions of the immediately precedingsentence shall survive the termination of this Agreement.     **12.10 Attorneys’ Fees, Costs and Expenses.**In any action or proceeding between Borrower,Collateral Agent and/or Lenders arising out of or relating to the Loan Documents, the prevailingparty shall be entitled to recover its reasonable attorneys’ fees and other costs and expensesincurred, in addition to any other relief to which it may be entitled.     **12.11 Right of Set Off**. Borrower hereby grants to Collateral Agent and to each Lender, alien, security interest and right of set off as security for all Obligations to Collateral Agentand each Lender hereunder, whether now existing or hereafter arising upon and against all deposits,credits, Collateral and property, now or hereafter in the possession, custody, safekeeping orcontrol of Collateral Agent or Lenders or any entity under the control of Collateral Agent orLenders (including an Collateral Agent affiliate) or in transit to any of them. At any time afterthe occurrence and during the continuance of an Event of Default, without demand or notice,Collateral Agent or Lenders may set off the same or any part thereof and apply the same to anyliability or obligation of Borrower even though unmatured and regardless of the adequacy of anyother Collateral securing the Obligations. ANY AND ALL RIGHTS TO REQUIRE COLLATERAL AGENT TOEXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS,PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OFBORROWER ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.     **13****DEFINITIONS**     **13.1 Definitions.**As used in this Agreement, the following terms have the following meanings:     **“Account”** is any “account” as defined in the Code with such additions to such term as mayhereafter be made, and includes, without limitation, all accounts receivable and other sums owingto Borrower.
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     **“Account Debtor”** is any “account debtor” as defined in the Code with such additions to suchterm as may hereafter be made.     **“Affiliate”** of any Person is a Person that owns or controls directly or indirectly the Person,any Person that controls or is controlled by or is under common control with the Person, and eachof that Person’s senior executive officers, directors, partners and, for any Person that is alimited liability company, that Person’s managers and members.     **“Agreement”** is defined in the preamble hereof.     **“Bank”** is defined in the preamble hereof.     **“Borrower”** is defined in the preamble hereof.     **“Borrower’s Books”** are all Borrower’s books and records including ledgers, federal and statetax returns, records regarding Borrower’s assets or liabilities, the Collateral, businessoperations or financial condition, and all computer programs or storage or any equipment containingsuch information.     **“Borrowing Resolutions”** are, with respect to any Person, those resolutions adopted by suchPerson’s Board of Directors and delivered by such Person to Lenders approving the Loan Documents towhich such Person is a party and the transactions contemplated thereby, together with a certificateexecuted by its secretary on behalf of such Person certifying that (a) such Person has theauthority to execute, deliver, and perform its obligations under each of the Loan Documents towhich it is a party, (b) that attached as an exhibit to such certificate is a true, correct, andcomplete copy of the resolutions then in full force and effect authorizing and ratifying theexecution, delivery, and performance by such Person of the Loan Documents to which it is a party,(c) the name(s) of the Person(s) authorized to execute the Loan Documents on behalf of such Person,together with a sample of the true signature(s) of such Person(s), and (d) that Lenders mayconclusively rely on such certificate unless and until such Person shall have delivered to Lendersa further certificate canceling or amending such prior certificate.     **“Business Day”** is any day that is not a Saturday, Sunday or a day on which Bank is closed.     **“Code”** is the Uniform Commercial Code, as the same may, from time to time, be enacted and ineffect in the State of California; provided, that, to the extent that the Code is used to defineany term herein or in any Loan Document and such term is defined differently in different Articlesor Divisions of the Code, the definition of such term contained in Article or Division 9 shallgovern; provided further, that in the event that, by reason of mandatory provisions of law, any orall of the attachment, perfection, or priority of, or remedies with respect to, Collateral Agent’sand Lenders’ Lien on any Collateral is governed by the Uniform Commercial Code in effect in ajurisdiction other than the State of California, the term “Code” shall mean the Uniform CommercialCode as enacted and in effect in such other jurisdiction solely for purposes on the provisionsthereof relating to such attachment, perfection, priority, or remedies and for purposes ofdefinitions relating to such provisions.     **“Collateral”** is any and all properties, rights and assets of Borrower described on ExhibitA.     **“Collateral Account”** is any Deposit Account, Securities Account, or Commodity Account.     **“Collateral Agent”** means Oxford Finance Corporation, not in its individual capacity, butsolely in its capacity as agent on behalf of and for the benefit of the Lenders.     **“Commodity Account”** is any “commodity account” as defined in the Code with such additions tosuch term as may hereafter be made.     **“Compliance Certificate”** is that certain certificate in the form attached hereto asExhibit C.     **“Contingent Obligation”** is, for any Person, any direct or indirect liability, contingent ornot, of that Person for (a) any indebtedness, lease, dividend, letter of credit or other obligationof another such as an obligation
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directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by thatPerson, or for which that Person is directly or indirectly liable; (b) any obligations for undrawnletters of credit for the account of that Person; and (c) all obligations from any interest rate,currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement orarrangement designated to protect a Person against fluctuation in interest rates, currency exchangerates or commodity prices; but “Contingent Obligation” does not include endorsements in theordinary course of business. The amount of a Contingent Obligation is the stated or determinedamount of the primary obligation for which the Contingent Obligation is made or, if notdeterminable, the maximum reasonably anticipated liability for it determined by the Person in goodfaith; but the amount may not exceed the maximum of the obligations under any guarantee or othersupport arrangement.     **“Control Agreement”** is any control agreement entered into among the depository institution atwhich Borrower maintains a Deposit Account or the securities intermediary or commodity intermediaryat which Borrower maintains a Securities Account or a Commodity Account, Borrower, and CollateralAgent pursuant to which Collateral Agent obtains control (within the meaning of the Code) for thebenefit of the Lenders over such Deposit Account, Securities Account, or Commodity Account.     **“Credit Extension”** is any Growth Capital Advance, or any other extension of credit by Lendersfor Borrower’s benefit.     **“Default”** means any event which with notice or passage of time or both, would constitute anEvent of Default.     **“Default Rate”** is defined in Section 2.2(b).     **“Deposit Account”** is any “deposit account” as defined in the Code with such additions to suchterm as may hereafter be made.     **“Designated Deposit Account”** is Borrower’s deposit account, account number 3300209385,maintained with Bank.     **“Dollars,”****“dollars”** and **“$”** each mean lawful money of the United States.     **“Effective Date”** is defined in the preamble of this Agreement.     **“Equipment”** is all “equipment” as defined in the Code with such additions to such term as mayhereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles(including motor vehicles and trailers), and any interest in any of the foregoing.     **“ERISA”** is the Employee Retirement Income Security Act of 1974, and its regulations.     **“Event of Default”** is defined in Section 8.     **“Final Payment Percentage”**is five percent (5.00%).     **“Funding Date”** is any date on which a Credit Extension is made to or on account of Borrowerwhich shall be a Business Day.     **“GAAP”** is generally accepted accounting principles set forth in the opinions andpronouncements of the Accounting Principles Board of the American Institute of Certified PublicAccountants and statements and pronouncements of the Financial Accounting Standards Board or insuch other statements by such other Person as may be approved by a significant segment of theaccounting profession, which are applicable to the circumstances as of the date of determination.     **“General Intangibles”** is all “general intangibles” as defined in the Code in effect on thedate hereof with such additions to such term as may hereafter be made, and includes withoutlimitation, all copyright rights,
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copyright applications, copyright registrations and like protections in each work ofauthorship and derivative work, whether published or unpublished, any patents, trademarks, servicemarks and, to the extent permitted under applicable law, any applications therefor, whetherregistered or not, any trade secret rights, including any rights to unpatented inventions, paymentintangibles, royalties, contract rights, goodwill, franchise agreements, purchase orders, customerlists, route lists, telephone numbers, domain names, claims, income and other tax refunds, securityand other deposits, options to purchase or sell real or personal property, rights in all litigationpresently or hereafter pending (whether in contract, tort or otherwise), insurance policies(including without limitation key man, property damage, and business interruption insurance),payments of insurance and rights to payment of any kind.     **“Governmental Approval”** is any consent, authorization, approval, order, license, franchise,permit, certificate, accreditation, registration, filing or notice, of, issued by, from or to, orother act by or in respect of, any Governmental Authority.     **“Governmental Authority”** is any nation or government, any state or other political subdivisionthereof, any agency, authority, instrumentality, regulatory body, court, central bank or otherentity exercising executive, legislative, judicial, taxing, regulatory or administrative functionsof or pertaining to government, any securities exchange and any self-regulatory organization.     **“Growth Capital Advance”** or **“Growth Capital Advances”** is defined in Section 2.1.1(a).     **“Growth Capital Amortization Date”** means April 1, 2009.     **“Growth Capital Commitment Percentage”** means 37.5% with respect to Bank, and 62.5% withrespect to Oxford.     **“Growth Capital Commitment Termination Date”** is November 17, 2008.     **“Growth Capital Final Payment”**is a payment (in addition to and not a substitution for theregular monthly payments of principal plus accrued interest) due on the earlier to occur of (a) theGrowth Capital Maturity Date, (b) the acceleration of the Growth Capital Advances, or (c) theprepayment of the Growth Capital Advances, equal to the amount of the Growth Capital Advancesmultiplied by the Final Payment Percentage.     **“Growth Capital Funding Date”** is any date on which a Growth Capital Advance is made to or onaccount of Borrower.     **“Growth Capital Interest Only Period”** means, for each Growth Capital Advance, the period oftime commencing on its Growth Capital Funding Date through the day before the Growth CapitalAmortization Date.     **“Growth Capital Loan Commitment”** is Eight Million Dollars ($8,000,000).     **“Growth Capital Maturity Date”** is, for each Growth Capital Advance, the earliest of (a)December 1, 2011, or (b) the occurrence of an Event of Default.     **“Growth Capital Repayment Period”** is a period of time equal to thirty-three (33) consecutivemonths commencing on the Growth Capital Amortization Date.     **“Indebtedness”** is (a) indebtedness for borrowed money or the deferred price of property orservices, such as reimbursement and other obligations for surety bonds and letters of credit, (b)obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital leaseobligations, and (d) Contingent Obligations.     **“Insolvency Proceeding”** is any proceeding by or against any Person under the United StatesBankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefitof creditors, compositions, extensions generally with its creditors, or proceedings seekingreorganization, arrangement, or other relief.
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     **“Inventory”** is all “inventory” as defined in the Code in effect on the date hereof with suchadditions to such term as may hereafter be made, and includes without limitation all merchandise,raw materials, parts, supplies, packing and shipping materials, work in process and finishedproducts, including without limitation such inventory as is temporarily out of Borrower’s custodyor possession or in transit and including any returned goods and any documents of titlerepresenting any of the above.     **“Investment”** is any beneficial ownership interest in any Person (including stock, partnershipinterest or other securities), and any loan, advance or capital contribution to any Person.     **“Lender”** is any one of the Lenders.     **“Lenders”** shall mean the Persons identified in the preamble of this Agreement and eachassignee that becomes a party to this Agreement pursuant to Section 12.1.     **“Lenders’ Expenses”** are all documented audit fees and expenses, costs, and expenses (includingreasonable attorneys’ fees and expenses) for preparing, amending, negotiating, administering,defending and enforcing the Loan Documents (including, without limitation, those incurred inconnection with appeals or Insolvency Proceedings) or otherwise incurred with respect to Borrower.     **“Letter of Credit”**means a standby letter of credit issued by Bank or another institutionbased upon an application, guarantee, indemnity or similar agreement on the part of Bank.     **“Lien”** is a claim, mortgage, lien, deed of trust, levy, charge, pledge, security interest orother encumbrance.     **“Loan Documents”** are, collectively, this Agreement, the Warrants, the Perfection Certificate,any Note, or Notes or guaranties executed by Borrower, and any other present or future agreementbetween Borrower and/or for the benefit of Collateral Agent and/or any Lender in connection withthis Agreement, all as amended, restated, or otherwise modified.     **“Material Adverse Change”** is (a) a material impairment in the perfection or priority ofLenders’ Lien in the Collateral or in the value of such Collateral; (b) a material adverse changein the business, operations, or condition (financial or otherwise) of Borrower; or (c) a materialimpairment of the prospect of repayment of any portion of the Obligations.     **“Note”** means for each Growth Capital Advance, one of the secured promissory notes of Borrowersubstantially in the form of Exhibit D.     **“Obligations”** are Borrower’s obligation to pay when due any debts, principal, interest,Lenders’ Expenses, Prepayment Fee, Final Payment, and other amounts Borrower owes Lenders now orlater, whether under this Agreement, the Loan Documents, or otherwise, including, withoutlimitation, all obligations relating to letters of credit (including reimbursement obligations fordrawn and undrawn letters of credit), cash management services, and foreign exchange contracts, ifany, and including interest accruing after Insolvency Proceedings begin (whether or not allowed)and debts, liabilities, or obligations of Borrower assigned to Lenders and/or Collateral Agent, andthe performance of Borrower’s duties under the Loan Documents. Notwithstanding anything to thecontrary contained herein, the term “Obligations” shall not include obligations of Borrower underthe Warrants or any equity-related documents executed in connection with the Warrants.     **“Operating Documents”** are, for any Person, such Person’s formation documents, as certifiedwith the Secretary of State of such Person’s state of formation on a date that is no earlier than30 days prior to the Effective Date, and, (a) if such Person is a corporation, its bylaws incurrent form, (b) if such Person is a limited liability company, its limited liability companyagreement (or similar agreement), and (c) if such Person is a partnership, its partnershipagreement (or similar agreement), each of the foregoing with all current amendments ormodifications thereto.
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     **“Payment/Advance Form”** is that certain form attached hereto as Exhibit B.     **“Perfection Certificate”** is defined in Section 5.1.     **“Permitted Indebtedness”** is:          (a) Borrower’s Indebtedness to Lenders and Collateral Agent under this Agreement and the otherLoan Documents;          (b) Indebtedness existing on the Effective Date and shown on the Perfection Certificate;          (c) Subordinated Debt;          (d) unsecured Indebtedness to trade creditors and with respect to surety bonds and similarobligations incurred in the ordinary course of business;          (e) Indebtedness in an aggregate principal amount not to exceed $250,000 secured by PermittedLiens;          (f) Indebtedness incurred as a result of endorsing negotiable instruments received in theordinary course of business; and          (g) extensions, refinancings, modifications, amendments and restatements of any items ofPermitted Indebtedness (a) through (f) above, provided that the then-outstanding principal amountthereof is not increased or the terms thereof are not modified to impose more burdensome terms uponBorrower or its Subsidiary, as the case may be.     **“Permitted Investments”** are:          (a) Investments shown on the Perfection Certificate and existing on the Effective Date;          (b) any Investments permitted by Borrower’s investment policy, as amended from time to time,provided that such investment policy (and any such amendment thereto) has been approved by Lenders(which investment policy as is currently in effect on the Effective Date has been approved byLenders);          (c) Investments consisting of the endorsement of negotiable instruments for deposit orcollection or similar transactions in the ordinary course of Borrower;          (d) Investments accepted in connection with Transfers permitted by Section 7.1;          (e) (i) Investments of Subsidiaries in or to other Subsidiaries or Borrower; and (ii)Investments by Borrower in Subsidiaries not to exceed $100,000 in the aggregate in any fiscal year(provided that Borrower shall not make cash Investments in Ardea Biosciences Ltd. at any timeduring the term hereof);          (f) Investments consisting of (i) travel advances and employee relocation loans and otheremployee loans and advances in the ordinary course of business, and (ii) loans to employees,officers or directors relating to the purchase of equity securities of Borrower or its Subsidiariespursuant to employee stock purchase plans or agreements approved by Borrower’s Board of Directorswhich do not exceed $100,000 in the aggregate in any year, provided that no cash loans under thisclause (ii) may be made if an Event of Default is then occurring or would otherwise occur upon themaking thereof;          (g) Investments (including debt obligations) received in connection with the bankruptcy orreorganization of customers or suppliers and in settlement of delinquent obligations of, and otherdisputes with, customers or suppliers arising in the ordinary course of business; and
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          (h) Investments consisting of notes receivable of, or prepaid royalties and other creditextensions, to customers and suppliers who are not Affiliates, in the ordinary course of business;provided that this paragraph (i) shall not apply to Investments of Borrower in any Subsidiary.     Notwithstanding the foregoing, Permitted Investments shall not include, and Borrower and eachSubsidiary is prohibited from purchasing, purchasing participations in, entering into any type ofswap or other equivalent derivative transaction, or otherwise holding or engaging in any ownershipinterest in any type of debt instrument, including, without limitation, any corporate or municipalbonds with a long-term nominal maturity for which the interest rate is reset through a dutchauction and more commonly referred to as an “auction rate security.”     **“Permitted Liens”** are:          (a) Liens existing on the Effective Date and shown on the Perfection Certificate or arisingunder this Agreement and the other Loan Documents;          (b) Liens for taxes, fees, assessments or other government charges or levies, either notdelinquent or being contested in good faith and for which Borrower maintains adequate reserves onits Books, if they have no priority over any of Collateral Agent’s and/or Lenders’ Liens;          (c) purchase money Liens (i) on Equipment acquired or held by Borrower incurred for financingthe acquisition of the Equipment securing no more than Two Hundred Fifty Thousand Dollars($250,000.00) in the aggregate amount outstanding, or (ii) existing on Equipment when acquired, ifthe Lien is confined to the property and improvements and the proceeds of the Equipment;          (d) statutory Liens securing claims or demands of materialmen, mechanics, carriers,warehousemen, landlords and other Persons imposed without action of such parties, provided, theyhave no priority over any of Collateral Agent’s and/or Lenders’ Liens and the aggregate amount ofsuch Liens does not at any time exceed $25,000;          (e) Liens to secure payment of workers’ compensation, employment insurance, old-age pensions,social security and other like obligations incurred in the ordinary course of business, provided,they have no priority over any of Collateral Agent’s and/or Lenders’ Liens and the aggregate amountof the Indebtedness secured by such Liens does not at any time exceed $25,000;          (f) Liens incurred in the extension, renewal or refinancing of the indebtedness secured byLiens described in (a) through (d), but any extension, renewal or replacement Lien must belimited to the property encumbered by the existing Lien and the principal amount of theindebtedness may not increase;          (g) leases or subleases of real property granted in the ordinary course of business, andleases, subleases, licenses or sublicenses of property (other than real property or intellectualproperty; except as otherwise expressly permitted herein) granted in the ordinary course ofBorrower’s business, if the leases, subleases, licenses and sublicenses do not prohibitgranting Collateral Agent and/or Lenders a security interest;          (h) Liens arising from judgments, decrees or attachments in circumstances not constituting anEvent of Default under Section 8.4 or 8.7; and          (i) Liens in favor of other financial institutions arising in connection with Borrower’sdeposit and/or securities accounts held at such institutions, provided that Borrower has compliedwith Section 6.5 hereof.     **“Person”** is any individual, sole proprietorship, partnership, limited liability company, jointventure, company, trust, unincorporated organization, association, corporation, institution, publicbenefit corporation, firm, joint stock company, estate, entity or government agency.     **“Prepayment Fee”** shall be an additional fee payable to the Collateral Agent in amount equalto:
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          (a) for a prepayment made on or prior to November 12, 2009, four percent (4%) of the principalamount of the Growth Capital Advance prepaid; or          (b) for a prepayment made after November 12, 2009, and on or prior to November 12, 2010, threepercent (3.0%) of the principal amount of the Growth Capital Advance prepaid; and          (c) for a prepayment made after November 12, 2010, and on or prior to the Growth CapitalAdvance Maturity Date, two percent (2.0%) of the principal amount of the Growth Capital Advanceprepaid.     **“Registered Organization”** is any “registered organization” as defined in the Code with suchadditions to such term as may hereafter be made     **“Requirement of Law”** is as to any Person, the organizational or governing documents of suchPerson, and any law (statutory or common), treaty, rule or regulation or determination of anarbitrator or a court or other Governmental Authority, in each case applicable to or binding uponsuch Person or any of its property or to which such Person or any of its property is subject.     **“Responsible Officer”** is any of the Chief Executive Officer, President, Chief FinancialOfficer and Controller of Borrower.     **“Securities Account”** is any “securities account” as defined in the Code with such additions tosuch term as may hereafter be made.     **“Subordinated Debt”** is indebtedness incurred by Borrower subordinated to all of Borrower’s nowor hereafter indebtedness to Lenders (pursuant to a subordination, intercreditor, or other similaragreement in form and substance satisfactory to Collateral Agent and Lenders entered into betweenCollateral Agent, the Borrower and the other creditor), on terms acceptable to Collateral Agent andLenders.     **“Subsidiary”** means, with respect to any Person, any Person of which more than 50% of thevoting stock or other equity interests is owned or controlled, directly or indirectly, by suchPerson or one or more Affiliates of such Person.     **“Transfer”** is defined in Section 7.1.     **“Valeant”**means Valeant Research & Development.     **“Valeant Option”**means Valeant’s option for an exclusive, royalty-bearing license to certainof Borrower’s intellectual property as more particularly described in Section 1.6 of that certainAsset Purchase Agreement by and among Valeant, Valeant Pharmaceuticals International, Inc. andBorrower, dated as of December 21, 2006 and appearing as an exhibit to Borrower’s Form 8-K filedwith the United States Securities Exchange Commission on December 28, 2006 (the “Valeant APA”).     **“Valeant Rights”**means the right of Valeant to receive from Borrower development-basedmilestone payments and sales-based royalty payments as more particularly described in Section 1.5of the Valeant APA.     **“Warrants”** are that certain Warrant to Purchase Stock dated on or about the Effective Dateexecuted by Borrower in favor of Bank and that certain Warrant to Purchase Stock dated on or aboutthe Effective Date executed by Borrower in favor of Oxford.**[*****Balance of Page Intentionally Left Blank*****]**
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     **IN WITNESS WHEREOF**, the parties hereto have caused this Agreement to be executed as of theEffective Date.BORROWER:ARDEA BIOSCIENCES, INC.     By /s/ John W. Beck       Name: John W. Beck       Title: SVP Finance, Operations and CFO       COLLATERAL AGENT:OXFORD FINANCE CORPORATION     By /s/ T. A. Lex       Name: T. A. Lex       Title: COO       LENDERS:SILICON VALLEY BANK     By /s/ Sarah Larson       Name: Sarah Larson       Title: Relationship Manager       OXFORD FINANCE CORPORATION     By /s/ T. A. Lex       Name: T. A. Lex       Title: COO       **[*****Signature Page to Loan and Security Agreement*****]**
 

 
**EXHIBIT A**The Collateral consists of all of Borrower’s right, title and interest in and to the followingpersonal property:     All goods, Accounts (including health-care receivables), Equipment, Inventory, contract rightsor rights to payment of money, leases, license agreements, franchise agreements, GeneralIntangibles (except as provided below), commercial tort claims, documents, instruments (includingany promissory notes), chattel paper (whether tangible or electronic), cash, deposit accounts,certificates of deposit, fixtures, letters of credit rights (whether or not the letter of credit isevidenced by a writing), securities, and all other investment property, supporting obligations, andfinancial assets, whether now owned or hereafter acquired, wherever located; and all Borrower’sBooks relating to the foregoing, and any and all claims, rights and interests in any of the aboveand all substitutions for, additions, attachments, accessories, accessions and improvements to andreplacements, products, proceeds and insurance proceeds of any or all of the foregoing.     Notwithstanding the foregoing, the Collateral does not include any of the following, whethernow owned or hereafter acquired, (i) any ownership interest in a foreign subsidiary which exceeds65% of the total outstanding ownership interests in such foreign subsidiary, or (ii) any copyrightrights, copyright applications, copyright registrations and like protections in each work ofauthorship and derivative work, whether published or unpublished, any patents, patent applicationsand like protections, including improvements, divisions, continuations, renewals, reissues,extensions, and continuations-in-part of the same, trademarks, service marks and, to the extentpermitted under applicable law, any applications therefor, whether registered or not, and thegoodwill of the business of Borrower connected with and symbolized thereby, know-how, operatingmanuals, trade secret rights, rights to unpatented inventions, and any claims for damage by way ofany past, present, or future infringement of any of the foregoing; provided, however, theCollateral shall include all Accounts, license and royalty fees and other revenues, proceeds, orincome arising out of or relating to any of the foregoing.     Pursuant to the terms of a certain negative pledge arrangement with Collateral Agent andLenders, Borrower has agreed, subject to certain exceptions, not to encumber any of its copyrightrights, copyright applications, copyright registrations and like protections in each work ofauthorship and derivative work, whether published or unpublished, any patents, patent applicationsand like protections, including improvements, divisions, continuations, renewals, reissues,extensions, and continuations-in-part of the same, trademarks, service marks and, to the extentpermitted under applicable law, any applications therefor, whether registered or not, and thegoodwill of the business of Borrower connected with and symbolized thereby, know-how, operatingmanuals, trade secret rights, rights to unpatented inventions, and any claims for damage by way ofany past, present, or future infringement of any of the foregoing, without Collateral Agent’s priorwritten consent.
 

 
**EXHIBIT B****Loan Payment/Advance Request Form****Deadline for same day processing is Noon P****.S.T.**   Fax To: Date: _________
**LOAN PAYMENT:**ARDEA BIOSCIENCES, INC.       From Account #   To Account #           (Deposit Account #)   (Loan Account #)Principal $   and/or Interest $                **Authorized Signature:**   Phone Number:         Print Name/Title:              
**Loan Advance:**Complete *Outgoing Wire Request*section below if all or a portion of the funds from this loanadvance are for an outgoing wire.       From Account #   To Account #           (Loan Account #)   (Deposit Account #)       Amount of Advance $             All Borrower’s representations and warranties in the Loan and Security Agreement are true, correctand complete in all material respects on the date of the request for an advance; provided, however,that such materiality qualifier shall not be applicable to any representations and warranties thatalready are qualified or modified by materiality in the text thereof; and provided, further thatthose representations and warranties expressly referring to a specific date shall be true, accurateand complete in all material respects as of such date:       **Authorized Signature:**   Phone Number:                Print Name/Title:             
**Outgoing Wire Request:**