Document:

<PAGE>
                                                                    EXHIBIT 10.1

                                 LOAN AGREEMENT

                                     Between

                      NASTECH PHARMACEUTICAL COMPANY, INC.

                                  as Borrower,

                                       and

                              SCHWARZ PHARMA, INC.,

                                    as Lender

                            Dated September 30, 2002

<PAGE>

                                 LOAN AGREEMENT

        This LOAN AGREEMENT, dated as of September 30, 2002, is among NASTECH
PHARMACEUTICAL COMPANY, INC., a Delaware corporation (the "Borrower"), and
SCHWARZ PHARMA, INC., a Delaware corporation (the "Lender").

                              W I T N E S S E T H:

        WHEREAS, Borrower and Lender entered into that certain License and
Supply Agreement, dated July 15, 1997 (as amended on November 24, 2000, the
"License Agreement") in respect of the pharmaceutical product Nascobal; and

        WHEREAS, on September 30, 2002, Borrower and Lender entered into that
certain Asset Purchase Agreement (the "Asset Purchase Agreement") for the sale
to Borrower of Lender's right, title and interest in and to Nascobal arising
under the License Agreement; and

        WHEREAS, Borrower desires to obtain a Loan from Lender in order to pay
the unpaid portion of purchase price due to Lender pursuant to the Asset
Purchase Agreement; and

        WHEREAS, Lender is willing, on the terms and subject to the conditions
hereinafter set forth (including Article V), to make such Loan to Borrower;

        NOW THEREFORE, in consideration of the premises, the mutual promises
made herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:

                                    ARTICLE I

                        DEFINITIONS AND ACCOUNTING TERMS

        SECTION 1.1. Defined Terms. The following terms (whether or not
underscored) when used in this Agreement, including its preamble and recitals,
shall, except where the context otherwise requires, have the following meanings
(such meanings to be equally applicable to the singular and plural forms
thereof):

        "Affiliate" of any Person means any other Person which, directly or
indirectly, controls, is controlled by or is under common control with such
Person. A Person shall be deemed to be "controlled by" any other Person if such
other Person possesses, directly or indirectly, power to vote 50% or more of the
securities (on a fully diluted basis) having ordinary voting power for the
election of directors or managing general partners.

        "Agreement" means, on any date, this Loan Agreement as originally in
effect on the Effective Date and as thereafter from time to time amended,
supplemented, amended and restated, or otherwise modified and in effect on such
date.

        "Annual Net Sales" means, for any Year, the Net Sales for such Year.

                                       1
<PAGE>

        "Business" means the development, manufacturing, marketing, sale and
distribution of Nascobal in the Territory.

        "Business Day" means any day which is neither a Saturday or Sunday nor a
legal holiday on which banks are authorized or required to be closed in Seattle,
Washington or Milwaukee, Wisconsin.

        "CERCLA" means the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended.

        "Code" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.

        "Collateral" is defined in the Security Agreement.

        "Controlled Group" means all members of a controlled group of
corporations and all members of a controlled group of trades or businesses
(whether or not incorporated) under common control which, together with
Borrower, are treated as a single employer under Section 414(b) or 414(c) of the
Code or Section 4001 of ERISA.

        "Constating Documents" shall mean the certificate of incorporation and
bylaws of Borrower.

        "Contingent Liability" means any agreement, undertaking or arrangement
by which any Person guarantees, endorses or otherwise becomes or is contingently
liable upon (by direct or indirect agreement, contingent or otherwise, to
provide funds for payment, to supply funds to, or otherwise to invest in, a
debtor, or otherwise to assure a creditor against loss) the indebtedness,
obligation or any other liability of any other Person (other than by
endorsements of instruments in the course of collection), or guarantees the
payment of dividends or other distributions upon the shares of any other Person.
The amount of any Person's obligation under any Contingent Liability shall
(subject to any limitation set forth therein) be deemed to be the outstanding
principal amount (or maximum principal amount, if larger) of the debt,
obligation or other liability guaranteed thereby.

        "Default" means any Event of Default or any condition, occurrence or
event which, after notice or lapse of time or both, would constitute an Event of
Default.

        "Dollar" and the sign "$" mean lawful currency of the United States.

        "Effective Date" means the date this Agreement becomes effective
pursuant to Section 7.8.

        "Environmental Laws" means all applicable federal, state or local
statutes, laws, ordinances, codes, rules, regulations and guidelines (including
consent decrees and administrative orders) relating to public health and safety
and protection of the environment.

        "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and any successor statute of similar import, together with the
regulations thereunder, in each case

                                       2
<PAGE>

as in effect from time to time. References to sections of ERISA also refer to
any successor sections.

        "FDA" means the U.S. Food and Drug Administration or any successor
thereto.

        "FDCA" means the Food, Drug and Cosmetic Act, 21 U.S.C. 1 et seq., as
amended, or corresponding provisions of subsequent superseding federal laws.

        "F.R.S. Board" means the Board of Governors of the Federal Reserve
System or any successor thereto.

        "Hazardous Material" means

               (a) any "hazardous substance," as defined by CERCLA;

               (b) any "hazardous waste," as defined by the Resource
        Conservation and Recovery Act, as amended;

               (c) any petroleum product; or

               (d) any pollutant or contaminant or hazardous, dangerous or toxic
        chemical, material or substance within the meaning of any other
        applicable federal, state or local law, regulation, ordinance or
        requirement (including consent decrees and administrative orders)
        relating to or imposing liability or standards of conduct concerning any
        hazardous, toxic or dangerous waste, substance or material, all as
        amended or hereafter amended.

        "herein," "hereof," "hereto," "hereunder" and similar terms contained in
this Agreement or any other Loan Document refer to this Agreement or such other
Loan Document, as the case may be, as a whole and not to any particular Section,
paragraph or provision of this Agreement or such other Loan Document.

        "including" means including without limiting the generality of any
description preceding such term.

        "Indebtedness" of any Person means, without duplication:

               (a) all obligations of such Person for borrowed money and all
        obligations of such Person evidenced by bonds, debentures, notes or
        other similar instruments;

               (b) all obligations, contingent or otherwise, relative to the
        face amount of all letters of credit, whether or not drawn, and banker's
        acceptances issued for the account of such Person;

               (c) net liabilities of such Person under all interest rate swap
        agreements, interest rate cap agreements and interest rate collar
        agreements, and all other agreements or arrangements designed to protect
        such Person against fluctuations in interest rates or currency exchange
        rates;

                                       3
<PAGE>

               (d) whether or not so included as liabilities in accordance with
        GAAP, all obligations of such Person to pay the deferred purchase price
        of property or services, and indebtedness (excluding prepaid interest
        thereon) secured by a Lien on property owned or being purchased by such
        Person (including indebtedness arising under conditional sales or other
        title retention agreements), whether or not such indebtedness shall have
        been assumed by such Person or is limited in recourse; and

               (e) all Contingent Liabilities of such Person in respect of any
        of the foregoing.

For all purposes of this Agreement, the Indebtedness of any Person shall include
the Indebtedness of any partnership or joint venture in which such Person is a
general partner or a joint venturer.

        "Lien" means any security interest, mortgage, pledge, hypothecation,
assignment, deposit arrangement, encumbrance, lien (statutory or otherwise),
charge against or interest in property to secure payment of a debt or
performance of an obligation or other priority or preferential arrangement of
any kind or nature whatsoever.

        "Loan Documents" means, collectively, this Agreement, the Note, the
Security Agreement, the Trademark Security Agreement, the Patent Security
Agreement, and each other agreement, certificate, document or instrument
delivered in connection therewith.

        "Maturity Date" means September 30, 2006.

        "Nascobal" means an intranasal form of cyanocobalamin/vitamin B-12 in
all dosage strengths and sizes that may, pursuant to applicable laws and
regulations, be manufactured, marketed and sold in the Territory under the NDA,
together with all expansions and improvements to, or any variations and
deviations of, Nascobal which may be included in any supplement, modification or
addition to the NDA, or any other application for marketing approval filed with
the FDA.

        "NDA" means New Drug Application No. 19-722.

        "Net Sales" means, with respect to Nascobal, the gross amount invoiced
to unrelated third parties for Nascobal in the Territory, less:

        (a)    trade and reasonable and customary cash discounts allowed;

        (b)    refunds, rebates, chargebacks, retroactive price adjustments and
               any other allowances which effectively reduce the net selling
               price; and

        (c)    returns, credits and allowances.

Such amounts shall be determined from books and records maintained in accordance
with GAAP, consistently applied.

        "Note" means a promissory note of Borrower payable to Lender, in the
form of Exhibit A hereto (as such promissory note may be amended, endorsed or
otherwise modified from time to

                                       4
<PAGE>

time), evidencing the Loan Amount and also means all other promissory notes
accepted from time to time in substitution therefor or renewal thereof,
including, without limitation, pursuant to Section 2.2.

        "Obligations" means all obligations (monetary or otherwise) of Borrower
arising under or in connection with this Agreement, the Note and each other Loan
Document.

        "Patent Security Agreement" means the Patent Security Agreement,
substantially in the form attached as Exhibit B to the Security Agreement.

        "PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.

        "Pension Plan" means a "pension plan," as such term is defined in
section 3(2) of ERISA, which is subject to Title IV of ERISA (other than a
multiemployer plan as defined in section 4001(a)(3) of ERISA), and to which
Borrower or any corporation, trade or business that is, along with Borrower, a
member of a Controlled Group, may have liability, including any liability by
reason of having been a substantial employer within the meaning of section 4063
of ERISA at any time during the preceding five years, or by reason of being
deemed to be a contributing sponsor under section 4069 of ERISA.

        "Person" means any natural person, corporation, partnership, firm,
limited liability company, association, trust, government, governmental agency
or any other entity, whether acting in an individual, fiduciary or other
capacity.

        "Plan" means any Pension Plan or Welfare Plan.

        "Quarter" means, as the case may be, the three months ending on March
31, June 30, September 30 or December 31 in any Year.

         "Security Agreement" means agreements substantially in the form
attached as Exhibit B hereto to be delivered at Closing by Borrower.

        "Subsidiary" means, with respect to any Person, any corporation,
partnership, joint venture, business trust or similar entity of which more than
50% of the outstanding equity interest having ordinary voting power to elect a
majority of the Board of Directors (or equivalent) of such entity, or to control
the management or policy of such entity (irrespective of whether or not at the
time equity interests of any other class or classes or type of such entity shall
have or might have voting power by reason of the happening of any contingency)
is at the time directly or indirectly owned by such Person, or by one or more of
its Subsidiaries, or by such Person and one or more of its Subsidiaries.

        "Territory" means the United States and its territories and possessions.

        "Trademark Security Agreement" means the Trademark Security Agreement,
substantially in the form attached as Exhibit A to the Security Agreement.

                                       5
<PAGE>

        "United States" or "U.S." means the United States of America, its fifty
States and the District of Columbia.

        "Welfare Plan" means a "welfare plan," as such term is defined in
section 3(1) of ERISA.

        "Year" means the twelve months ending September 30 of each calendar
year.

        SECTION 1.2. Other Defined Terms. The following terms are defined in the
Sections or other areas indicated:

<TABLE>
<CAPTION>
                Term                                              Section
                ----                                              -------
        <S>                                                       <C>
        Asset Purchase Agreement..............................    second recital
        Assignee Lender.......................................    7.10
        Borrower..............................................    preamble
        Event of Default......................................    6.1
        GAAP..................................................    1.5
        Indemnified Liabilities...............................    7.4
        Indemnified Parties...................................    7.4
        Lender................................................    preamble
        License Agreement.....................................    first recital
        Loan..................................................    2.1
        Loan Amount...........................................    2.1
        New License Agreement.................................    6.4
        Taxes.................................................    2.8
</TABLE>

        SECTION 1.3. Use of Defined Terms. Unless otherwise defined or the
context otherwise requires, terms for which meanings are provided in this
Agreement shall have such meanings when used in each Note, Loan Document, notice
and other communication delivered from time to time in connection with this
Agreement or any other Loan Document. Capitalized terms not defined herein shall
have the meanings given them in the Asset Purchase Agreement.

        SECTION 1.4. Cross-References. Unless otherwise specified, references in
this Agreement and in each other Loan Document to any Article or Section are
references to such Article or Section of this Agreement or such other Loan
Document, as the case may be, and, unless otherwise specified, references in any
Article, Section or definition to any clause are references to such clause of
such Article, Section or definition.

        SECTION 1.5. Accounting and Financial Determinations. Unless otherwise
specified, all accounting terms used herein or in any other Loan Document shall
be interpreted, and all accounting determinations and computations hereunder or
thereunder shall be made, in accordance with those generally accepted accounting
principles in effect in the United States from time to time applied on a
consistent basis ("GAAP").

                                       6
<PAGE>

                                   ARTICLE II

                                  LOAN AND NOTE

        SECTION 2.1. Loan. On the terms and subject to the conditions of this
Agreement (including Article III), Lender agrees to loan to Borrower (the
"Loan") an amount equal to $7,250,000 (the "Loan Amount").

        SECTION 2.2. Note. Lender's Loan shall be evidenced by a Note payable to
the order of Lender in a principal amount equal to the Loan Amount.

        SECTION 2.3. Repayments and Prepayments. Borrower shall repay in full
the unpaid principal amount of the Loan, and all accrued and unpaid interest
owing thereon, on the Maturity Date. Prior thereto, Borrower:

               (a) shall make a scheduled repayment of the outstanding principal
        amount, if any, of the Loan on a semi-annual basis in accordance with
        the following schedule:

<TABLE>
              <S>                         <C>
              March 31, 2003:             The lesser of (i) twenty percent (20%)
                                          of Net Sales for the preceding
                                          six-month period, or (ii) $1,375,000.

              September 30, 2003:         An amount equal to: (i) the greater
                                          of  $2,750,000 or twenty percent (20%)
                                          of Net Sales for the preceding
                                          twelve-month period; (ii) minus the
                                          amount paid by Borrower on March 31,
                                          2003.
              March 31, 2004:             The lesser of: (i) twenty percent
                                          (20%) of Net Sales for the preceding
                                          six-month period, or (ii) $1,000,000.
              September 30, 2004:         An amount equal to: (i) the greater
                                          of  $2,000,000 or twenty percent (20%)
                                          of Net Sales for the preceding
                                          twelve-month period; (ii) minus the
                                          amount paid by Borrower on March 31,
                                          2004.
              March 31, 2005              The lesser of: (i) twenty percent
                                          (20%) of Net Sales for the preceding
                                          six-month period, or (ii) $625,000.
              September 30, 2005:         An amount equal to: (i) the greater
                                          of  $1,250,000 or twenty percent (20%)
                                          of Net Sales for the preceding
                                          twelve-month period (ii) minus the
                                          amount paid by Borrower on March 31,
                                          2005.
</TABLE>

                                       7
<PAGE>

<TABLE>
              <S>                         <C>
              March 31, 2006              The lesser of: (i) twenty percent
                                          (20%) of Net Sales for the preceding
                                          six-month period, and (ii) 50% of the
                                          remaining unpaid portion of the Loan
                                          Amount.

              September 30, 2006:         An amount equal to the remaining
                                          unpaid portion of the  Loan Amount
                                          (after taking into account all
                                          payments made pursuant to the above
                                          schedule), plus any remaining accrued
                                          but unpaid interest thereon; provided
                                          that in no event shall the aggregate
                                          principal payments made by Borrower
                                          exceed the Loan Amount.
</TABLE>

        Each Loan payment due under this Section 2.3(a) shall be calculated on
        the basis of Borrower's reasonable estimate of the Net Sales in respect
        of the applicable period preceding such payment date. To the extent that
        Borrower's estimate of the Net Sales for any six-month period is less
        than the actual Net Sales for such six-month period, the Loan payment
        due under this Section 2.3(a) in respect of the next succeeding
        six-month period shall be adjusted accordingly;

               (b) may, from time to time on any Business Day, make a voluntary
        prepayment, in whole or in part, without any prepayment penalty, of the
        outstanding principal amount of the Loan; and

               (c) shall, immediately upon any acceleration of the Maturity Date
        of the Loan pursuant to Section 6.2 or Section 6.3, repay all of the
        unpaid principal amount of the Loan, unless, pursuant to Section 6.3,
        only a portion of the Loan is so accelerated.

        SECTION 2.4. Interest Provisions. Subject to Section 2.5, interest shall
accrue on the outstanding Obligations hereunder at a rate of 7.5% per annum and
shall be payable, without duplication:

               (a) on the Maturity Date;

               (b) on the date of any payment or prepayment, in whole or in
        part, of principal outstanding on the Loan; and

               (c) on that portion of the Loan which is accelerated pursuant to
        Section 6.2 or Section 6.3, immediately upon such acceleration.

Interest accrued on Loans or other monetary Obligations arising under this
Agreement or any other Loan Document after the date such amount is due and
payable (whether on the Maturity Date, upon acceleration or otherwise) shall be
payable upon demand.

                                       8
<PAGE>

        SECTION 2.5. Post-Maturity Rates. After the date any principal amount of
the Loan is due and payable (whether on the Maturity Date, upon acceleration or
otherwise), or after any other monetary Obligation of Borrower shall have become
due and payable, Borrower shall pay, but only to the extent permitted by law,
interest (after as well as before judgment) on such amounts at a rate per annum
equal to 15%.

        SECTION 2.6. Taxes. All payments by Borrower of principal of, and
interest on, the Loan and all other amounts payable hereunder shall be made free
and clear of and without deduction for any present or future excise, stamp or
franchise taxes and other taxes, fees, duties, withholdings or other charges of
any nature whatsoever imposed by any taxing authority, including any imputed
income taxes owed by Lender on account of the Loan but excluding franchise
taxes, income taxes and any other taxes imposed on or measured by Lender's net
income or receipts (such non-excluded items being called "Taxes"). In the event
that any withholding or deduction from any payment to be made by Borrower
hereunder is required in respect of any Taxes pursuant to any applicable law,
rule or regulation, then Borrower will

               (a) pay directly to the relevant authority the full amount
        required to be so withheld or deducted;

               (b) promptly forward to the Lender an official receipt or other
        documentation satisfactory to Lender evidencing such payment to such
        authority; and

               (c) pay to Lender such additional amount or amounts as is
        necessary to ensure that the net amount actually received by Lender will
        equal the full amount Lender would have received had no such withholding
        or deduction been required.

Moreover, if any Taxes are directly asserted against Lender with respect to any
payment received by Lender hereunder, Lender may pay such Taxes and Borrower
will promptly pay such additional amounts (including any penalties, interest or
expenses) as is necessary in order that the net amount received by such person
after the payment of such Taxes (including any Taxes on such additional amount)
shall equal the amount such person would have received had no such Taxes been
asserted. If Borrower fails to pay any Taxes when due to the appropriate taxing
authority or fails to remit to Lender the required receipts or other required
documentary evidence, Borrower shall indemnify Lender for any incremental Taxes,
interest or penalties that may become payable by Lender as a result of any such
failure.

        SECTION 2.7. Payments, Computations, etc. All payments by Borrower to
Lender pursuant to this Agreement, the Note or any other Loan Document shall be
made by Borrower without setoff, deduction or counterclaim, not later than 2:00
p.m., Milwaukee, Wisconsin time, on the date due, in same day or immediately
available funds, to such account as Lender shall specify from time to time by
notice to Borrower. Funds received after that time shall be deemed to have been
received by Lender on the next succeeding Business Day. Any interest and fees
shall be computed on the basis of the actual number of days (including the first
day but excluding the last day) occurring during the period for which such
interest or fee is payable over a year comprised of 365 days. Whenever any
payment to be made hereunder shall be due on a day which is not a Business Day,
such payment shall be made on the next succeeding Business

                                       9
<PAGE>

Day and such extension of time shall be included in computing interest and fees,
if any, in connection with such payment.

        SECTION 2.8. Application of Funds. Unless otherwise provided in this
Article 2, all funds received by the Lender in respect of the Loan under the
Loan Documents shall be applied toward the Obligations as follows:

               (a) First, to the payment of all reasonable fees, charges and
        other sums (with the exception of principal and interest) due and
        payable to the Lender under the Note, this Agreement or the other Loan
        Documents at such time including, without limitation, all reasonable
        costs, expenses, disbursements and losses which shall have been incurred
        or sustained by the Lender in or incidental to the collection of the
        Obligations hereunder or the powers and privileges of the Lender under
        this Agreement, the Note, or any of the other Loan Documents and in and
        towards the provision of adequate indemnity to the Lender against all
        taxes or Liens which by law shall have, or may have priority over the
        rights of the Lender in and to such funds;

               (b) Second, to the payment of the interest that is due and
        payable on the principal of the Note at the time of such payment; and

               (c) Third, to the payment of payments of principal on the Loan.

                                   ARTICLE III

                             CONDITIONS TO BORROWING

        SECTION 3.1. Conditions Precedent to the Loan. Lender's obligation to
make the Loan hereunder is subject to the following conditions precedent, in
each case in form and substance satisfactory to Lender:

               (a) Lender shall have received from Borrower a certificate, dated
        the date of the making of the Loan, of its authorized officer as to

                      (i) resolutions of its Board of Directors then in full
               force and effect authorizing the execution, delivery and
               performance of this Agreement, the Note, the Security Agreement,
               and each other Loan Document executed or to be executed by it;
               and

                      (ii) the incumbency and signatures of those of its
               officers authorized to act with respect to this Agreement, the
               Note, the Security Agreement, and each other Loan Document
               executed by it,

        upon which certificate Lender may conclusively rely until it shall have
        received a further certificate of Borrower canceling or amending such
        prior certificate.

               (b) Lender shall have received its Note duly executed and
        delivered by Borrower.

                                       10
<PAGE>

               (c) Lender shall have received from Borrower an executed copy of
        the Security Agreement, the Trademark Security Agreement and the Patent
        Security Agreement.

               (d) Lender shall have received Uniform Commercial Code financing
        statements (Form UCC-1), naming Borrower as the debtor and Lender as the
        secured party, or other similar instruments or documents, properly
        executed and suitable for filing under the Uniform Commercial Code of
        all jurisdictions as may be necessary or, in the opinion of Lender,
        desirable to perfect the security interest of Lender pursuant to the
        Loan Agreement.

               (e) The conditions set forth in Sections 7.1 through 7.3 of the
        Asset Purchase Agreement to the obligations of the Borrower to
        consummate the Asset Purchase shall have been satisfied in full (without
        amendment or waiver of, or any other forbearance to exercise any rights
        with respect to, any of the terms or provisions thereof by the
        Borrower), and the transactions contemplated in the Asset Purchase
        Agreement shall have been consummated.

               (f) All documents executed or submitted pursuant hereto by or on
        behalf of Borrower shall be reasonably satisfactory in form and
        substance to Lender.

                                   ARTICLE IV

                         REPRESENTATIONS AND WARRANTIES

        In order to induce Lender to enter into this Agreement and to make the
Loan hereunder, Borrower represents and warrants unto Lender as set forth in
this Article IV.

        SECTION 4.1. Organization, Qualifications and Corporate Power, etc.

               (a) Borrower is a corporation duly formed, validly existing and
        in good standing under the laws of the State of Delaware and is duly
        licensed or qualified to transact business as a foreign corporation and
        is in good standing in each jurisdiction in which the nature of the
        business transacted by it or the character of the properties owned or
        leased by it requires such licensing or qualification, except where the
        failure to be so qualified or in good standing would not have a material
        adverse effect on Borrower. Borrower has the power and authority (i) to
        own and hold its properties and to carry on its business as now
        conducted and as currently proposed to be conducted and (ii) to execute,
        deliver and perform this Agreement and each other Loan Document.

               (b) Except for Atossa HealthCare, Inc. ("Atossa"), Borrower has
        no Subsidiaries.

        SECTION 4.2. Authorization of Agreements, etc. The execution and
delivery by Borrower of this Agreement and each other Loan Document and the
performance by Borrower of its obligations hereunder and thereunder, including
the issuance and delivery of the Note, have been duly authorized by all
requisite action and will not (a) violate (i) any existing provision of law,
rule or regulation to which Borrower is subject, (ii) any existing order or
decree of any court or other agency of government to which Borrower is subject,
(iii) Borrower's Constating Documents, (iv) any provision of any indenture,
agreement, contract or other instrument to

                                       11
<PAGE>

which Borrower, or any of its properties or assets is bound; or (b) conflict
with, result in a breach of or constitute (with due notice or lapse of time or
both) a default under any such indenture, agreement, contract or other
instrument; or (c) result in the creation or imposition of any Lien upon any of
the properties or assets of Borrower, other than pursuant to the Security
Agreement.

        SECTION 4.3. Government Approval, Regulation, etc. No authorization or
approval or other action by, and no notice to or filing with, any governmental
authority or regulatory body or other Person is required for the due execution,
delivery or performance by Borrower of this Agreement, the Note or any other
Loan Document. Borrower is not an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, or a "holding company," or a
"subsidiary company" of a "holding company," or an "affiliate" of a "holding
company" or of a "subsidiary company" of a "holding company," within the meaning
of the Public Utility Holding Company Act of 1935, as amended.

        SECTION 4.4. Validity, etc. This Agreement constitutes, and the Note and
each other Loan Document executed by Borrower will, on the due execution and
delivery thereof, constitute, the legal, valid and binding obligations of
Borrower enforceable in accordance with their respective terms, except as
enforcement may be limited by equitable principles or by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or limiting creditors'
rights generally.

        SECTION 4.5. Litigation; Compliance with Law. Except as disclosed on
Borrower's public filings with the Securities and Exchange Commission, there is
no (i) action, suit, claim, proceeding or investigation pending or, to
Borrower's best knowledge, threatened against or affecting Borrower, at law or
in equity, or before or by any Federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, , except for (A) matters that are fully covered by insurance (subject
to customary deductibles), and (B) matters that, if decided adversely to
Borrower, reasonably could not be expected to have a material adverse effect on
Borrower, (ii) arbitration proceeding relating to Borrower pending under
collective bargaining agreements or otherwise, except for (A) matters that are
fully covered by insurance (subject to customary deductibles), and (B) matters
that, if decided adversely to Borrower, reasonably could not be expected to have
a material adverse effect on Borrower, or (iii) governmental inquiry pending or,
to Borrower's best knowledge, threatened against or affecting Borrower
(including, without limitation, any inquiry as to the qualification of Borrower
to hold or receive any license or permit, except for matters that, if decided
adversely to Borrower, reasonably could not be expected to have a material
adverse effect on Borrower), and to Borrower's best knowledge there is no basis
for any of the foregoing. Borrower is not in default with respect to any order,
writ, injunction or decree known to or served upon Borrower of any court or of
any federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign including, without
limitation, FDA. Borrower has complied in all respects with all laws, rules,
regulations and orders applicable to its business, operations, properties,
assets, products and services, except to the extent that noncompliance could not
reasonably be expected to have a material adverse effect on Borrower, and
Borrower has all necessary permits, licenses and other authorizations required
to conduct its business as conducted and as currently proposed to be conducted,
except to the extent that the failure to have such permits, licenses or other
authorizations could not reasonably be expected to have a material adverse
effect on Borrower.

                                       12
<PAGE>

Borrower is not aware of its non-compliance with any existing or proposed law,
rule, regulation or order, whether federal or state, which noncompliance could
reasonably be expected to have a material adverse effect on Borrower.

        SECTION 4.6. Title to Properties. Borrower has good and marketable title
to the Collateral and its other properties and assets and the Collateral and all
such properties and assets are free and clear of all Liens, except for Liens
permitted pursuant to Section 5.2.4.

        SECTION 4.7. Taxes.

               (a) Borrower has filed all material tax returns, federal, state,
        county, local and foreign, required to be filed by it, as well as all
        informational returns required of it. All material amounts of taxes
        shown as due on all such returns have been paid or are being contested
        in good faith. Each such material return and filing is true and correct
        in all material respects and Borrower neither has nor will have any
        additional material liability for taxes with respect to any return or
        other filing heretofore filed or which was required by law to be filed.
        All taxes which Borrower is required by law to withhold or collect,
        including sales and use taxes, and amounts required to be withheld for
        taxes of employees, have been duly withheld or collected and, to the
        extent required, have been paid over to the proper governmental
        authorities or are held in separate bank accounts for such purpose,
        other than the failure to withhold, collect or pay any amounts which,
        individually or in the aggregate, could not reasonably be expected to
        have a material adverse effect on Borrower. All such taxes with respect
        to which Borrower has become obligated pursuant to elections made by
        Borrower in accordance with generally accepted practice have been paid
        and adequate reserves have been established for all taxes accrued but
        not yet payable.

               (b) The federal income tax returns of Borrower have never been
        audited by the Internal Revenue Service and there are no extensions of
        statutes of limitations other than those that result from late filed
        returns. No deficiency assessment with respect to or proposed adjustment
        of Borrower's federal, state, county or local taxes is pending or, to
        Borrower's best knowledge, threatened, and Borrower is not aware of any
        fact which would constitute grounds for the assessment of any additional
        material taxes by any taxing authority with respect to the taxable years
        of Borrower beginning on or before the date hereof. Borrower has not
        granted or been requested to grant waivers of any statutes of
        limitations applicable to any material claim for taxes. There is no tax
        lien, whether imposed by any Federal, state, county or local taxing
        authority, outstanding against the assets, properties or business of
        Borrower.

        SECTION 4.8. Pension and Welfare Plans. During the
twelve-consecutive-month period prior to the date of the execution and delivery
of this Agreement and prior to the date of the making of the Loans hereunder, no
steps have been taken to terminate any Pension Plan, and no contribution failure
has occurred with respect to any Pension Plan sufficient to give rise to a Lien
under section 302(f) of ERISA. No condition exists or event or transaction has
occurred with respect to any Pension Plan which might result in the incurrence
by Borrower or any member of the Controlled Group of any material liability,
fine or penalty. Neither Borrower nor any member of the Controlled Group has any
contingent liability with respect to any post-retirement

                                       13
<PAGE>

benefit under a Welfare Plan, other than liability for continuation coverage
described in Part 6 of Title I of ERISA.

                                   ARTICLE V

                                    COVENANTS

        SECTION 5.1. Affirmative Covenants. Borrower agrees with Lender that,
until all Obligations have been paid and performed in full, Borrower will
perform the obligations set forth in this Section 5.1.

        SECTION 5.1.1. Existence. Except as permitted by Section 5.2.1.,
Borrower will maintain its existence, rights and franchises in full force and
effect.

        SECTION 5.1.2. Insurance. The Borrower will, and will cause each of its
Subsidiaries to, maintain or cause to be maintained with responsible insurance
companies insurance with respect to its properties and business against such
casualties and contingencies and of such types and in such amounts as is
customary in the case of similar businesses and will, upon request of the
Lender, furnish to the Lender at reasonable intervals a certificate of an
authorized officer of the Borrower setting forth the nature and extent of all
insurance maintained by the Borrower and its Subsidiaries in accordance with
this Section.

        SECTION 5.1.3. Compliance with Laws. Borrower will comply, and cause
each of its Subsidiaries to comply, with all applicable laws, rules, regulations
and orders, including Environmental Laws and ERISA, noncompliance with which
could reasonably be expected to materially adversely affect its business or
condition, financial or otherwise. Each of Borrower and its Subsidiaries will
obtain all consents, approvals, licenses and permits required by federal, state,
local and foreign law to carry on its business, except for such consents,
approvals, licenses and permits which, if lacking, could not reasonably be
expected to have a materially adverse effect on Borrower.

        SECTION 5.1.4. Taxes. Borrower will pay and discharge, and cause each of
its Subsidiaries to pay and discharge, promptly all taxes, assessments and
governmental charges or levies imposed upon it or its income or profits or in
respect of its property, before the same shall become in default, as well as all
lawful claims for labor and supplies or otherwise which, if unpaid, might become
a lien or charge upon such properties or any part thereof; provided, however,
that Borrower shall not be required to pay and discharge or to cause to be paid
and discharged any tax, assessment, charge, levy or claim so long as the
validity or amount thereof shall be contested in good faith by appropriate
proceedings and Borrower shall set aside on its books such reserves as are
required by GAAP with respect to any such tax, assessment, charge, levy or claim
so contested.

        SECTION 5.1.5. Further Assurances. Borrower will cure promptly or will
cause any or all of its Subsidiaries to cure promptly any defects in the
creation and issuance of the Note and in the execution and delivery of this
Agreement and any other Loan Document, Borrower, at its reasonable expense, will
promptly execute and deliver or will cause any or all of its Subsidiaries to
execute and deliver promptly to Lender upon request all such other and further
documents,

                                       14
<PAGE>

agreements and instruments in compliance with or pursuant to its covenants and
agreements herein, and obtain any consents and take any further action as may be
reasonably necessary or appropriate in connection therewith.

        SECTION 5.1.6. Default Notice. Borrower shall furnish, or shall cause to
be furnished, to Lender as soon as practicable and in any event within five
Business Days after Borrower becomes aware of the occurrence of each Default a
statement setting forth details of such Default and the action that Borrower has
taken and proposes to take with respect thereto.

        SECTION 5.1.7. Financial Information, Reports, Notices, etc. Borrower
will furnish, or will cause to be furnished, to the Lender copies of the
following financial statements, reports, notices and information:

               (a) immediately upon becoming aware of the institution of any
        steps by the Borrower or any other Person to terminate any Pension Plan,
        or the failure to make a required contribution to any Pension Plan if
        such failure is sufficient to give rise to a Lien under section 302(f)
        of ERISA, or the taking of any action with respect to a Pension Plan
        which could result in the requirement that the Borrower furnish a bond
        or other security to the PBGC or such Pension Plan, or the occurrence of
        any event with respect to any Pension Plan which could result in the
        incurrence by the Borrower of any material liability, fine or penalty,
        or any material increase in the contingent liability of the Borrower
        with respect to any post-retirement Welfare Plan benefit, notice thereof
        and copies of all documentation relating thereto; and

               (b) such other information respecting the condition or
        operations, financial or otherwise, of the Borrower or any of its
        Subsidiaries as the Lender may from time to time reasonably request.

        SECTION 5.1.8. Records and Audit. Borrower and its Affiliates shall keep
full, true and accurate books of account containing all particulars that may be
necessary for the purpose of showing the amounts payable to Lender under Section
2.3(a). Such books of account shall be kept at Borrower's principal place of
business or the principal place of business of the appropriate Affiliate of
Borrower to which this Agreement relates. Such books and the supporting data
shall be open, at all reasonable times and upon reasonable notice during the
term of this Agreement and for two Years after its termination, to the
inspection of a firm of certified public accountants selected by Lender and
reasonably acceptable to Borrower, for the limited purpose of verifying
Borrower's payments under Section 2.3(a); provided, however, that such
examination shall not take place more often than once each Year and shall not
cover more than the preceding three Years, with no right to audit any period
previously audited. Except as otherwise provided in this Section, the cost of
any such examination shall be paid by Lender. In the event that any such
inspection reveals a deficiency in excess of five percent (5%) of the reported
royalty for the period covered by the inspection, Borrower shall promptly pay
Lender the deficiency, plus interest, and shall reimburse Lender for the
reasonable fees and expenses paid to such accountants in connection with their
inspection. The parties agree that neither party shall be required to retain
books and records with respect to the above other than books and records
relating to the current Year and the immediately preceding three Years.

                                       15
<PAGE>

        SECTION 5.1.9. Net Sales Reports. In any Quarter, Borrower shall, within
30 days after the end of each Quarter, deliver to Lender true and accurate
reports, certified by an authorized officer of Borrower, setting forth the
actual Net Sales for such Quarter.

        SECTION 5.2. Negative Covenants. Borrower agrees with Lender that, until
all Obligations have been paid and performed in full, Borrower will comply with
the restrictions set forth in this Section 5.2.

        SECTION 5.2.1. Consolidation, Merger, etc. Borrower will not, and will
not permit any of its Subsidiaries to, liquidate or dissolve, or consolidate
with, or merge into or with, any other corporation, or purchase or otherwise
acquire all or substantially all of the assets of any Person (or of any division
thereof) except

               (a) any such Subsidiary may liquidate or dissolve voluntarily
        into, and may merge with and into, Borrower or any other Subsidiary, and
        the assets or stock of any Subsidiary may be purchased or otherwise
        acquired by Borrower or any other Subsidiary; and

               (b) so long as no Default has occurred and is continuing or would
        occur after giving effect thereto, Borrower or any of its Subsidiaries
        may purchase all or substantially all of the assets of any Person, or
        acquire such Person by merger.

        The foregoing notwithstanding, Atossa may liquidate or dissolve
voluntarily into, and may merge with and into, any other Person, and the assets
or stock of Atossa may be purchased or otherwise acquired by any other Person;
provided, in each case that, at the time of any such transaction, Atossa does
not hold any assets comprising or rights material to the Business.

        SECTION 5.2.2. Modification of Certain Agreements. Borrower will not and
will not permit its Subsidiaries to enter into, or consent to any amendment,
supplement or other modification of any of the terms or provisions contained in,
or applicable to, any agreement that relates to Nascobal if the effect could
reasonably be expected to be materially adverse to the Business.

        SECTION 5.2.3. Transactions with Affiliates. Other than arrangements
disclosed in Borrower's most recent Form 10-Q filed with the Securities and
Exchange Commission, Borrower will not, and will not permit any of its
Subsidiaries to, enter into, or cause, suffer or permit to exist any arrangement
or contract with any of its other Affiliates unless such arrangement or contract
is fair and equitable to Borrower or such Subsidiary and is an arrangement or
contract of the kind which would be entered into by a prudent Person in the
position of Borrower or such Subsidiary with a Person which is not one of its
Affiliates.

        SECTION 5.2.4. Liens. Borrower will not, and will not permit any of its
Subsidiaries to, create, incur, assume or suffer to exist any Lien upon the
Collateral except:

               (a) Liens granted or permitted under the Loan Documents;

               (b) Liens for taxes, assessments or other governmental charges or
        levies not at the time delinquent or thereafter payable without penalty
        or being diligently contested in

                                       16
<PAGE>

        good faith by appropriate proceedings and for which adequate reserves in
        accordance with GAAP shall have been set aside on its books;

               (c) Liens of carriers, warehousemen, mechanics, materialmen and
        landlords incurred in the ordinary course of business for sums not
        overdue or being diligently contested in good faith by appropriate
        proceedings and for which adequate reserves in accordance with GAAP
        shall have been set aside on its books;

               (d) judgment Liens in existence less than 30 days after the entry
        thereof or with respect to which execution has been stayed or the
        payment of which is covered in full (subject to a customary deductible)
        by insurance maintained with nationally recognized insurance companies;
        and

               (e) implied or express licenses pursuant to any agreements
        entered into in the ordinary course for the day-to-day operation of the
        Business, as described under Section 5.2.2.

        SECTION 5.2.5. Asset Dispositions, etc. Except as provided in Section
5.2.1, neither Borrower nor any of its Subsidiaries will sell, transfer, lease,
contribute or otherwise convey, or grant options or other rights with respect
to, all or substantially all of its assets or all or any material part of the
Business, in each case other than the sale of product in the ordinary course of
business.

        SECTION 5.2.6. Negative Pledges, Restrictive Agreements, etc. Neither
Borrower nor any of its Subsidiaries will enter into any agreement (excluding
this Agreement and any other Loan Document) prohibiting or restricting the
creation or assumption of any Lien upon any item of Collateral or the ability of
Borrower to amend or otherwise modify this Agreement or any other Loan Document
or to perform its obligations hereunder and thereunder.

                                   ARTICLE VI

                                EVENTS OF DEFAULT

        SECTION 6.1. Listing of Events of Default. Each of the following events
or occurrences described in this Section 6.1 shall constitute an "Event of
Default".

        SECTION 6.1.1. Non-Payment of Obligations. Borrower shall default in the
payment when due of any principal of or interest on any Loan (and such default
shall continue for five days from such due date), or Borrower shall default in
the payment when due of any other Obligation (and such default shall continue
unremedied for a period of 20 days after notice thereof shall have been given to
Borrower by Lender).

        SECTION 6.1.2. Breach of Warranty. Any representation or warranty of
Borrower made hereunder or in any other Loan Document or any other writing or
certificate furnished by or on behalf of Borrower to Lender for the purposes of
or in connection with this Agreement or any such other Loan Document (including
any certificates delivered pursuant to Article III) is or shall be false when
made in any material respect.

                                       17
<PAGE>

        SECTION 6.1.3. Non-Performance of Certain Covenants and Obligations.
Borrower shall default in the due performance and observance of any of its
obligations under Section 5.1.6 or Section 5.2.

        SECTION 6.1.4. Non-Performance of Other Covenants and Obligations.
Borrower shall default in the due performance and observance of any other
agreement contained herein or in any other Loan Document, and such default shall
continue unremedied for a period of 30 days after notice thereof shall have been
given to Borrower by Lender.

        SECTION 6.1.5. Default on Other Indebtedness. A default shall occur in
the payment due upon the final stated maturity of any Indebtedness (other than
Indebtedness described in Section 6.1.1) of Borrower having a principal amount
in excess of $250,000, or a default shall occur in the performance or observance
of any obligation or condition with respect to such Indebtedness if the effect
of such default is to accelerate the maturity of any such Indebtedness.

        SECTION 6.1.6. Judgments. Any judgment or order for the payment of money
in excess of $250,000 not covered by insurance shall be rendered against
Borrower or any of its Subsidiaries and either

               (a) enforcement proceedings shall have been commenced by any
        creditor upon such judgment or order; or

               (b) there shall be any period of 10 consecutive days during which
        a stay of enforcement of such judgment or order, by reason of a pending
        appeal or otherwise, shall not be in effect.

        SECTION 6.1.7. Pension Plans. Any of the following events shall occur
with respect to any Pension Plan

               (a) the institution of any steps by Borrower, any member of its
        Controlled Group or any other Person to terminate a Pension Plan if, as
        a result of such termination, Borrower or any such member could be
        required to make a contribution to such Pension Plan, or could
        reasonably expect to incur a liability or obligation to such Pension
        Plan, in excess of $250,000; or

               (b) a contribution failure occurs with respect to any Pension
        Plan sufficient to give rise to a Lien under Section 302(f) of ERISA.

        SECTION 6.1.8. Bankruptcy, Insolvency, etc. Borrower or any of its
Subsidiaries shall

               (a) generally fail to pay, or admit in writing its inability or
        unwillingness to pay, debts as they become due;

               (b) apply for, consent to, or acquiesce in, the appointment of a
        trustee, receiver, sequestrator or other custodian for Borrower or any
        of its Subsidiaries or any property of any thereof, or make a general
        assignment for the benefit of creditors;

                                       18
<PAGE>

               (c) in the absence of such application, consent or acquiescence,
        permit or suffer to exist the appointment of a trustee, receiver,
        sequestrator or other custodian for Borrower or any of its Subsidiaries
        or for a substantial part of its property and such trustee, receiver,
        sequestrator or other custodian shall not be discharged within 60 days,
        provided that Borrower and each Subsidiary hereby expressly authorizes
        Lender to appear in any court conducting any relevant proceeding during
        such 60-day period to preserve, protect and defend its rights under the
        Loan Documents;

               (d) permit or suffer to exist the commencement of any bankruptcy,
        reorganization, debt arrangement or other case or proceeding under any
        bankruptcy or insolvency law, or any dissolution, winding up or
        liquidation proceeding, in respect of Borrower or any of its
        Subsidiaries, and, if any such case or proceeding is not commenced by
        Borrower or each Subsidiary, such case or proceeding shall be consented
        to or acquiesced in by Borrower or such Subsidiary or shall result in
        the entry of an order for relief or shall remain for 60 days
        undismissed, provided that Borrower and each Subsidiary hereby expressly
        authorizes Lender to appear in any court conducting any such case or
        proceeding during such 60-day period to preserve, protect and defend
        their rights under the Loan Documents; or

               (e) take any action authorizing, or in furtherance of, any of the
        foregoing.

        SECTION 6.1.9. Impairment of Security, etc. Any Loan Document, or any
Lien granted thereunder, shall (except in accordance with its terms), in whole
or in part, terminate, cease to be effective or cease to be the legally valid,
binding and enforceable obligation of Borrower or any Lien securing any
Obligation shall, in whole or in part, cease to be a perfected Lien, subject
only to those exceptions expressly permitted by such Loan Document.

        SECTION 6.2. Action if Bankruptcy. If any Event of Default described in
clauses (a) through (d) of Section 6.1.8 shall occur, all of the outstanding
principal amount of the Loan and all other Obligations shall automatically be
and become immediately due and payable, without notice or demand.

        SECTION 6.3. Action if Other Event of Default. If any Event of Default
(other than any Event of Default described in clauses (a) through (d) of Section
6.1.8) shall occur for any reason, whether voluntary or involuntary, and be
continuing, Lender may by notice to Borrower declare all or any portion of the
outstanding principal amount of the Loan and other Obligations to be due and
payable, whereupon the full unpaid amount of such Loan and other Obligations
which shall be so declared due and payable shall be and become immediately due
and payable, without further notice, demand or presentment.

        SECTION 6.4. Reinstatement Option. From time to time after the
occurrence of an Event of Default, Lender may, at its option (to be exercised in
its sole discretion), require Borrower to grant Lender the exclusive right to
distribute Nascobal in the Territory (the "Reinstatement Option") by sending
Borrower a written notice stating that Lender has exercised such Reinstatement
Option. In the event that Lender exercises the Reinstatement Option, Lender and
Borrower shall, promptly and, in any event, within 10 Business Days, negotiate
in good faith a mutually acceptable license and supply agreement (the "New
License Agreement") which shall

                                       19
<PAGE>

be in form and substance substantially the same as the License Agreement;
provided, however, that the New License Agreement shall provide that:

               (a) Lender, as distributor, shall be entitled to 100% of the Net
        Sales generated from Lender's distribution and sale of Nascobal,

               (b) Lender may require that the manufacture of the Products is
        transferred to its manufacturing facility. Borrower will do all things
        to assist Lender to effect such manufacturing transfer,

               (c) Lender's net profits, calculated on a post-Tax (including
        Taxes measured by Lender's income, but excluding Taxes that would have
        been owing had such Obligations otherwise been paid hereunder) basis
        shall offset the Obligations then owing hereunder, and

               (d) the New License Agreement shall terminate after all
        Obligations then owing hereunder are offset as described in clause (c)
        above.

                                   ARTICLE VII

                            MISCELLANEOUS PROVISIONS

        SECTION 7.1. Waivers, Amendments, etc. The provisions of this Agreement
and of each other Loan Document may from time to time be amended, modified or
waived, if such amendment, modification or waiver is in writing and consented to
by Borrower and Lender. No failure or delay on the part of Lender or the holder
of any Note in exercising any power or right under this Agreement or any other
Loan Document shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power or right preclude any other or further exercise
thereof or the exercise of any other power or right. No notice to or demand on
Borrower in any case shall entitle it to any notice or demand in similar or
other circumstances. No waiver or approval by Lender or the holder of any Note
under this Agreement or any other Loan Document shall, except as may be
otherwise stated in such waiver or approval, be applicable to subsequent
transactions. No waiver or approval hereunder shall require any similar or
dissimilar waiver or approval thereafter to be granted hereunder.

        SECTION 7.2. Notices. All notices and other communications provided to
any party hereto under this Agreement or any other Loan Document shall be in
writing or by facsimile and addressed, delivered or transmitted to such party at
its address or facsimile number set forth below its signature hereto or at such
other address or facsimile number as may be designated by such party in a notice
to the other parties. Any notice, if mailed and properly addressed with postage
prepaid or if properly addressed and sent by pre-paid courier service, shall be
deemed given when received; any notice, if transmitted by facsimile, shall be
deemed given when transmitted and electronically confirmed.

        SECTION 7.3. Payment of Costs and Expenses. Subject to Section 2.6,
Borrower agrees to pay, and to save Lender harmless from all liability for, any
stamp or other taxes which may be payable in connection with the execution or
delivery of this Agreement, the borrowings hereunder, or the issuance of the
Note or any other Loan Documents. Borrower also agrees to

                                       20
<PAGE>

reimburse Lender upon demand for all reasonable out-of-pocket expenses
(including reasonable attorneys' fees and reasonable legal expenses in excess of
$10,000 in the aggregate) incurred by Lender in connection with (x) the
negotiation of any restructuring or "work-out," whether or not consummated, of
any Obligations and (y) the enforcement of any Obligations or any Loan Document.

        SECTION 7.4. Indemnification. In consideration of the execution and
delivery of this Agreement by Lender and the making of the Loan, Borrower hereby
indemnifies, exonerates and holds Lender and its officers, directors, employees
and agents (collectively, the "Indemnified Parties"), irrespective of whether
any such Indemnified Party is a party to the action for which indemnification
hereunder is sought, free and harmless from and against any and all losses,
costs, liabilities and damages, and expenses, including reasonable attorneys'
fees and reasonable disbursements (collectively, the "Indemnified Liabilities"),
incurred by the Indemnified Parties or any of them as a result of, arising out
of, or relating to (i) any breach by Borrower of this Agreement or any other
Loan Document, (ii) the enforcement by Lender of the terms of this Agreement or
any other Loan Agreement, or (iii) any investigation, litigation or proceeding
related to any environmental cleanup, audit, compliance or other matter relating
to the protection of the environment or the Release by Borrower or any of its
Subsidiaries of any Hazardous Material, except, in each case, for any such
Indemnified Liabilities arising for the account of a particular Indemnified
Party by reason of the relevant Indemnified Party's gross negligence or willful
misconduct. If and to the extent that the foregoing undertaking may be
unenforceable for any reason, Borrower hereby agrees to make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law.

        SECTION 7.5. Survival. The obligations of Borrower under Section
7.4(iii) shall survive any termination of this Agreement and the payment in full
of all Obligations for a period of three years.

        SECTION 7.6. Severability. Any provision of this Agreement or any other
Loan Document which is prohibited or unenforceable in any jurisdiction shall, as
to such provision and such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions of
this Agreement or such Loan Document or affecting the validity or enforceability
of such provision in any other jurisdiction.

        SECTION 7.7. Headings. The various headings of this Agreement and of
each other Loan Document are inserted for convenience only and shall not affect
the meaning or interpretation of this Agreement or such other Loan Document or
any provisions hereof or thereof.

        SECTION 7.8. Execution in Counterparts, Effectiveness, etc. This
Agreement may be executed by the parties hereto in several counterparts, each of
which shall be deemed to be an original and all of which shall constitute
together but one and the same agreement. This Agreement shall become effective
when counterparts hereof executed on behalf of Borrower and Lender.

        SECTION 7.9. Governing Law; Entire Agreement. THIS AGREEMENT, THE NOTE
AND EACH OTHER LOAN DOCUMENT SHALL EACH BE DEEMED TO BE A

                                       21
<PAGE>

CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO
THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTERESTS GRANTED
HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE
GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. This
Agreement, the Note and the other Loan Documents constitute the entire
understanding among the parties hereto with respect to the subject matter hereof
and supersede any prior agreements, written or oral, with respect thereto.

        SECTION 7.10. Successors and Assigns. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that:

               (a) Borrower may not assign or transfer its rights or obligations
        hereunder without the prior written consent of Lender;

               (b) Lender may assign to any Person (each Person to whom such
        assignment and delegation is to be made being hereinafter referred to as
        an "Assignee Lender"), all or any fractional share of Lender's total
        Loans; provided, that such fractional share shall not be less than 25%
        of the Loan; provided, however, that Borrower shall be entitled to
        continue to deal solely and directly with Lender in connection with the
        interests so assigned to an Assignee Lender until written notice of such
        assignment, together with payment instructions, addresses and related
        information with respect to such Assignee Lender, shall have been given
        to Borrower by Lender and such Assignee Lender. Within three Business
        Days after its receipt of notice of any such assignment, Borrower shall
        execute and deliver to the Assignee Lender a new Note evidencing such
        Assignee Lender's assigned Loans and, if the assignor Lender has
        retained Loans hereunder, a replacement Note to the assignor Lender in
        the principal amount of the Loans retained by the assignor Lender
        hereunder (such Note to be in exchange for, but not in payment of, that
        Note then held by such assignor Lender).

               (c) The Lender may at any time sell to one or more Persons (each
        such Person a "Participant") participating interests in the Loan or
        other interests of Lender hereunder; provided, however that (i) no such
        participation shall relieve such Lender from its obligations hereunder
        or under any Loan Document, (ii) Borrower shall continue to deal solely
        and directly with the Lender in connection with this Agreement and the
        other Loan Documents, and (iii) Borrower shall not be required to pay
        any amount hereunder that is greater than the amount the Borrower would
        have had to pay had such participation not taken place.

        SECTION 7.11. Other Transactions. Nothing contained herein shall
preclude Lender from engaging in any transaction, in addition to those
contemplated by this Agreement or any other Loan Document, with Borrower or any
of its Affiliates in which Borrower or such Affiliate is not restricted hereby
from engaging with any other Person.

        SECTION 7.12. Forum Selection and Consent to Jurisdiction. ANY
LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS

                                       22
<PAGE>

AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE LENDER OR THE
BORROWER SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE
OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF
NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY
COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE LENDER'S OPTION, IN THE
COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND.
THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE
COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET
FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY
IN CONNECTION WITH SUCH LITIGATION. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO
THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL
SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. THE BORROWER HEREBY EXPRESSLY
AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION
WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH
LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY
SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT
THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY
COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT
PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO
ITSELF OR ITS PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN
RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.

        SECTION 7.13. Waiver of Jury Trial. LENDER AND BORROWER HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF,
UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY
COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR
ACTIONS OF LENDER OR BORROWER. BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS
RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER
PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS
PROVISION IS A MATERIAL INDUCEMENT FOR LENDER ENTERING INTO THIS AGREEMENT AND
EACH SUCH OTHER LOAN DOCUMENT.

                [REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]

                                       23
<PAGE>

        IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.

                                            NASTECH PHARMACEUTICAL COMPANY, INC.

                                            By: /s/ Gregory Weaver
                                               Name: Gregory Weaver
                                               Title: CFO

                                            Address:    3450 Monte Villa Parkway
                                                        Bothell, WA 98021

                                            Facsimile:  (425) 908-3650
                                            Attention:  President

                                            SCHWARZ PHARMA, INC.

                                            By: /s/ Ron Stratton
                                               Dr. Ron Stratton
                                               President and COO

                                            Address:    6140 W. Executive Drive
                                                        Mequon, Wisconsin 53092

                                            Facsimile:  (262) 242-1641
                                            Attention:  General Counsel

<PAGE>
                                                                       EXHIBIT A

                                      NOTE

                                                              September 30, 2002

        FOR VALUE RECEIVED, the undersigned, NASTECH PHARMACEUTICAL COMPANY,
INC., a Delaware corporation (the "Borrower"), unconditionally promises to pay
to the order of SCHWARZ PHARMA, INC., a Delaware corporation (the "Lender") the
principal sum of $7,250,000 or, if less, the aggregate unpaid principal amount
of all Loans made by Lender pursuant to that certain Loan Agreement, dated as of
September 30, 2002 (together with all amendments and other modifications, if
any, from time to time thereafter made thereto, the "Loan Agreement"), between
Borrower and Lender, payable on the Maturity Date (as defined in the Loan
Agreement).

        The Borrower also promises to pay interest on the unpaid principal
amount hereof from time to time outstanding from the date hereof until maturity
(whether by acceleration or otherwise) and, after maturity, until paid, at the
rates per annum and on the dates specified in the Loan Agreement.

        The outstanding principal of this Note and unpaid accrued interest may
be prepaid, in whole or in part without penalty, from time to time on any
Business Day in accordance with Loan Agreement.

        Payments of both principal and interest are to be made in lawful money
of the United States of America in same day or immediately available funds to
such account or accounts as are designated by Lender by a written notice given
pursuant to the Loan Agreement.

        This Note is a Note referred to in, and evidences Indebtedness incurred
under, the Loan Agreement, to which reference is made for a description of the
security for this Note and for a statement of the terms and conditions on which
Borrower is permitted and required to make prepayments and repayments of
principal of the Indebtedness evidenced by this Note and on which such
Indebtedness may be declared to be immediately due and payable. Unless otherwise
defined, terms used herein have the meanings provided in the Loan Agreement.

        All parties hereto, whether as makers, endorsers, or otherwise,
severally waive presentment for payment, demand, protest and notice of dishonor.

THIS NOTE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS
OF THE STATE OF NEW YORK.

                              [Signature next page]

<PAGE>

                                        NASTECH PHARMACEUTICAL
                                        COMPANY, INC.

                                        By:
                                           -------------------------------------
                                           Name:
                                           Title:

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                         PAGE
<S>               <C>                                                                    <C>
ARTICLE I         DEFINITIONS AND ACCOUNTING TERMS..........................................1

        SECTION 1.1.         Defined Terms..................................................1

        SECTION 1.2.         Other Defined Terms............................................6

        SECTION 1.3.         Use of Defined Terms...........................................6

        SECTION 1.4.         Cross-References...............................................6

        SECTION 1.5.         Accounting and Financial Determinations........................6

ARTICLE II        LOAN AND NOTE.............................................................7

        SECTION 2.1.         Loan...........................................................7

        SECTION 2.2.         Note...........................................................7

        SECTION 2.3.         Repayments and Prepayments.....................................7

        SECTION 2.4.         Interest Provisions............................................8

        SECTION 2.5.         Post-Maturity Rates............................................9

        SECTION 2.6.         Taxes..........................................................9

        SECTION 2.7.         Payments, Computations, etc....................................9

        SECTION 2.8.         Application of Funds..........................................10

ARTICLE III       CONDITIONS TO BORROWING..................................................10

        SECTION 3.1.         Conditions Precedent to the Loan..............................10

ARTICLE IV        REPRESENTATIONS AND WARRANTIES...........................................11

        SECTION 4.1.         Organization, Qualifications and Corporate Power, etc.........11

        SECTION 4.2.         Authorization of Agreements, etc..............................11

        SECTION 4.3.         Government Approval, Regulation, etc..........................12

        SECTION 4.4.         Validity, etc.................................................12

        SECTION 4.5.         Litigation; Compliance with Law...............................12

        SECTION 4.6.         Title to Properties...........................................13

        SECTION 4.7.         Taxes.........................................................13

        SECTION 4.8.         Pension and Welfare Plans.....................................13

ARTICLE V         COVENANTS................................................................14

        SECTION 5.1.         Affirmative Covenants.........................................14

               SECTION 5.1.1.       Existence..............................................14
</TABLE>

                                      -i-
<PAGE>

                                TABLE OF CONTENTS
                                   (continued)

<TABLE>
<CAPTION>
                                                                                         PAGE
<S>               <C>                                                                    <C>
               SECTION 5.1.2.       Insurance..............................................14

               SECTION 5.1.3.       Compliance with Laws...................................14

               SECTION 5.1.4.       Taxes..................................................14

               SECTION 5.1.5.       Further Assurances.....................................14

               SECTION 5.1.6.       Default Notice.........................................15

               SECTION 5.1.7.       Financial Information, Reports, Notices, etc...........15

               SECTION 5.1.8.       Records and Audit......................................15

               SECTION 5.1.9.       Net Sales Reports......................................16

        SECTION 5.2.         Negative Covenants............................................16

               SECTION 5.2.1.       Consolidation, Merger, etc.............................16

               SECTION 5.2.2.       Modification of Certain Agreements.....................16

               SECTION 5.2.3.       Transactions with Affiliates...........................16

               SECTION 5.2.4.       Liens..................................................16

               SECTION 5.2.5.       Asset Dispositions, etc................................17

               SECTION 5.2.6.       Negative Pledges, Restrictive Agreements, etc..........17

ARTICLE VI        EVENTS OF DEFAULT........................................................17

        SECTION 6.1.         Listing of Events of Default..................................17

               SECTION 6.1.1.       Non-Payment of Obligations.............................17

               SECTION 6.1.2.       Breach of Warranty.....................................17

               SECTION 6.1.3.       Non-Performance of Certain Covenants and
                                    Obligations............................................18

               SECTION 6.1.4.       Non-Performance of Other Covenants and Obligations.....18

               SECTION 6.1.5.       Default on Other Indebtedness..........................18

               SECTION 6.1.6.       Judgments..............................................18

               SECTION 6.1.7.       Pension Plans..........................................18

               SECTION 6.1.8.       Bankruptcy, Insolvency, etc............................18

               SECTION 6.1.9.       Impairment of Security, etc............................19

        SECTION 6.2.         Action if Bankruptcy..........................................19

        SECTION 6.3.         Action if Other Event of Default..............................19

        SECTION 6.4.         Reinstatement Option..........................................19
</TABLE>

                                      -ii-
<PAGE>

                                TABLE OF CONTENTS
                                   (continued)

<TABLE>
<CAPTION>
                                                                                         PAGE
<S>               <C>                                                                    <C>
ARTICLE VII       MISCELLANEOUS PROVISIONS.................................................20

        SECTION 7.1.         Waivers, Amendments, etc......................................20

        SECTION 7.2.         Notices.......................................................20

        SECTION 7.3.         Payment of Costs and Expenses.................................20

        SECTION 7.4.         Indemnification...............................................21

        SECTION 7.5.         Survival......................................................21

        SECTION 7.6.         Severability..................................................21

        SECTION 7.7.         Headings......................................................21

        SECTION 7.8.         Execution in Counterparts, Effectiveness, etc.................21

        SECTION 7.9.         Governing Law; Entire Agreement...............................21

        SECTION 7.10.        Successors and Assigns........................................22

        SECTION 7.11.        Other Transactions............................................22

        SECTION 7.12.        Forum Selection and Consent to Jurisdiction...................22

        SECTION 7.13.        Waiver of Jury Trial..........................................23
</TABLE>

                                     -iii-<PAGE>
                                                                    EXHIBIT 10.2

                               SECURITY AGREEMENT

        This SECURITY AGREEMENT (as amended, supplemented, amended and restated
or otherwise modified from time to time, this "Security Agreement"), dated as of
September 30, 2002, is made by NASTECH PHARMACEUTICAL COMPANY, INC., a Delaware
corporation (the "Grantor"), in favor of SCHWARZ PHARMA, INC., a Delaware
corporation (the "Beneficiary").

                              W I T N E S S E T H:

        WHEREAS, pursuant to that certain Loan Agreement, dated as of the date
hereof (as amended, supplemented, amended and restated or otherwise modified
from time to time, the "Loan Agreement"), among the Grantor and the Beneficiary,
the Beneficiary has extended commitments to the Grantor;

        WHEREAS, as a condition precedent to the Loan Agreement, the Grantor is
required to execute and deliver this Security Agreement; and

        WHEREAS, the Grantor has duly authorized the execution, delivery and
performance of this Security Agreement;

        NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Grantor agrees, for the
benefit of Beneficiary, as follows:

                                    ARTICLE I

                                   DEFINITIONS

        SECTION 1.1. Certain Terms. The following terms (whether or not
underscored) when used in this Security Agreement, including its preamble and
recitals, shall have the following meanings (such definitions to be equally
applicable to the singular and plural forms thereof):

        "Beneficiary" is defined in the preamble.

        "Best Efforts" is defined in the Asset Purchase Agreement.

        "Business" means the development, manufacturing, marketing and sale of
Nascobal in the Territory.

        "Collateral" is defined in Section 2.1.

        "Collateral Account" is defined in Section 4.1.2(b).

        "Computer Hardware and Software Collateral" means, in each case to the
extent that they are used in the Business:

                                       1
<PAGE>

               (a) all computer and other electronic data processing hardware,
        integrated computer systems, central processing units, memory units,
        display terminals, printers, features, computer elements, card readers,
        tape drives, hard and soft disk drives, cables, electrical supply
        hardware, generators, power equalizers, accessories and all peripheral
        devices and other related computer hardware;

               (b) all software programs (including, both source code, object
        code and all related applications and data files), whether now owned,
        licensed or leased or hereafter acquired by the Grantor, designed for
        use on the computers and electronic data processing hardware described
        in clause (a) above;

               (c) all firmware associated therewith;

               (d) all documentation (including flow charts, logic diagrams,
        manuals, guides and specifications) with respect to such hardware,
        software and firmware described in the preceding clauses (a) through
        (c); and

               (e) all rights with respect to all of the foregoing, including
        any and all copyrights, licenses, options, warranties, service
        contracts, program services, test rights, maintenance rights, support
        rights, improvement rights, renewal rights and indemnifications and any
        substitutions, replacements, additions or model conversions of any of
        the foregoing.

        "Copyright Collateral" means all copyrights of the Grantor, whether
statutory or common law, registered or unregistered, now or hereafter in force
throughout the Territory including all of the Grantor's right, title and
interest in and to all copyrights registered in the United States Copyright
Office, and all applications for registration thereof, whether pending or in
preparation, all copyright licenses, the right to sue for past, present and
future infringements of any thereof, all rights corresponding thereto throughout
the Territory, all extensions and renewals of any thereof and all proceeds of
the foregoing, including licenses, royalties, income, payments, claims, damages
and proceeds of suit, in each case to the extent that they are used in the
Business.

        "Equipment" is defined in clause (b) of Section 2.1.

        "Grantor" is defined in the preamble.

        "Intellectual Property Collateral" means, collectively, the Computer
Hardware and Software Collateral, the Copyright Collateral, the Patent
Collateral, the Trademark Collateral and the Trade Secrets Collateral.

        "Inventory" is defined in clause (c) of Section 2.1.

        "Loan Agreement" is defined in the first recital.

        "Patent Collateral" means, in each case only to the extent that they are
used in the Business:

                                       2
<PAGE>

               (a) all letters patent and applications for letters patent
        throughout the Territory, including all patent applications in
        preparation for filing anywhere in the Territory and including each
        patent and patent application referred to in Item A of Schedule II
        attached hereto;

               (b) all reissues, divisions, continuations,
        continuations-in-part, extensions, renewals and reexaminations of any of
        the items described in clause (a);

               (c) all patent licenses, including each patent license referred
        to in Item B of Schedule II attached hereto; and

               (d) all proceeds of, and rights associated with, the foregoing
        (including license royalties and proceeds of infringement suits), the
        right to sue third parties for past, present or future infringements of
        any patent or patent application, including any patent or patent
        application referred to in Item A of Schedule II attached hereto, and
        for breach or enforcement of any patent license, including any patent
        license referred to in Item B of Schedule II attached hereto, and all
        rights corresponding thereto throughout the Territory.

        "Permits and Approvals" means the NDA, the INDs, any future New Drug
Approvals or Investigational New Drug Approvals filed with the FDA with respect
to the Business and all other regulatory filings, registrations and governmental
authorizations that relate to the Business.

        "Receivables" is defined in clause (d) of Section 2.1.

        "Related Contracts" is defined in clause (d) of Section 2.1.

        "Security Agreement" is defined in the preamble.

        "Trademark Collateral" in each case to the extent they are used in the
Business:

               (a) all trademarks, trade names, corporate names, company names,
        business names, fictitious business names, trade styles, service marks,
        certification marks, collective marks, logos, other source of business
        identifiers, prints and labels on which any of the foregoing have
        appeared or appear, designs and general intangibles of a like nature
        (all of the foregoing items in this clause (a) being collectively called
        a "Trademark"), now existing anywhere in the Territory or hereafter
        adopted or acquired, whether currently in use or not, all registrations
        and recordings thereof and all applications in connection therewith,
        whether pending or in preparation for filing, including registrations,
        recordings and applications in the United States Patent and Trademark
        Office or in any office or agency of the United States of America or any
        State thereof, including those referred to in Item A of Schedule III
        attached hereto;

               (b) all Trademark licenses, including each Trademark license
        referred to in Item B of Schedule III attached hereto;

                                       3
<PAGE>

               (c) all reissues, extensions or renewals of any of the items
        described in clauses (a) and (b);

               (d) all of the goodwill of the business connected with the use
        of, and symbolized by the items described in, clauses (a) and (b); and

               (e) all proceeds of, and rights associated with, the foregoing,
        including any claim by the Grantor against third parties for past,
        present or future infringement or dilution of any Trademark, Trademark
        registration or Trademark license, including any Trademark, Trademark
        registration or Trademark license referred to in Item A and Item B of
        Schedule III attached hereto, or for any injury to the goodwill
        associated with the use of any such Trademark or for breach or
        enforcement of any Trademark license.

        "Trade Secrets Collateral" means all common law and statutory trade
secrets and all other confidential or proprietary or useful information and all
know-how obtained by or used in the Business of the Grantor (all of the
foregoing being collectively called a "Trade Secret"), whether or not such Trade
Secret has been reduced to a writing or other tangible form, including all
documents and things embodying, incorporating or referring in any way to such
Trade Secret, all Trade Secret licenses, including each Trade Secret license
referred to in Schedule IV attached hereto, and including the right to sue for
and to enjoin and to collect damages for the actual or threatened
misappropriation of any Trade Secret and for the breach or enforcement of any
such Trade Secret license, in each case to the extent that they are used in the
Business.

        "U.C.C." means the Uniform Commercial Code, as in effect from time to
time in the State of New York; provided, that if, with respect to any Filing
Statement or by reason of any provisions of law, the perfection or the effect of
perfection or non-perfection of the security interests granted to the
Beneficiary pursuant the applicable Loan Document is governed by the Uniform
Commercial Code as in effect in a jurisdiction of the United States other than
New York, UCC means the Uniform Commercial Code as in effect from time to time
in such other jurisdiction for purposes of the provisions of each Loan Document
and any Filing Statement relating to such perfection or effect of perfection or
non-perfection..

        SECTION 1.2. Loan Agreement Definitions. Unless otherwise defined herein
or the context otherwise requires, terms used in this Security Agreement,
including its preamble and recitals, have the meanings provided in the Loan
Agreement.

        SECTION 1.3. U.C.C. Definitions. Unless otherwise defined herein or in
the Loan Agreement or the context otherwise requires, terms for which meanings
are provided in the U.C.C. are used in this Security Agreement, including its
preamble and recitals, with such meanings.

                                   ARTICLE II

                                SECURITY INTEREST

                                       4
<PAGE>

        SECTION 2.1. Grant of Security. The Grantor hereby pledges to the
Beneficiary, and hereby grants to the Beneficiary, a security interest in all of
the following, whether now or hereafter existing or acquired by the Grantor, but
only to the extent such items are used in or designated for use in the Business
in the Territory (the "Collateral"):

               (a) all equipment in all of its forms of the Grantor, wherever
        located, including all parts thereof and all accessions, additions,
        attachments, improvements, substitutions and replacements thereto and
        therefor and all accessories related thereto (any and all of the
        foregoing being the "Equipment");

               (b) all inventory in all of its forms of the Grantor, wherever
        located, including

                      (i) all raw materials and work in process therefor,
               finished goods thereof, and materials used or consumed in the
               manufacture or production thereof,

                      (ii) all goods in which the Grantor has an interest in
               mass or a joint or other interest or right of any kind (including
               goods in which the Grantor has an interest or right as
               consignee), and

                      (iii) all goods which are returned to or repossessed by
               the Grantor,

        and all accessions thereto, products thereof and documents therefor (any
        and all such inventory, materials, goods, accessions, products and
        documents being the "Inventory");

               (c) all accounts, contracts, contract rights, chattel paper,
        documents, instruments, and general intangibles (including tax refunds)
        of the Grantor, whether or not arising out of or in connection with the
        sale or lease of goods or the rendering of services, relating to the
        Business and all rights of the Grantor now or hereafter existing in and
        to all security agreements, guaranties, leases and other contracts
        securing or otherwise relating to any such accounts, contracts, contract
        rights, chattel paper, documents, instruments, and general intangibles
        (any and all such accounts, contracts, contract rights, chattel paper,
        documents, instruments, and general intangibles being the "Receivables",
        and any and all such security agreements, guaranties, leases and other
        contracts being the "Related Contracts");

               (d) all Intellectual Property Collateral of the Grantor;

               (e) all books, records, writings, data bases, information and
        other property relating to, or used in connection with, evidencing,
        embodying, incorporating or referring to, any of the foregoing in this
        Section 2.1;

                                       5
<PAGE>

               (f) all of the Grantor's other property and rights of every kind
        and description and interests therein to the extent that such property
        and rights are used in the Business;

               (g) all Permits and Approvals of the Grantor; and

               (h) all products, rents, issues, profits, returns, income and
        proceeds of and from any and all of the foregoing Collateral (including
        proceeds which constitute property of the types described in clauses
        (a), (b), (c), (d), (e), (f) and (g), proceeds deposited from time to
        time in the Collateral Account and in any lock boxes of the Grantor,
        and, to the extent not otherwise included, all payments under insurance
        (whether or not the Beneficiary is the loss payee thereof), or any
        indemnity, warranty or guaranty, payable by reason of loss or damage to
        or otherwise with respect to any of the foregoing Collateral).

Notwithstanding the foregoing, "Collateral" shall not include (i) any general
intangibles or other rights arising under any contracts, instruments, licenses
or other documents as to which the grant of a security interest would constitute
a violation of a valid and enforceable restriction in favor of a third party on
such grant, unless and until any required consents shall have been obtained; or
(ii) any equipment (including any accessions, replacements, substitutions and
proceeds thereof) to the extent financed pursuant to that certain Master
Equipment Lease, dated as of April 9, 2002, by and between Grantor and General
Electric Capital Corporation. Upon the request of the Beneficiary, the Grantor
agrees to use Best Efforts to promptly obtain any such required consent.

        SECTION 2.2. Security for Obligations. This Security Agreement secures
the payment of all Obligations of the Grantor now or hereafter existing under
the Loan Agreement, the Note and each other Loan Document to which the Grantor
is or may become a party, whether for principal, interest, costs, fees, expenses
or otherwise.

        SECTION 2.3. Continuing Security Interest; Transfer of Notes. This
Security Agreement shall create a continuing security interest in the Collateral
and shall

               (a) remain in full force and effect until payment in full in cash
        of all Obligations,

               (b) be binding upon the Grantor, its successors, transferees and
        assigns, and

               (c) inure, together with the rights and remedies of the
        Beneficiary hereunder, to the benefit of the Beneficiary.

Without limiting the generality of the foregoing clause (c), the Beneficiary may
assign or otherwise transfer (in whole or in part) the Note held by it to any
other Person or entity, and such other Person or entity shall thereupon become
vested with all the rights and benefits in respect thereof granted to the
Beneficiary under any Loan Document (including this Security Agreement) or
otherwise. Upon the payment in full in cash of all

                                       6
<PAGE>

Obligations, the security interest granted herein shall terminate and all rights
to the Collateral shall revert to the Grantor. Upon any such termination, the
Beneficiary will, at the Grantor's sole expense, promptly execute and deliver to
the Grantor such documents as the Grantor shall reasonably request to evidence
such termination.

        SECTION 2.4. Grantor Remains Liable. Anything herein to the contrary
notwithstanding

               (a) the Grantor shall remain liable under the contracts and
        agreements included in the Collateral to the extent set forth therein,
        and shall perform all of its duties and obligations under such contracts
        and agreements to the same extent as if this Security Agreement had not
        been executed,

               (b) the exercise by the Beneficiary of any of its rights
        hereunder shall not release the Grantor from any of its duties or
        obligations under any such contracts or agreements included in the
        Collateral, and

               (c) the Beneficiary shall not have any obligation or liability
        under any such contracts or agreements included in the Collateral by
        reason of this Security Agreement, nor shall the Beneficiary be
        obligated to perform any of the obligations or duties of the Grantor
        thereunder or to take any action to collect or enforce any claim for
        payment assigned hereunder.

                                   ARTICLE III

                         REPRESENTATIONS AND WARRANTIES

        SECTION 3.1. Representations and Warranties. The Grantor represents and
warrants to the Beneficiary as set forth in this Section.

        SECTION 3.1.1. Location of Collateral, etc. All of the Equipment and
Inventory of the Grantor are located at the places specified in Item A and Item
B, respectively, of Schedule I hereto. The place(s) of business and chief
executive office of the Grantor and the office(s) where the Grantor keeps its
records concerning the Receivables, and all originals of all chattel paper which
evidence Receivables, are located at the address set forth in Item C of Schedule
I hereto. The Grantor has no corporate names, company names, or fictitious
business names other than those set forth in Item D of Schedule I hereto. During
the four months preceding the date hereof, the Grantor has not been known by any
legal name different from the one set forth on the signature page hereto.

        SECTION 3.1.2. Ownership, No Liens, etc. The Grantor owns its Collateral
free and clear of any Lien, security interest, charge or encumbrance except for
the security interest created by this Security Agreement and except as permitted
by the Loan Agreement. No effective financing statement or other instrument
similar in effect covering all or any part of the Collateral is on file in any
recording office, except such as may have been filed in favor of the Beneficiary
relating to this Security Agreement or as have been filed in connection with
Liens permitted pursuant to the Loan Agreement.

                                       7
<PAGE>

        SECTION 3.1.3. Possession and Control. The Grantor has exclusive
possession and control of its Equipment and Inventory, other than the Nascobal
inventory being transferred to Grantor pursuant to the Asset Purchase Agreement
dated as of the date hereof, by and between Grantor and Beneficiary.

        SECTION 3.1.4. Intellectual Property Collateral. With respect to any
Intellectual Property Collateral:

               (a) such Intellectual Property Collateral is subsisting and has
        not been adjudged invalid or unenforceable, in whole or in part;

               (b) to Grantor's knowledge, such Intellectual Property Collateral
        is valid and enforceable;

               (c) to Grantor's knowledge, the Grantor has made all
        necessary filings and recordations to protect its interest in such
        Intellectual Property Collateral, including recordations of all of its
        interests in the Patent Collateral and Trademark Collateral in the
        United States Patent and Trademark Office and its claims to the
        Copyright Collateral in the United States Copyright Office;

               (d) to Grantor's knowledge, no claim has been made that the use
        of such Intellectual Property Collateral does or may violate the
        asserted rights of any third party; and

               (e) subject to Section 4.1.4, the Grantor has performed all
        reasonable acts and has paid and will continue to pay all required fees
        and taxes to maintain each and every item of Intellectual Property
        Collateral in full force and effect throughout the Territory, as
        applicable.

The Grantor owns directly or is entitled to use by license or otherwise, all
patents, Trademarks, Trade Secrets, copyrights, mask works, licenses,
technology, know-how, processes and rights with respect to any of the foregoing
used in, necessary for or of importance to the conduct of the Business.

        SECTION 3.1.5. Validity, etc. This Security Agreement creates a valid
first priority security interest in the Collateral, securing the payment of the
Obligations, and all filings and other actions necessary to be taken by Grantor
to perfect and protect such security interest have been or will be duly taken.

        SECTION 3.1.6. Authorization, Approval, etc. Except as have been
obtained or made and are in full force and effect, no authorization, approval or
other action by, and no notice to or filing with, any governmental authority or
regulatory body is required either

               (a) for the grant by the Grantor of the security interest granted
        hereby or for the execution, delivery and performance of this Security
        Agreement by the Grantor, or

                                       8
<PAGE>

               (b) for the perfection of or the exercise by the Beneficiary of
        its rights and remedies hereunder.

        SECTION 3.1.7. Compliance with Laws. The Grantor is in compliance with
the requirements of all applicable laws, rules, regulations and orders of every
governmental authority, the non-compliance with which might materially adversely
affect the value of the Collateral or the worth of the Collateral as collateral
security.

                                   ARTICLE IV

                                    COVENANTS

        SECTION 4.1. Certain Covenants. The Grantor covenants and agrees that,
so long as any portion of the Obligations shall remain unpaid, the Grantor will,
unless the Beneficiary shall otherwise consent in writing, perform, comply with
and be bound by the obligations set forth in this Article IV.

        SECTION 4.1.1. As to Equipment and Inventory. The Grantor hereby agrees
that it shall

               (a) keep all the Equipment and Inventory (other than Inventory
        sold in the ordinary course of business) at the places therefor
        specified in Section 3.1.1 or, upon 30 days' prior written notice to the
        Beneficiary, at such other places in a jurisdiction where all
        representations and warranties set forth in Article III (including
        Section 3.1.6) shall be true and correct, and all action required
        pursuant to the first sentence of Section 4.1.6 shall have been taken
        with respect to the Equipment and Inventory;

               (b) cause the Equipment to be maintained and preserved in the
        same condition, repair and working order as when new, ordinary wear and
        tear excepted, and forthwith, or in the case of any loss or damage to
        any of the Equipment, as quickly as practicable after the occurrence
        thereof, make or cause to be made all repairs, replacements, and other
        improvements in connection therewith which are necessary or desirable to
        such end; and

               (c) pay promptly when due all property and other taxes,
        assessments and governmental charges or levies imposed upon, and all
        claims (including claims for labor, materials and supplies) against, the
        Equipment and Inventory, except to the extent the validity thereof is
        being contested in good faith by appropriate proceedings and for which
        adequate reserves in accordance with GAAP have been set aside.

        SECTION 4.1.2.  As to Receivables.

               (a) The Grantor shall keep its place(s) of business and chief
        executive office and the office(s) where it keeps its records concerning
        the Receivables, and all originals of all chattel paper which evidenced
        Receivables, located at the address(es) set forth in Item D of Schedule
        I hereto, or, upon 30 days' prior

                                       9
<PAGE>

        written notice to the Beneficiary, at such other locations in a
        jurisdiction where all actions required by the first sentence of Section
        4.1.6 shall have been taken with respect to the Receivables; not change
        its name except upon 30 days' prior written notice to the Beneficiary;
        hold and preserve such records and chattel paper; and permit
        representatives of the Beneficiary at any time on a reasonable notice
        during normal business hours to inspect and make abstracts from such
        records and chattel paper. In addition, the Grantor shall give the
        Beneficiary a supplement to Schedule I hereto on each date a Compliance
        Certificate is required to be delivered to the Beneficiary under the
        Loan Agreement, which shall set forth any changes to the information set
        forth in Section 3.1.1.

               (b) Upon the occurrence and continuation of an Event of Default
        and upon written notice by the Beneficiary to the Grantor pursuant to
        this Section 4.1.2(b), all proceeds of Collateral received by the
        Grantor shall be delivered in kind to the Beneficiary for deposit to a
        deposit account (the "Collateral Account") of the Grantor maintained
        with a financial institution designated by the Beneficiary, and the
        Grantor shall not commingle any such proceeds, and shall hold separate
        and apart from all other property, all such proceeds in express trust
        for the benefit of the Beneficiary until delivery thereof is made to the
        Beneficiary.

               (c) The Beneficiary shall have the right to apply any amount in
        the Collateral Account to the payment of any Obligations which are due
        and payable or payable upon demand, or to the payment of any Obligations
        at any time that an Event of Default shall exist.

        SECTION 4.1.3. As to Collateral.

               (a) Until the occurrence and continuance of an Event of Default,
        and such time as the Beneficiary shall notify the Grantor of the
        revocation of such power and authority, the Grantor (i) may in the
        ordinary course of its business (except as otherwise permitted under the
        Loan Agreement), at its own expense, sell, lease or furnish under the
        contracts of service any of the Inventory normally held by the Grantor
        for such purpose, and use and consume, in the ordinary course of its
        business (except as otherwise permitted under the Loan Agreement), any
        raw materials, work in process or materials normally held by the Grantor
        for such purpose, (ii) will, at its own expense, endeavor to collect, as
        and when due, all amounts due with respect to any of the Collateral,
        including the taking of such action with respect to such collection as
        the Beneficiary may reasonably request during the existence of an Event
        of Default or, in the absence of such request, as the Grantor may deem
        advisable, and (iii) may grant, in the ordinary course of business
        (except as otherwise permitted under the Loan Agreement), to any party
        obligated on any of the Collateral, any rebate, refund or allowance to
        which such party may be lawfully entitled, and may accept, in connection
        therewith, the return of goods, the sale or lease of which shall have
        given rise to such Collateral. The Beneficiary, however, may, at any
        time during the existence of an Event of Default of the nature set forth
        in Section 6.1.8 of the Loan Agreement or an Event

                                       10
<PAGE>

        of Default, whether before or after any revocation of such power and
        authority or the maturity of any of the Obligations, notify any parties
        obligated on any of the Collateral to make payment to the Beneficiary of
        any amounts due or to become due thereunder and enforce collection of
        any of the Collateral by suit or otherwise and surrender, release, or
        exchange all or any part thereof, or compromise or extend or renew for
        any period (whether or not longer than the original period) any
        indebtedness thereunder or evidenced thereby. Upon request of the
        Beneficiary during the existence of an Event of Default, the Grantor
        will, at its own expense, notify any parties obligated on any of the
        Collateral to make payment to the Beneficiary of any amounts due or to
        become due thereunder.

               (b) In the exercise of the power detailed in subparagraph (a),
        the Beneficiary is authorized to endorse, in the name of the Grantor,
        any item, howsoever received by the Beneficiary, representing any
        payment on or other proceeds of any of the Collateral and, thereupon,
        the amount of such item will be applied to reduce the Obligations.

        SECTION 4.1.4. As to Intellectual Property Collateral. The Grantor
covenants and agrees to comply with the following provisions as such provisions
relate to any Intellectual Property Collateral of the Grantor:

               (a) The Grantor shall not, unless the Grantor shall either (i)
        reasonably and in good faith determine that any of the Patent Collateral
        is of negligible economic value to the Grantor, or (ii) have a valid
        business purpose to do otherwise, do any act, or omit to do any act,
        whereby any of the Patent Collateral may lapse or become abandoned or
        dedicated to the public or unenforceable.

               (b) The Grantor shall not, and the Grantor shall not permit any
        of its licensees to, unless the Grantor shall either (i) reasonably and
        in good faith determine that any of the Trademark Collateral is of
        negligible economic value to the Grantor, or (ii) have a valid business
        purpose to do otherwise,

                      (i) fail to continue to use any of the Trademark
               Collateral in order to maintain all of the Trademark Collateral
               in full force free from any claim of abandonment for non-use,

                      (ii) fail to maintain the quality of products and services
               offered under all of the Trademark Collateral in a manner
               consistent with past practices, and

                      (iii) do or permit any act or knowingly omit to do any act
               whereby any of the Trademark Collateral may lapse or become
               invalid or unenforceable.

               (c) The Grantor shall not, unless the Grantor shall either

                                       11
<PAGE>

                      (i) reasonably and in good faith determine that any of the
               Copyright Collateral or any of the Trade Secrets Collateral is of
               negligible economic value to the Grantor, or

                      (ii) have a valid business purpose to do otherwise, do or
               permit any act or knowingly omit to do any act whereby any of the
               Copyright Collateral or any of the Trade Secrets Collateral may
               lapse or become invalid or unenforceable or placed in the public
               domain except upon expiration of the end of an unrenewable term
               of a registration thereof.

               (d) The Grantor shall notify the Beneficiary promptly if it
        knows, or has reason to know, that any application or registration
        relating to any material item of the Intellectual Property Collateral
        may become abandoned or dedicated to the public or placed in the public
        domain or invalid or unenforceable, or of any adverse determination or
        development (including the institution of, or any such determination or
        development in, any proceeding in the United States Patent and Trademark
        Office, the United States Copyright Office or any foreign counterpart
        thereof or any court) regarding the Grantor's ownership of any of the
        Intellectual Property Collateral, its right to register the same or to
        keep and maintain and enforce the same.

               (e) In no event shall the Grantor or any of its agents,
        employees, designees or licensees file an application for the
        registration of any Intellectual Property Collateral with the United
        States Patent and Trademark Office, the United States Copyright Office
        unless it promptly informs the Beneficiary, and upon request of the
        Beneficiary, executes and delivers any and all agreements, instruments,
        documents and papers as the Beneficiary may reasonably request to
        evidence the Beneficiary's security interest in such Intellectual
        Property Collateral and the goodwill and general intangibles of the
        Grantor relating thereto or represented thereby.

               (f) The Grantor shall take all necessary steps, including in any
        proceeding before the United States Patent and Trademark Office, the
        United States Copyright Office to maintain and pursue any application
        (and to obtain the relevant registration) filed by Grantor with respect
        to, and to maintain any registration of, the Intellectual Property
        Collateral, including the filing of applications for renewal, affidavits
        of use, affidavits of incontestability and opposition, interference and
        cancellation proceedings and the payment of fees and taxes (except to
        the extent that dedication, abandonment or invalidation is permitted
        under the foregoing clauses (a), (b) and (c)).

               (g) The Grantor shall, contemporaneously herewith, execute and
        deliver to the Beneficiary, (i) a Trademark Security Agreement in the
        form of Exhibit A hereto, and (ii) a Patent Security Agreement in the
        form of Exhibit B hereto, and shall execute and deliver to the
        Beneficiary any other document required to acknowledge or register or
        perfect the Beneficiary's interest in any part of the Intellectual
        Property Collateral.

                                       12
<PAGE>

        SECTION 4.1.5. Transfers and Other Liens. The Grantor shall not

               (a) sell, assign (by operation of law or otherwise), license or
        otherwise dispose of any of the Collateral, except Inventory in the
        ordinary course of business and except as permitted by the Loan
        Agreement; or

               (b) create or suffer to exist any Lien or other charge or
        encumbrance upon or with respect to any of the Collateral to secure
        Indebtedness of any Person or entity, except for the security interest
        created by this Security Agreement and except as permitted by the Loan
        Agreement.

        SECTION 4.1.6. Further Assurances, etc. The Grantor agrees that, from
time to time at its own expense, it will promptly execute and deliver all
further instruments and documents, and take all further action required, or that
the Beneficiary may reasonably request, in order to perfect, preserve and
protect any security interest granted or purported to be granted hereby or to
enable the Beneficiary to exercise and enforce its rights and remedies hereunder
with respect to any Collateral. Without limiting the generality of the
foregoing, the Grantor will

               (a) execute and file such financing or continuation statements,
        or amendments thereto, and such other instruments or notices (including
        any assignment of claim form under or pursuant to the federal assignment
        of claims statute, 31 U.S.C. Section 3726, any successor or amended
        version thereof or any regulation promulgated under or pursuant to any
        version thereof), as may be necessary or as the Beneficiary may
        reasonably request, in order to perfect and preserve the security
        interests and other rights granted or purported to be granted to the
        Beneficiary hereby; and

               (b) furnish to the Beneficiary, from time to time at the
        Beneficiary's request, statements and schedules further identifying and
        describing the Collateral and such other reports in connection with the
        Collateral as the Beneficiary may reasonably request, all in reasonable
        detail.

With respect to the foregoing and the grant of the security interest hereunder,
the Grantor hereby authorizes the Beneficiary to file one or more financing or
continuation statements, and amendments thereto, relative to all or any part of
the Collateral without the signature of the Grantor where permitted by law. A
carbon, photographic or other reproduction of this Security Agreement or any
financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law.

                                    ARTICLE V

                                 THE BENEFICIARY

        SECTION 5.1. Beneficiary Appointed Attorney-in-Fact. Following the
occurrence and continuation of a Default or an Event of Default, the Grantor
hereby irrevocably appoints the Beneficiary the Grantor's attorney-in-fact, with
full authority in

                                       13
<PAGE>

the place and stead of the Grantor and in the name of the Grantor or otherwise,
from time to time in the Beneficiary's discretion, to take any action and to
execute any instrument which the Beneficiary may deem necessary or advisable to
accomplish the purposes of this Security Agreement, including:

               (a) to ask, demand, collect, sue for, recover, compromise,
        receive and give acquittance and receipts for moneys due and to become
        due under or in respect of any of the Collateral;

               (b) to receive, endorse, and collect any drafts or other
        instruments, documents and chattel paper, in connection with clause (a)
        above;

               (c) to file any claims or take any action or institute any
        proceedings which the Beneficiary may deem necessary or desirable for
        the collection of any of the Collateral or otherwise to enforce the
        rights of the Beneficiary with respect to any of the Collateral; and

               (d) to perform the affirmative obligations of the Grantor
        hereunder (including all obligations of the Grantor pursuant to Section
        4.1.6).

The Grantor hereby acknowledges, consents and agrees that the power of attorney
granted pursuant to this Section is irrevocable and coupled with an interest.

        Beneficially shall give notice to Grantor concurrently with taking any
of the above actions.

        SECTION 5.2. Beneficiary May Perform. If the Grantor fails to perform
any agreement contained herein after receiving written notice of such failure
from the Beneficiary, the Beneficiary may itself perform, or cause performance
of, such agreement, and the reasonable expenses of the Beneficiary incurred in
connection therewith shall be payable by the Grantor pursuant to Section 6.2.

        SECTION 5.3. Beneficiary Has No Duty. In addition to, and not in
limitation of, Section 2.4, the powers conferred on the Beneficiary hereunder
are solely to protect its interest in the Collateral and shall not impose any
duty on it to exercise any such powers. Except for reasonable care of any
Collateral in its possession and the accounting for moneys actually received by
it hereunder, the Beneficiary shall have no duty as to any Collateral or as to
the taking of any necessary steps to preserve rights against prior parties or
any other rights pertaining to any Collateral.

        SECTION 5.4. Reasonable Care. The Beneficiary is required to exercise
reasonable care in the custody and preservation of any of the Collateral in its
possession; provided, however, the Beneficiary shall be deemed to have exercised
reasonable care in the custody and preservation of any of the Collateral if it
takes such action for that purpose as the Grantor reasonably requests in writing
at times other than upon the occurrence and during the continuance of any
Default or Event of Default, but failure of the Beneficiary to comply with any
such request at any time shall not in itself be deemed a failure to exercise
reasonable care.

                                       14
<PAGE>

                                   ARTICLE VI

                                    REMEDIES

        SECTION 6.1. Certain Remedies. If any Event of Default shall have
occurred and be continuing:

               (a) The Beneficiary may exercise in respect of the Collateral, in
        addition to other rights and remedies provided for herein or otherwise
        available to it, all the rights and remedies of a secured party on
        default under the U.C.C. (whether or not the U.C.C. applies to the
        affected Collateral) and

                      (i) also may require the Grantor to, and the Grantor
               hereby agrees that it will, at its expense and upon request of
               the Beneficiary, forthwith assemble all or part of the Collateral
               as directed by the Beneficiary and make it available to the
               Beneficiary at a place to be designated by the Beneficiary which
               is reasonably convenient to both parties, and

                      (ii) without notice except as specified below, sell the
               Collateral or any part thereof in one or more parcels at public
               or private sale, at any of the Beneficiary's offices or
               elsewhere, for cash, on credit or for future delivery, and upon
               such other terms as the Beneficiary may deem commercially
               reasonable. The Grantor agrees that, to the extent notice of sale
               shall be required by law, at least ten days' prior notice to the
               Grantor of the time and place of any public sale or the time
               after which any private sale is to be made shall constitute
               reasonable notification. The Grantor further agrees that
               Beneficiary may purchase the Collateral or any part thereof at
               any such sale. The Beneficiary shall not be obligated to make any
               sale of Collateral regardless of notice of sale having been
               given. The Beneficiary may adjourn any public or private sale
               from time to time by announcement at the time and place fixed
               therefor, and such sale may, without further notice, be made at
               the time and place to which it was so adjourned.

               (b) All cash proceeds received by the Beneficiary in respect of
        any sale of, collection from, or other realization upon all or any part
        of the Collateral may, in the discretion of the Beneficiary, be held by
        the Beneficiary as collateral for, and/or then or at any time thereafter
        applied (after payment of any amounts payable to the Beneficiary
        pursuant to Section 6.2) in whole or in part by the Beneficiary against,
        all or any part of the Obligations in such order as the Beneficiary
        shall elect; provided that any application to the Note shall be applied
        first to accrued but unpaid interest and the balance to the installments
        due on the Notes in the inverse order thereof. Any surplus of such cash
        or cash proceeds held by the Beneficiary and remaining after payment in
        full in cash of all the Obligations shall be paid over to the Grantor or
        to whomsoever may be lawfully entitled to receive such surplus.

                                       15
<PAGE>

        SECTION 6.2. Indemnity and Expenses.

               (a) The Grantor agrees to indemnify the Beneficiary from and
        against any and all claims, losses and liabilities arising out of or
        resulting from this Security Agreement (including enforcement of this
        Security Agreement), except claims, losses or liabilities resulting from
        the Beneficiary's gross negligence or wilful misconduct.

               (b) The Grantor will upon demand pay to the Beneficiary the
        amount of any and all reasonable expenses, including the reasonable fees
        and disbursements of its counsel, costs associated with internal
        personnel, and the reasonable fees and expenses of any experts and
        agents, which the Beneficiary may incur in connection with

                      (i) the custody, preservation, use or operation of, or the
               sale of, collection from, or other realization upon, any of the
               Collateral, and

                      (ii) the exercise or enforcement of any of the rights of
               the Beneficiary or the Secured Parties hereunder, or

                      (iii) the failure by the Grantor to perform or observe any
               of the provisions hereof.

                                   ARTICLE VII

                            MISCELLANEOUS PROVISIONS

        SECTION 7.1. Loan Document. This Security Agreement is a Loan Document
executed pursuant to the Loan Agreement and shall (unless otherwise expressly
indicated herein) be construed, administered and applied in accordance with the
terms and provisions thereof.

        SECTION 7.2. Amendments; etc. No amendment to or waiver of any provision
of this Security Agreement nor consent to any departure by the Grantor herefrom,
shall in any event be effective unless the same shall be in writing and signed
by the Beneficiary and Grantor, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.

        SECTION 7.3. Addresses for Notices. All notices and other communications
provided for hereunder shall be in writing (including telegraphic communication)
and mailed or telecopied or delivered to either party hereto, addressed to such
party at the address of such party specified in the Loan Agreement. All such
notices and other communications, when mailed and properly addressed with
postage prepaid or if properly addressed and sent by pre-paid courier service,
shall be deemed given when received; any such notice or communication, if
transmitted by telecopier, shall be deemed given when transmitted and
electronically confirmed.

                                       16
<PAGE>

        SECTION 7.4. Section Captions. Section captions used in this Security
Agreement are for convenience of reference only, and shall not affect the
construction of this Security Agreement.

        SECTION 7.5. Severability. Wherever possible each provision of this
Security Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Security Agreement
shall be prohibited by or invalid under such law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Security Agreement.

        SECTION 7.6. Counterparts. This Security Agreement may be executed by
the parties hereto in several counterparts, each of which shall be deemed an
original and all of which shall constitute together but one and the same
agreement.

        SECTION 7.7. Governing Law, Entire Agreement, etc. THIS SECURITY
AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED EXCLUSIVELY
BY THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING FOR SUCH PURPOSE
SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW
YORK), EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY
INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR
COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF
NEW YORK. THIS SECURITY AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE
ENTIRE UNDERSTANDING AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER
HEREOF AND THEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH
RESPECT THERETO.

                             [SIGNATURES NEXT PAGE]

                                       17
<PAGE>

        IN WITNESS WHEREOF, the Grantor has caused this Security Agreement to be
duly executed and delivered by its officer thereunto duly authorized as of the
date first above written.

                                         NASTECH PHARMACEUTICAL COMPANY, INC.

                                         By: /s/ Gregory Weaver
                                         Name: Gregory Weaver
                                         Title: CFO

                                         SCHWARZ PHARMA, INC.

                                         By: /s/ Ron Stratton
                                         Dr. Ron Stratton, President and COO

                                       18

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