Document:

Exhibit 10.2

 

 

	
  

  	
  THE NASDAQ
  STOCK MARKET

  9600 BLACKWELL ROAD, SUITE 200

  ROCKVILLE, MD 20850

  

 

By Facsimile and First Class Mail

 

September 19, 2003

 

Mr. Ralph M. Norwood

Vice President and Chief
Financial Officer

SatCon Technology Corporation

161 First Street

Cambridge, MA 02142

 

	
  Re:

  	
   

  	
  SatCon
  Technology Corporation (the “Company”)

  
	
   

  	
   

  	
  Nasdaq
  Symbol: SATC

  

 

Dear Mr. Norwood:

 

On March 19, 2003, Staff
notified the Company that its common stock failed to maintain a minimum bid
price of $1.00 over the previous 30 consecutive trading days as required by The
Nasdaq National Market set forth in Marketplace Rule 4450(a)(5) (the
“Rule”).  Since then, the closing bid
price of the Company’s common stock has been at $1.00 per share or greater for
at least 10 consecutive trading days. 
Accordingly, the Company has regained compliance with the Rule and this
matter is now closed.

 

If you have any questions,
please do not hesitate to contact Adam Foulke, Listing Analyst, at (301)
978-8029.

 

	
  Sincerely,

  
	
   

  
	
   

  
	
  /s/ Cynthia
  T. Melo

  	
   

  
	
  Cynthia T.
  Melo

  
	
  Director

  
	
  Nasdaq
  Listing QualificationsExhibit 10.13

 

LOAN AND SECURITIES
PURCHASE AGREEMENT

 

This Loan and Securities Purchase Agreement
is entered into and dated as of September 9, 2003 (this “Agreement”), by and between Aerogen, Inc.,
a Delaware corporation (the “Borrower”),
and the Lender identified on the signature page hereto (the “Lender”).

 

WHEREAS, subject to the terms and conditions
set forth in this Agreement, the Borrower desires to borrow certain sums from
the Lender (the “Loan”) and sell certain securities to the Lender desires to loan
certain sums to the Borrower and purchase from the Borrower, certain securities
of the Borrower, pursuant to the terms set forth herein.

 

NOW, THEREFORE, IN CONSIDERATION of the
mutual covenants contained in this Agreement, and for other good and valuable
consideration the receipt and adequacy of which are hereby acknowledged, the
Borrower and the Lender agree as follows:

 

ARTICLE I.

 

DEFINITIONS

 

1.1.                              
Definitions.   In addition to the
terms defined elsewhere in this Agreement, the following terms shall have the
meanings set forth in this Section 1.1:

 

“Action”
means any action, suit, inquiry, notice of violation, proceeding (including any
partial proceeding such as a deposition) or investigation pending or threatened
in writing against or affecting the Borrower, any Subsidiary or any of their
respective properties before or by any court, arbitrator, governmental or
administrative agency, regulatory authority (federal, state, county, local or
foreign), stock market, stock exchange or trading facility.

 

“Additional Closing” means the closing of
the loan and purchase and sale of Additional Securities pursuant to Section
2.3.

 

“Additional Closing Date” means the Business
Day immediately following the date on which all the conditions set forth in
Sections 6.3 and 6.4 hereof are satisfied.

 

“Additional
Loan Amount” means, at the sole option of the Lender (which shall be
indicated in a written notice delivered to the Borrower prior to the Additional
Closing Date), an amount no less than $500,000 and no greater than $2,000,000;
provided that in no event shall the Additional Loan Amount be higher than the
amount necessary to purchase Additional Debentures that would be convertible
into a maximum of 10,800,000 shares of Common Stock on the Additional Closing
Date.

 

“Affiliate” means any Person that, directly
or indirectly through one or more intermediaries, controls or is controlled by
or is under common control with a Person, as

 

 

such terms are used in and construed under
Rule 144 under the Securities Act. With respect to the Lender, any investment
fund or managed account that is managed on a discretionary basis by the same
investment manager as the Lender will be deemed to be an Affiliate of the
Lender.

 

“Bankruptcy Event” means any of the
following events: (a) the Borrower or any Subsidiary commences a case or other
proceeding under any bankruptcy, reorganization, arrangement, adjustment of
debt, relief of debtors, dissolution, insolvency or liquidation or similar law
of any jurisdiction relating to the Borrower or any Subsidiary thereof; (b)
there is commenced against the Borrower or any Subsidiary any such case or
proceeding that is not dismissed within 60 days after commencement; (c) the
Borrower or any Subsidiary is adjudicated by a court of competent jurisdiction
insolvent or bankrupt or any order of relief or other order approving any such
case or proceeding is entered; (d) the Borrower or any Subsidiary suffers any
appointment of any custodian or the like for it or any substantial part of its
property that is not discharged or stayed within 60 days; (e) under applicable
bankruptcy law the Borrower or any Subsidiary makes a general assignment for
the benefit of creditors; (f) the Borrower or any Subsidiary fails to pay, or
states that it is unable to pay or is unable to pay, its debts generally as
they become due; (g) the Borrower or any Subsidiary calls a meeting of its
creditors with a view to arranging a composition, adjustment or restructuring
of its debts; or (h) the Borrower or any Subsidiary, by any act or failure to
act, expressly indicates its consent to, approval of or acquiescence in any of
the foregoing or takes any corporate or other action for the purpose of
effecting any of the foregoing.

 

“Borrower Counsel” means Cooley Godward LLP,
counsel to the Borrower.

 

“Business
Day” means any day except Saturday, Sunday and any day
which shall be a federal legal holiday or a day on which banking institutions
in the State of New York are authorized or required by law or other
governmental action to close.

 

“Capital Lease Obligations” of any Person
shall mean the obligations of such Person to pay rent or other amounts under
any lease of (or other arrangement conveying the right to use) real or personal
property, or a combination thereof, which obligations are required to be
classified and accounted for as capital leases on a balance sheet of such
Person under GAAP and, for the purposes of this Agreement, the amount of such
obligations at any time shall be the capitalized amount thereof at such time
determined in accordance with GAAP.

 

“Closing” means the closing of the loan and
purchase and sale of Securities pursuant to Section 2.1.

 

“Closing Date” means the Business Day
immediately following the date on which all the conditions set forth in
Sections 6.1 and 6.2 hereof are satisfied.

 

“Commission” means the Securities and
Exchange Commission.

 

“Common Stock” means the common stock of the
Borrower, $0.001 par value per share, and any securities into which such common
stock may hereafter be

 

2

 

reclassified.

 

“Common
Stock Equivalents” means any securities of the
Borrower or any Subsidiary which entitle the holder thereof to acquire Common
Stock at any time, including without limitation, any debt, preferred stock,
rights, options, warrants or other instrument that is at any time convertible
into or exchangeable for, or otherwise entitles the holder thereof to receive,
Common Stock or other securities that entitle the holder to receive, directly
or indirectly, Common Stock.

 

“Debentures” means the senior secured
convertible debentures due December 31, 2003 and March 1, 2004, issuable by the
Borrower to the Lender pursuant to Section 2.2(a)(ii) and Section 2.4(a)(i), in
the form of Exhibit A hereto.

 

“Effective
Date” means the date that a Registration Statement is
first declared effective by the Commission.

 

“Eligible Market” means any of the New York
Stock Exchange, the American Stock Exchange, the Nasdaq National Market or the
Nasdaq SmallCap Market.

 

“Exchange Act” means the Securities Exchange
Act of 1934, as amended.

 

“Guarantee” of or by any Person shall mean
any obligation, contingent or otherwise, of such Person guaranteeing or having
the economic effect of guaranteeing any Indebtedness of any other Person (the
“primary obligor”) in any manner, whether directly or indirectly, and including
any obligation of such Person, direct or indirect, (a) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or to
purchase (or to advance or supply funds for the purchase of) any security for
the payment of such Indebtedness, (b) to purchase property, securities or
services for the purpose of assuring the owner of such Indebtedness of the
payment of such Indebtedness or (c) to maintain working capital, equity capital
or other financial statement condition or liquidity of the primary obligor so
as to enable the primary obligor to pay such Indebtedness, provided,
that the term Guarantee shall not include endorsements for collection or deposit,
in either case in the ordinary course of business.

 

“Indebtedness” of any Person shall mean,
without duplication, (a) all obligations of such Person for borrowed money or
with respect to deposits or advances of any kind, (b) all obligations of such
Person evidenced by bonds, debentures, notes or similar instruments, (c) all
obligations of such Person upon which interest charges are customarily paid,
(d) all obligations of such Person under conditional sale or other title
retention agreements relating to property or assets purchased by such Person,
(e) all obligations of such Person issued or assumed as the deferred purchase
price of property or services, (f) all Indebtedness of others secured by (or
for which the holder of such Indebtedness has an existing right, contingent or
otherwise, to be secured by) any Lien on property owned or acquired by such
Person, whether or not the obligations secured thereby have been assumed, (g)
all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease
Obligations of such Person, (i) all obligations of such Person in respect of
interest rate protection agreements, foreign currency exchange agreements or

 

3

 

other interest or exchange rate hedging arrangements
and (j) all obligations of such Person as an account party in respect of
letters of credit and bankers’ acceptances. 
The Indebtedness of any Person shall include the Indebtedness of any
partnership in which such Person is a general partner.

 

“Initial
Loan Amount” means
$950,000.10.

 

“IP
Security Agreement” means the Intellectual Property
Security Agreement, dated as of the date of this Agreement, between the
Borrower and the Lender, in the form of Exhibit G hereto.

 

“Lender Counsel” means Bryan Cave LLP.

 

“Losses” means any and all losses, claims,
damages, liabilities, settlement costs and expenses, including without
limitation costs of preparation of legal action and reasonable attorneys’ fees.

 

“Person” means an individual or corporation,
partnership, trust, incorporated or unincorporated association, joint venture,
limited liability company, joint stock company, government (or an agency or
subdivision thereof) or other entity of any kind.

 

“Proceeding” means an action, claim, suit,
investigation or proceeding (including, without limitation, an investigation or
partial proceeding, such as a deposition), whether commenced or threatened.

 

“Registration
Statement” means one or more registration statements
meeting the requirements of the Registration Rights Agreement and covering the
resale of the applicable Underlying Shares by the Lender who shall be named
“selling stockholder” thereunder.

 

“Registration
Rights Agreement” means the Registration Rights
Agreement, dated as of the date of this Agreement, between the Borrower and the
Lender, in the form of Exhibit B hereto.

 

“Required Minimum” means, as of any date,
the maximum aggregate number of shares of Common Stock then issued or
potentially issuable in the future pursuant to the Transaction Documents,
including any Underlying Shares issuable upon exercise or conversion (as
applicable) in full of all Warrants and Debentures, ignoring any limits on the
number of shares of Common Stock that may be owned by the Lender at any one
time and assuming that: (a) any previously unconverted Debentures are held
until the maturity date thereof, and all interest on the Debentures is paid in
shares of Common Stock, (b) the maximum number of Underlying Shares is issued
pursuant to the Warrants and (c) the conversion price of the Debentures and the
exercise price of the Warrants at all times on and after the date of
determination equals $0.35, subject to adjustments pursuant to the terms of the
Debentures or the Warrants, as applicable.

 

“Rule 144” means Rule 144 promulgated by the
Commission pursuant to the Securities Act, as such Rule may be amended from
time to time, or any similar rule or

 

4

 

regulation hereafter adopted by the
Commission having substantially the same effect as such Rule.

 

“Securities” means the Debentures, the
Warrants and the Underlying Shares issuable to the Lender pursuant to the
Transaction Documents.

 

“Securities Act” means the Securities Act of
1933, as amended.

 

“Security
Agreement” means the Security Agreement, dated as of
the date of this Agreement, between the Borrower and the Lender, in the form of
Exhibit F hereto.

 

“Security
Agreements” means, collectively, the Security
Agreement and the IP Security Agreement.

 

“Strategic
Transaction” means a transaction or relationship in which the
Borrower issues shares of Common Stock or other securities of the Borrower to a
Person which is, itself or through its Subsidiaries, an operating company in a
business synergistic with the business of the Borrower and in which the
Borrower receives benefits in addition to the investment of funds, but shall
not include a transaction in which the Borrower is issuing securities primarily
for the purpose of raising capital or to an entity whose primary business is investing
in securities.

 

“Subsidiary” means any subsidiary of the
Borrower that is required to be listed in Disclosure Schedule 3.1(a).

 

“Trading
Day” means (i) a day on which the Common Stock is
traded on a Trading Market, or (ii) if the Common Stock is not listed on a
Trading Market, a day on which the Common Stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board, or (iii) if the
Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
to its functions of reporting prices); provided, that in the event that the
Common Stock is not listed or quoted as set forth in (i), (ii) and (iii)
hereof, then Trading Day shall mean a Business Day.

 

“Trading Market” means the Nasdaq SmallCap
Market or any other national securities exchange, market or trading or
quotation facility on which the Common Stock is then listed or quoted.

 

“Transaction Documents” means this
Agreement, the Warrants, the Debentures, the Security Agreements, the
Registration Rights Agreement and any other documents or agreements executed or
delivered in connection with the transactions contemplated hereunder.

 

“Underlying Shares” means the shares of
Common Stock issuable upon conversion of the Debentures and payment of interest
thereunder and upon exercise of the Warrants and in satisfaction of any other
obligation of the Borrower to issue shares of Common Stock pursuant to the
Transaction Documents.

 

5

 

“Warrants” means all Common Stock purchase
warrants in the form of Exhibit C, issuable pursuant to Section
2.2(a)(iii) and Section 2.4(a)(ii).

 

ARTICLE II.

 

PURCHASE AND SALE

 

2.1.                              Closing.   Subject to the terms and conditions set
forth in this Agreement, at the Closing the Borrower shall issue and sell to
the Lender, and the Lender shall purchase from the Borrower, the Debentures and
the Warrants for the Initial Loan Amount. The Closing shall take place at the
New York offices of Lender Counsel on the Closing Date or at such other
location or time as the parties may agree.

 

2.2.                              Closing
Deliveries.

 

(a)                                  At
the Closing, the Borrower shall deliver or cause to be delivered to the Lender
the following:

 

(i)                                     a
Debenture in the aggregate principal amount of the Initial Loan Amount
registered in the name of the Lender;

 

(ii)                                  a
Warrant, registered in the name of the Lender, pursuant to which the Lender
shall have the right to acquire 50% of the number of shares of Common Stock
issuable upon assumed conversion in full of the Debenture issuable to the
Lender in accordance with Section 2.2(a)(i), on the terms set forth therein;

 

(iii)                               the
Registration Rights Agreement, duly executed by the Borrower;

 

(iv)                              the
Security Agreements, duly executed by the Borrower;

 

(v)                                 the
legal opinion of Borrower Counsel, in agreed form, executed by such counsel and
delivered to the Lender;

 

(vi)                              a
certificate from a duly authorized officer certifying on behalf of the Borrower
that each of the conditions set forth in Section 6.1 has been satisfied; and

 

(vii)                           any
other document reasonably requested by the Lender.

 

(b)                                 At
the Closing, the Lender shall deliver or cause to be delivered to the Borrower
the following:

 

6

 

(i)                                     the
Initial Loan Amount in United States dollars and in immediately available
funds, by wire transfer to an account designated in writing by the Borrower for
such purpose;

 

(ii)                                  the
Registration Rights Agreement, duly executed by the Lender; and

 

(iii)                               the
Security Agreements, duly executed by the Lender.

 

2.3.                              Additional
Closing.   Subject to the terms and
conditions set forth in this Agreement, on the Additional Closing Date, the
Borrower shall issue and sell to the Lender, and the Lender shall purchase from
the Borrower: (i) a Debenture (the “Additional
Debenture”) in an aggregate principal amount of the Additional Loan
Amount and (ii) a Warrant (the “Additional
Warrant” and together with the Additional Debenture, the “Additional Securities”) to purchase 50% of
the number of shares of Common Stock issuable upon assumed conversion in full
of the Additional Debenture issuable to the Lender in accordance with Section
2.3(i), on the terms set forth therein. 
The Additional Debenture shall be included within the definition of “Debentures,” shall be due on March 1, 2004
and shall have identical terms as the Debenture (other than the maturity date),
mutatis mutandis, and shall rank
pari passu therewith. The Additional Warrant shall be included within the
definition of “Warrants,” shall be
exercisable for a term of four years from the Additional Closing Date and shall
be in the form of Exhibit C.  The
Additional Securities shall be included in the definition of “Securities.”  Subject
to the terms and conditions set forth in this Agreement, the Additional Closing
shall take place at the New York offices of Lender Counsel on the Additional
Closing Date or at such other location or time as the parties may agree.

 

2.4.                              Additional
Closing Deliveries.

 

(a)                                  On
the Additional Closing Date, the Borrower shall deliver or cause to be
delivered to the Lender the following:

 

(i)                                     an
Additional Debenture in the aggregate principal amount of the Additional Loan
Amount, registered in the name of the Lender;

 

(ii)                                  an
Additional Warrant, registered in the name of the Lender, pursuant to which the
Lender shall have the right to acquire 50% of the number of shares of Common
Stock issuable upon assumed conversion in full of the Additional Debenture
issuable to the Lender in accordance with Section 2.4(a)(i), on the terms set
forth therein;

 

(iii)                               a
certificate from a duly authorized officer certifying on behalf of the Borrower
that each of the conditions set forth in Section 6.3 has been satisfied; and

 

(iv)                              any
other document reasonably requested by the Lender or Lender Counsel.

 

7

 

(b)                                 On
the Additional Closing Date, the Lender shall deliver or cause to be delivered
to the Borrower the Additional Loan Amount in United States dollars and in
immediately available funds, by wire transfer to an account designated in
writing by the Borrower for such purpose.

 

ARTICLE III.

 

REPRESENTATIONS AND WARRANTIES

 

3.1.                              Representations
and Warranties of the Borrower.  
The Borrower hereby makes the following representations and warranties
to the Lender: (The Disclosure Schedule dated as of even date herewith which is
referenced in this Section 3.1 shall be provided to the Lender separately from
this Agreement.)

 

(a)                                  Subsidiaries.   The Borrower does not directly or
indirectly control or own any interest in any other corporation, partnership,
joint venture or other business association or entity (a “Subsidiary”), other than those listed in Disclosure
Schedule 3.1(a). Except as disclosed in Disclosure Schedule 3.1(a),
the Borrower owns, directly or indirectly, all of the capital stock of each
Subsidiary free and clear of any lien, charge, claim, security interest,
encumbrance, right of first refusal or other restriction (collectively, “Liens”), and all the issued and outstanding
shares of capital stock of each Subsidiary are validly issued and are fully
paid, non-assessable and free of preemptive and similar rights.

 

(b)                                 Organization
and Qualification.   Each of the
Borrower and the Subsidiaries is an entity duly incorporated or otherwise
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization (as applicable), with the
requisite power and authority to own and use its properties and assets and to
carry on its business as currently conducted. Neither the Borrower nor any
Subsidiary is in violation of any of the provisions of its respective
certificate or articles of incorporation, bylaws or other organizational or
charter documents. Each of the Borrower and each Subsidiary is duly qualified
to conduct business and is in good standing as a foreign corporation or other
entity in each jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary, except where the
failure to be so qualified or in good standing, as the case may be, could not,
individually or in the aggregate, have or reasonably be expected to result in
(i) an adverse effect on the legality, validity or enforceability of any
Transaction Document, (ii) a material and adverse effect on the results of
operations, assets, prospects, business or condition (financial or otherwise)
of the Borrower and the Subsidiaries, taken as a whole, or (iii) an adverse
impairment to the Borrower ability to perform on a timely basis its obligations
under any Transaction Document (any of (i), (ii) or (iii), a “Material Adverse Effect”), except
(a) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors’ rights, (b) general principles of equity that restrict the
availability of equitable remedies, and (c) to the extent that the enforceability
of the indemnification provisions contained herein or in the Registration
Rights Agreement may be limited by applicable laws.

 

8

 

(c)                                  Authorization;
Enforcement.   The Borrower has the
requisite corporate power and authority to enter into and to consummate the
transactions contemplated by each of the Transaction Documents and otherwise to
carry out its obligations hereunder. The execution and delivery of each of the
Transaction Documents by the Borrower and the consummation by it of the
transactions contemplated hereunder and thereunder have been duly authorized by
all necessary action on the part of the Borrower and no further consent or
action is required by the Borrower, its Board of Directors or its stockholders.
Each of the Transaction Documents has been (or upon delivery will be) duly
executed by the Borrower and, when delivered in accordance with the terms
hereof, will constitute the valid and binding obligation of the Borrower
enforceable against the Borrower in accordance with its terms.

 

(d)                                 No
Conflicts.   The execution, delivery
and performance of the Transaction Documents by the Borrower and the
consummation by the Borrower of the transactions contemplated thereby do not
and will not (i) conflict with or violate any provision of the Borrower’s or
any Subsidiary’s certificate or articles of incorporation, bylaws or other
organizational or charter documents, or (ii) conflict with, or constitute a
default (or an event that     with
notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation  (with or without notice, lapse of time or
both) of, any agreement, credit facility, debt or other instrument (evidencing
a Borrower or Subsidiary debt or otherwise) or other understanding to which the
Borrower or any Subsidiary is a party or by which any property or asset of the
Borrower or any Subsidiary is bound or affected, or (iii) result in a violation
of any law, rule, regulation, order, judgment, injunction, decree or other
restriction of any court or governmental authority to which the Borrower or a
Subsidiary is subject (including federal and state securities laws and
regulations) and the rules and regulations of any self-regulatory organization
to which the Borrower or its securities are subject, or by which any property
or asset of the Borrower or a Subsidiary is bound or affected; except in the
case of each of clauses (ii) and (iii), such as could not, individually or in the
aggregate, have or reasonably be expected to result in a Material Adverse
Effect.  The security interests granted
to the Lender pursuant to the Security Agreements will convey and grant to the
Lender a first priority security interest in all of the Collateral (as such
term is defined in each of the Security Agreements).

 

(e)                                  Filings,
Consents and Approvals.  The
Borrower is not required to obtain any consent, waiver, authorization or order
of, give any notice to, or make any filing or registration with, any court or
other federal, state, local or other governmental authority or other Person in
connection with the execution, delivery and performance by the Borrower of the
Transaction Documents, other than (i) the filing with the Commission of one or
more Registration Statements in accordance with the requirements Registration
Rights Agreement and (ii) the application(s) to the Trading Market on which the
Common Stock is listed for trading for the listing of the Underlying Shares for
trading thereon in the time and manner required thereby which have been made
and obtained prior to the Closing Date.

 

(f)                                    Issuance
of the Securities.   The Securities
have been duly authorized and, when issued and paid for in accordance with the
Transaction Documents, will be duly and validly issued, fully paid and
nonassessable, free and clear of all Liens. The Borrower has reserved from its
duly authorized capital stock a number of shares of Common Stock to be issued
to the Lender upon conversion or exercise of the Debentures or Warrants and
such

 

9

 

number of reserved shares of
Common Stock shall be at least equal to the Required Minimum calculated as of
the date hereof.

 

(g)                                 Capitalization.   The number of shares and type of all
authorized, issued and outstanding capital stock of the Borrower, and all
shares of Common Stock reserved for issuance under the Borrower’s various
option and incentive plans, is set forth in Disclosure Schedule 3.1(g).  Except as set forth in Disclosure Schedule
3.1(g), no securities of the Borrower are entitled to preemptive or similar
rights, and no Person has any right of first refusal, preemptive right, right
of participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents. 
Except as a result of the purchase and sale of the Securities and except
as disclosed in Disclosure Schedule 3.1(g), there are no outstanding
options, warrants, scrip rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities, rights or obligations
convertible into or exchangeable for, or giving any Person any right to
subscribe for or acquire, any shares of Common Stock, or contracts,
commitments, understandings or arrangements by which the Borrower or any
Subsidiary is or may become bound to issue additional shares of Common Stock,
or securities or rights convertible or exchangeable into shares of Common
Stock.  Except as set forth in Disclosure
Schedule 3.1(g), the issue and sale of the Securities will not, immediately
or with the passage of time, obligate the Borrower to issue shares of Common
Stock or other securities to any Person (other than the Lender) and will not
result in a right of any holder of Borrower securities to adjust the exercise,
conversion, exchange or reset price under such securities.

 

(h)                                 SEC
Reports; Financial Statements.   The
Borrower has filed all reports required to be filed by it under the Exchange
Act, including pursuant to Section 13(a) or 15(d) thereof, for the twelve
months preceding the date hereof (or such shorter period as the Borrower was
required by law to file such material) (the foregoing materials being
collectively referred to herein as the “SEC Reports”
and, together with this Agreement and the Schedules to this Agreement, the “Disclosure Materials”) on a timely basis or has timely filed
a valid extension of such time of filing and has filed any such SEC Reports
prior to the expiration of any such extension. The Borrower has made available
to the Lender a copy of all SEC Reports filed within the 10 days preceding the
date hereof. As of their respective dates, the SEC Reports complied in all
material respects with the requirements of the Securities Act and the Exchange
Act and the rules and regulations of the Commission promulgated thereunder, and
none of the SEC Reports, when filed, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Borrower included in the SEC Reports comply in all material
respects with applicable accounting requirements and the rules and regulations
of the Commission with respect thereto as in effect at the time of filing. Such
financial statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
(“GAAP”), except as may be otherwise
specified in such financial statements or the notes thereto or in the case of
unaudited financial statements, as permitted by Form 10-Q of the Commission,
and fairly present in all material respects the financial position of the
Borrower and its consolidated Subsidiaries as of and for the dates thereof and
the results of operations and cash flows for the periods then ended, subject,
in the case of unaudited statements, to normal, immaterial, year-end audit
adjustments. All material contracts, as such contracts are defined in
§601(a)(10) of Reg. S-K under the Securities Act, to which the Borrower or any
Subsidiary is a

 

10

 

party or to which the property
or assets of the Borrower or any Subsidiary are subject are included as part of
or specifically identified in the SEC Reports.

 

(i)                                     Press
Releases.  The press releases
disseminated by the Borrower during the three (3) years preceding the date of
this Agreement taken as a whole do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.

 

(j)                                     Material
Changes.   Since the date of the
latest audited financial statements included within the SEC Reports, except as
specifically disclosed in the SEC Reports, (i) there has been no event,
occurrence or development that has had or that could reasonably be expected to
result in a Material Adverse Effect, (ii) the Borrower has not incurred any
liabilities (contingent or otherwise) other than (A) trade payables and accrued
expenses incurred in the ordinary course of business consistent with past
practice and (B) liabilities not required to be reflected in the Borrower’s
financial statements pursuant to GAAP or required to be disclosed in filings
made with the Commission, (iii) the Borrower has not altered its method of
accounting or the identity of its auditors, (iv) the Borrower has not declared
or made any dividend or distribution of cash or other property to its
stockholders or purchased, redeemed or made any agreements to purchase or
redeem any shares of its capital stock, and (v) the Borrower has not issued any
equity securities to any officer, director or Affiliate, except pursuant to
existing Borrower stock option and stock purchase plans. The Borrower does not
have pending before the Commission any request for confidential treatment of
information.

 

(k)                                  Litigation.  There is no Action which (i) adversely
affects or challenges the legality, validity or enforceability of any of the
Transaction Documents or the Securities or (ii) could, if there were an
unfavorable decision, individually or in the aggregate, have or reasonably be
expected to result in a Material Adverse Effect.  Neither the Borrower nor any Subsidiary, nor any director or
officer thereof, is or has been the subject of any Action involving a claim of
violation of or liability under federal or state securities laws or a claim of
breach of fiduciary duty.  There has not
been, and to the knowledge of the Borrower, there is not pending or
contemplated, any investigation by the Commission involving the Borrower or any
current or former director or officer of the Borrower.  The Commission has not issued any stop order
or other order suspending the effectiveness of any registration statement filed
by the Borrower or any Subsidiary under the Exchange Act or the Securities Act.

 

(l)                                     Labor
Relations.  No material labor
dispute exists or, to the knowledge of the Borrower, is imminent with respect
to any of the employees of the Borrower.

 

(m)                               Compliance.   Neither the Borrower nor any Subsidiary (i)
is in default under or in violation of (and no event has occurred that has not
been waived that, with notice or lapse of time or both, would result in a
default by the Borrower or any Subsidiary under), nor has the Borrower or any
Subsidiary received notice of a claim that it is in default under or that it is
in violation of, any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is in
violation of any order of any court, arbitrator or governmental body, or (iii)
is or has been in violation of any statute, rule or

 

11

 

regulation of any governmental
authority, including without limitation all foreign, federal, state and local
laws relating to taxes, environmental protection, occupational health and
safety, product quality and safety and employment and labor matters, except in
each case as could not, individually or in the aggregate, have or could
reasonably be expected to result in a Material Adverse Effect. The Borrower is
in compliance with the applicable requirements of the Sarbanes-Oxley Act of
2002 and the rules and regulations thereunder promulgated by the Commission,
except where such noncompliance could not have or reasonably be expected to
result in a Material Adverse Effect.

 

(n)                                 Regulatory
Permits.   The Borrower and the
Subsidiaries possess all certificates, authorizations and permits issued by the
appropriate federal, state, local or foreign regulatory authorities necessary
to conduct their respective businesses as described in the SEC Reports, except
where the failure to possess such permits could not, individually or in the
aggregate, have or could reasonably be expected to result in a Material Adverse
Effect (“Material Permits”), and neither the
Borrower nor any Subsidiary has received any notice of proceedings relating to
the revocation or modification of any Material Permit.

 

(o)                                 Title
to Assets.   The Borrower and the
Subsidiaries have good and marketable title in fee simple to all real property
owned by them that is material to the business of the Borrower and the
Subsidiaries and good and marketable title in all personal property owned by
them that is material to the business of the Borrower and the Subsidiaries, in
each case free and clear of all Liens, except for Liens granted to the Lender
pursuant to the Security Agreements and except for Liens as do not materially
affect the value of such property and do not materially interfere with the use
made and proposed to be made of such property by the Borrower and the
Subsidiaries. Any real property and facilities held under lease by the Borrower
and the Subsidiaries are held by them under valid, subsisting and enforceable
leases of which the Borrower and the Subsidiaries are in compliance.

 

(p)                                 Patents
and Trademarks.   The Borrower and
the Subsidiaries have, or have rights to use, all patents, patent applications,
trademarks, trademark applications, service marks, trade names, copyrights,
licenses and other similar rights that are necessary or material for use in
connection with their respective businesses as described in the SEC Reports and
which the failure to so have could, individually or in the aggregate, have or
reasonably be expected to result in a Material Adverse Effect (collectively,
the “Intellectual Property Rights”).  Neither the Borrower nor any Subsidiary has
received a written notice that the Intellectual Property Rights used by the
Borrower or any Subsidiary violates or infringes upon the rights of any Person.  Except as set forth in the SEC Reports, to
the knowledge of the Borrower, all such Intellectual Property Rights are
enforceable and there is no existing infringement by another Person of any of
the Intellectual Property Rights.

 

(q)                                 Insurance.   The Borrower and the Subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as are prudent and customary in the businesses in
which the Borrower and the Subsidiaries are engaged. Neither the Borrower nor
any Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business without a significant increase in cost.

 

12

 

(r)                                    Transactions
With Affiliates and Employees.  
Except as set forth in SEC Reports, none of the officers or directors of
the Borrower and, to the knowledge of the Borrower, none of the employees of
the Borrower is presently a party to any transaction with the Borrower or any
Subsidiary (other than for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the knowledge of the Borrower, any entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.

 

(s)                                  Internal
Accounting Controls.   The Borrower
and the Subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed
in accordance with management’s general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management’s general or specific authorization, and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.

 

(t)                                    Certain
Fees.  Except as described in Disclosure
Schedule 3.1(u), no brokerage or finder’s fees or commissions are or will
be payable by the Borrower to any broker, financial advisor or consultant,
finder, placement agent, investment banker, bank or other Person with respect
to the transactions contemplated by this Agreement.  The Lender shall have no obligation with respect to any fees or
with respect to any claims (other than such fees or commissions owed by the
Lender pursuant to written agreements executed by the Lender which fees or
commissions shall be the sole responsibility of the Lender) made by or on
behalf of other Persons for fees of a type contemplated in this Section that
may be due in connection with the transactions contemplated by this Agreement.

 

(u)                                 Certain
Registration Matters. Assuming the accuracy of the Lender’s representations
and warranties set forth in Section 3.2(b)-(e), no registration under the
Securities Act is required for the offer and sale of the Securities by the
Borrower to the Lender under the Transaction Documents.  The Borrower is eligible to register the
resale of its  Common Stock for resale
by the Lender under Form S-3 promulgated under the Securities Act.  Except as described in Disclosure
Schedule 3.1(v), the Borrower has not granted or agreed to grant to any
Person any rights (including “piggy-back” registration rights) to have any
securities of the Borrower registered with the Commission or any other governmental
authority that have not been satisfied.

 

(v)                                 Listing
and Maintenance Requirements.  
Except as specified in the SEC Reports, the Borrower has not, in the two
years preceding the date hereof, received notice from the Trading Market to the
effect that the Borrower is not in compliance with the listing or maintenance
requirements thereof. The Borrower is, and has no reason to believe that it
will not in the foreseeable future continue to be, in compliance with the
listing and maintenance requirements for continued trading of the Common Stock
on the Trading Market. The issuance and sale of the Securities at the Closing
hereunder does not contravene the rules

 

13

 

and regulations of the Trading
Market and no approval of the shareholders of the Borrower is required for the
Borrower to issue and deliver to the Lender at the Closing the maximum number
of Securities contemplated by this Agreement assuming exercise of the Warrants
and conversion of the Debentures on the date hereof.  The issuance of the Additional Securities shall be subject to
approval of the shareholders of the Borrower in accordance with the
requirements of The Nasdaq Stock Market.

 

(w)                               Investment
Company.   The Borrower is not, and
is not an Affiliate of, an “investment company” within the meaning of the
Investment Company Act of 1940, as amended.

 

(x)                                   No
Additional Agreements.  The Borrower
does not have any agreement or understanding with the Lender with respect to
the transactions contemplated by the Transaction Documents other than as
specified in this Agreement.

 

(y)                                 Disclosure.   The Borrower understands and confirms that
the Lender will rely on the foregoing representations and covenants in
effecting transactions in securities of the Borrower.  All disclosure provided to the Lender regarding the Borrower, its
business and the transactions contemplated hereby, furnished by or on behalf of
the Borrower (including the Borrower’s representations and warranties set forth
in this Agreement) are true and correct and do not contain any untrue statement
of a material fact or omit to state any material fact necessary in order to
make the statements made therein, in light of the circumstances under which
they were made, not misleading.

 

(z)                                   Acknowledgment
Regarding Lender’s Purchase of Securities. The Borrower acknowledges and
agrees that the Lender is acting solely in the capacity of an arm’s length
lender with respect to the Transaction Documents and the transactions
contemplated hereby. The Borrower further acknowledges that the Lender is not
acting as a financial advisor or fiduciary of the Borrower (or in any similar
capacity) with respect to the Transaction Documents and the transactions
contemplated hereby and any advice given by the Lender or any of its
representatives or agents in connection with the Transaction Documents and the
transactions contemplated hereby is merely incidental to the Lender’s purchase
of the Securities. The Borrower further represents to the Lender that the
Borrower’s decision to enter into this Agreement has been based solely on the
independent evaluation by the Borrower and its representatives.

 

(aa)                            Seniority.   As of the date hereof, no indebtedness of
the Borrower is senior to or pari passu with the Debentures in right of
payment, whether with respect to interest or upon liquidation or dissolution,
or otherwise.

 

3.2.                              Representations
and Warranties of the Lender.  The
Lender hereby  represents and warrants
to the Borrower as follows:

 

(a)                                  Organization;
Authority.  The Lender is an entity
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization with the requisite corporate or partnership
power and authority to enter into and to consummate the transactions
contemplated by the applicable Transaction Documents and

 

14

 

otherwise to carry out its
obligations thereunder. The execution, delivery and performance by the Lender
of the transactions contemplated by this Agreement has been duly authorized by
all necessary corporate or, if the Lender is not a corporation, such
partnership, limited liability Borrower or other applicable like action, on the
part of the Lender.  Each of this
Agreement and the Registration Rights Agreement has been duly executed by the
Lender, and when delivered by the Lender in accordance with terms hereof, will
constitute the valid and legally binding obligation of the Lender, enforceable
against it in accordance with its terms.

 

(b)                                 Investment
Intent.  The Lender is acquiring the
Securities as principal for its own account for investment purposes only and
not with a view to or for distributing or reselling such Securities or any part
thereof, without prejudice, however, to the Lender’s right at all times to sell
or otherwise dispose of all or any part of such Securities in compliance with
applicable federal and state securities laws. 
Subject to the immediately preceding sentence, nothing contained herein
shall be deemed a representation or warranty by the Lender to hold the
Securities for any period of time.  The
Lender is acquiring the Securities hereunder in the ordinary course of its
business. The Lender does not have any agreement or understanding, directly or
indirectly, with any Person to distribute any of the Securities.

 

(c)                                  Lender
Status.  At the time the Lender was
offered the Securities, it was, and at the date hereof and as of the Closing
Date and the Additional Closing Date (if any), it is, and on each date on which
it exercises the Warrants it will be, an “accredited investor” as defined in
Rule 501(a) under the Securities Act. 
The Lender is not a registered broker-dealer under Section 15 of the
Exchange Act.

 

(d)                                 General
Solicitation.  The Lender is not
purchasing the Securities as a result of any advertisement, article, notice or
other communication regarding the Securities published in any newspaper,
magazine or similar media or broadcast over television or radio or presented at
any seminar or any other general solicitation or general advertisement.

 

(e)                                  Access
to Information.  The Lender
acknowledges that it has reviewed the Disclosure Materials and has been
afforded (i) the opportunity to ask such questions as it has deemed necessary
of, and to receive answers from, representatives of the Borrower concerning the
terms and conditions of the offering of the Securities and the merits and risks
of investing in the Securities; (ii) access to information about the Borrower
and the Subsidiaries and their respective financial condition, results of operations,
business, properties, management and prospects sufficient to enable it to
evaluate its investment; and (iii) the opportunity to obtain such additional
information that the Borrower possesses or can acquire without unreasonable
effort or expense that is necessary to make an informed investment decision
with respect to the investment.  Neither
such inquiries nor any other investigation conducted by or on behalf of the
Lender or its representatives or counsel shall modify, amend or affect the
Lender’s right to rely on the truth, accuracy and completeness of the
Disclosure Materials and the Borrower’s representations and warranties
contained in the Transaction Documents.

 

(f)                                    No
Short Positions or Stock Ownership. 
The Lender does not, as of the Closing Date, have any open short
positions (either directly or through an affiliate)

 

15

 

with respect to the Common
Stock.  The Lender is not, as of
immediately prior to the Closing Date, the beneficial owner of any of
Borrower’s capital stock.

 

The Borrower
acknowledges and agrees that the Lender does not make or has not made any
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 3.2.

 

ARTICLE IV.

 

OTHER AGREEMENTS OF THE PARTIES

 

4.1.                              (a)                                  Securities
may only be disposed of in compliance with state and federal securities
laws.  In connection with any transfer
of the Securities other than pursuant to an effective registration statement,
to the Borrower, to an Affiliate of the Lender or in connection with a pledge
as contemplated in Section 4.1(b), the Borrower may require the transferor
thereof to provide to the Borrower an opinion of counsel selected by the
transferor, the form and substance of which opinion shall be reasonably
satisfactory to the Borrower, to the effect that such transfer does not require
registration of such transferred Securities under the Securities Act.

 

                                                (b)                                 Certificates
evidencing the Securities will contain the following legend, so long as is
required by this Section 4.1(b) or Section 4.1(c):

 

[NEITHER THESE
SECURITIES NOR THE SECURITIES ISSUABLE UPON CONVERSION/EXERCISE OF THESE
SECURITIES HAVE BEEN REGISTERED] [THESE SECURITIES HAVE NOT BEEN REGISTERED]WITH
THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH
SHALL BE REASONABLY ACCEPTABLE TO THE BORROWER.  [THESE SECURITIES AND THE SECURITIES ISSUABLE UPON CONVERSION/EXERCISE
OF THESE SECURITIES] [THESE SECURITIES] MAY BE PLEDGED IN CONNECTION WITH A
BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.

 

The Borrower acknowledges and agrees that the
Lender may from time to time pledge, and/or grant a security interest in some
or all of the Securities pursuant to a bona fide margin agreement in connection
with a bona fide margin account and, if required under the terms of such
agreement or account, the Lender may transfer pledged or secured Securities to
the pledgees or secured parties.  Such a
pledge or transfer would not be subject to approval or

 

16

 

consent of the Borrower and no
legal opinion of legal counsel to the pledgee, secured party or pledgor shall
be required in connection with the pledge, but such legal opinion may be
required in connection with a subsequent transfer following default by the
Lender transferee of the pledge.  No
notice shall be required of such pledge. 
At the Lender’s expense, the Borrower will execute and deliver such
reasonable documentation as a pledgee or secured party of Securities may
reasonably request in connection with a pledge or transfer of the Securities
including the preparation and filing of any required prospectus supplement
under Rule 424(b)(3) of the Securities Act or other applicable provision of the
Securities Act to appropriately amend the list of Selling Stockholders
thereunder.

 

                                                (c)                                  Certificates
evidencing the Underlying Shares shall not contain any legend (including the
legend set forth in Section 4.1(b)): (i) following any sale of such Underlying Shares pursuant to Rule 144, or
(ii) while such Underlying Shares are eligible for sale under Rule
144(k), or (iii) if such legend is not required under applicable requirements
of the Securities Act (including judicial interpretations and pronouncements
issued by the Staff of the Commission). 
Following the Effective Date or at such earlier time as a legend is no
longer required for the Underlying Shares under this Section 4.1(c), the
Borrower will, no later than three Trading Days following the delivery by the
Lender to the Borrower or the Borrower’s transfer agent of a certificate
representing the Underlying Shares containing a restrictive legend, deliver or
cause to be delivered to the Lender a certificate representing such Underlying
Shares that is free from all restrictive and other legends.  The Borrower may not make any notation on
its records or give instructions to any transfer agent of the Borrower that
enlarge the restrictions on transfer set forth in this Section.

 

4.2.                              Furnishing
of Information.   As long as the
Lender owns the Securities issued or issuable to it, the Borrower covenants to
use its best efforts to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed
by the Borrower after the date hereof pursuant to the Exchange Act. Upon the
request of any such Person, the Borrower shall deliver to such Person a written
certification of a duly authorized officer as to whether it has complied with
the preceding sentence.  As long as the
Lender owns Securities, if the Borrower is not required to file reports
pursuant to such laws, it will prepare and furnish to the Lender and make
publicly available in accordance with Rule 144(c) such information as is
required for the Lender to sell the Underlying Shares under Rule 144. The
Borrower further covenants that it will take such further action as any holder
of Securities may reasonably request, all to the extent required from time to
time to enable such Person to sell such Underlying Shares without registration
under the Securities Act within the limitation of the exemptions provided by
Rule 144.

 

4.3.                              Acknowledgment
of Dilution.   The Borrower
acknowledges that the issuance of the Securities (including the Underlying
Shares) will result in dilution of the outstanding shares of Common Stock,
which dilution may be substantial. The Borrower further acknowledges that its
obligations under the Transaction Documents, including without limitation its
obligation to issue the Securities (including the Underlying Shares) pursuant
to the Transaction Documents, are unconditional and absolute and not subject to
any right of set off, counterclaim, delay or reduction, regardless of the
effect of any such dilution or any claim that the Borrower may have against the
Lender.

 

17

 

4.4.                              Integration.  The Borrower shall not, and shall use its
best efforts to ensure that no Affiliate of the Borrower shall, sell, offer for
sale or solicit offers to buy or otherwise negotiate in respect of any security
(as defined in Section 2 of the Securities Act) that would be integrated with
the offer or sale of the Securities in a manner that would require the
registration under the Securities Act of the sale of the Securities to the
Lender, or that would be integrated with the offer or sale of the Securities
for purposes of the rules and regulations of any Trading Market.

 

4.5.                              Listing
of Securities.  The Borrower shall:
(i) in the time and manner required by each Trading Market on which the Common
Stock is listed, prepare and file with such Trading Market an additional shares
listing application covering the Underlying Shares, (ii) take all steps
necessary to cause such shares to be approved for listing on each Trading
Market on which the Common Stock is listed as soon as possible thereafter,
(iii) provide to the Lender evidence of such listing, and (iv) maintain the
listing of such shares on each such Trading Market or another eligible securities
market.

 

4.6.                              Reservation
of Shares.  The Borrower shall
maintain a reserve from its duly authorized shares of Common Stock to comply
with its conversion and exercise obligations under the Debentures and Warrants
pursuant to the Transaction Documents. 
If on any date the Borrower would be, if notice of exercise or
conversion were to be delivered on such date, precluded from issuing the number
of Underlying Shares, as the case may be, issuable upon exercise in full of all
of the Warrants and issuable upon conversion in full of the Debentures due to
the unavailability of a sufficient number of authorized but unissued or
reserved shares of Common Stock, then the Board of Directors of the Borrower
shall promptly prepare and mail to the stockholders of the Borrower proxy
materials or other applicable materials requesting authorization to amend the
Borrower’s certificate of incorporation or other organizational document to
increase the number of shares of Common Stock which the Borrower is authorized
to issue so as to provide enough shares for issuance of the Underlying
Shares.  In connection therewith, the
Board of Directors shall (a) adopt proper resolutions authorizing such
increase, (b) recommend to and otherwise use its best efforts to promptly and
duly obtain stockholder approval to carry out such resolutions (and hold a
special meeting of the stockholders as soon as practicable, but in any event
not later than the 60th day after delivery of the proxy or other
applicable materials relating to such meeting) and (c) within five Business
Days of obtaining such stockholder authorization, file an appropriate amendment
to the Borrower’s certificate of incorporation or other organizational document
to evidence such increase.

 

4.7.                              Conversion
and Exercise Procedures.   The form
of Exercise Notice included in the Warrants and the form of Conversion Notice
included in the Debentures set forth the totality of the procedures required by
the Lender in order to exercise the Warrants or convert the Debentures. No
additional legal opinion or other information or instructions shall be
necessary to enable the Lender to exercise its Warrants or convert their
Debenture. The Borrower shall honor exercise of the Warrant and conversion of
the Debenture and shall deliver Underlying Shares in accordance with the terms,
conditions and time periods set forth in the Transaction Documents.

 

4.8.                              Subsequent
Registrations; Subsequent Placements.

 

18

 

(a)                                  From
the Closing Date through and including the Effective Date of the Registration
Statement covering the resale of the Underlying Shares issuable upon conversion
and exercise (as applicable) of the Securities issued on the Closing Date or if
there’s an Additional Closing, the Securities issued on the Additional Closing
Date, the Borrower will not file a registration statement (other than: (i) on a
Form S-8, (ii) pursuant to the Registration Rights Agreement, (iii) for the
resale of the securities to be issued to the Borrower’s landlord in connection
with the restructuring of its lease, and (iv) pursuant to the exercise of
existing registration rights by certain stockholders of the Borrower) with the
Commission with respect to any securities of the Borrower.

 

(b)                                 Prior
to the third year anniversary of the Closing Date, in the event the Borrower,
directly or indirectly, offers, sells, grants any option to purchase, or
otherwise disposes of (or announces any offer, sale, grant or any option to
purchase or other disposition of  any of
Common Stock or Common Stock Equivalents or any of its Subsidiaries’ equity or
Common Stock Equivalents, including without limitation, pursuant to a private
placement, an equity line of credit or a shelf registration statement in
accordance with Rule 415 under the Securities Act, (such offer, sale, grant,
disposition or announcement being referred to as “Subsequent Placement”), the
Borrower shall deliver to the Lender a written notice (the “Subsequent Placement Notice”) of its
intention to effect such Subsequent Placement, which specifies in reasonable
detail all of the material terms of such Subsequent Placement, the amount of
proceeds intended to be raised thereunder, the names of the investors
(including the investment manager of such investors, if any) and the investment
bankers with whom such Subsequent Placement is proposed to be effected, and
attached to which shall be a term sheet or similar document. The Lender shall
have until 6:30 p.m. (New York City time) on the fifth Trading Day after their
respective receipt of the Subsequent Placement Notice to notify Borrower of its
intention to participate, subject to completion of mutually acceptable
documentation, in such financing on the same terms as set forth in the
Subsequent Placement Notice. 
Notwithstanding anything herein to the contrary, the Borrower shall not
be required to permit the Lender to participate in a Subsequent Placement
hereunder in an amount (whether in terms of a purchase price or shares of
Common Stock) in excess of the lesser of: (i) the Lender’s beneficial ownership
(expressed as a percentage) of Common Stock (without giving effect to any
conversion or exercise limitations set forth in the Transaction Documents) and
(ii) $2,000,000.

 

(c)                                  The
Borrower’s obligations under Section 4.8(b) shall not apply to any grant or
issuance by the Borrower of any of the following: (i) the issuance of
securities upon the exercise or conversion of any Common Stock Equivalents
issued by the Borrower prior to the date of this Agreement (but will apply to
any amendments, modifications and reissuances thereof), (ii) the grant of
options or warrants, or the issuance of additional securities, under any duly
authorized company stock option, restricted stock plan or stock purchase plan
(including any amendments or other modifications thereto ), (iii) the issuance
of Common Stock in connection with a restructuring of the Borrower’s lease for
its principal offices in Mountain View, California, or (iv) the issuance of
Common Stock Equivalents pursuant to a Strategic Transaction.

 

4.9.                              Securities
Laws Disclosure; Publicity.  By 8:30
a.m. (New York City time) on each of the Closing Date and the Additional
Closing Date, the Borrower shall issue a press release reasonably acceptable to
the Lender disclosing the transactions contemplated

 

19

 

hereby.  In addition, the Borrower will make such
other filings and notices in the manner and time required by the Commission and
the Trading Market on which the Common Stock is listed.  Notwithstanding the foregoing, the Borrower
shall not publicly disclose the name of the Lender, or include the name of the
Lender in any filing with the Commission (other than the Registration Statement
and any exhibits to filings made in respect of this transaction in accordance
with periodic filing requirements under the Exchange Act) or any regulatory
agency or Trading Market, without the prior written consent of the Lender,
except to the extent such disclosure is required by law or Trading Market
regulations, in which case the Borrower shall provide the Lender with prior
notice of such disclosure.

 

4.10.                        Limitation
on Issuance of Securities.  During
the six months following the Closing Date, the Borrower shall not issue any
“Future Priced Securities” as such term is described by NASD IM-4350-1.  Prior to the date of the Stockholders
Meeting (as defined in Section 4.15), except for issuances specified in Section
12(c)(iii) of the Debenture, the Borrower shall not issue shares of Common
Stock or Common Stock Equivalents entitling any Person to acquire shares of
Common Stock, at a price per share less than $0.35 (subject to equitable
adjustments for stock splits, recombinations and similar events).

 

4.11.                        Indemnification
of Lender.  In addition to the
indemnity provided in the Registration Rights Agreement, the Borrower will
indemnify and hold the Lender and their directors, officers, shareholders,
partners, employees and agents (each, a “Lender
Party”) harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys’ fees and
costs of investigation (collectively, “Losses”)
that any the Lender Party may suffer or incur as a result of or relating to any
misrepresentation, breach or inaccuracy of any representation, warranty,
covenant or agreement made by the Borrower in any Transaction Document.  In addition to the indemnity contained
herein, the Borrower will reimburse the Lender Party for its reasonable legal
and other expenses (including the cost of any investigation, preparation and
travel in connection therewith) incurred in connection therewith, as such
expenses are incurred.

 

4.12.                        Non-Public
Information.  Following the date of this
Agreement, the Borrower covenants and agrees that neither it nor any other
Person acting on its behalf will provide the Lender or its agents or counsel
with any information that the Borrower believes constitutes material non-public
information, unless prior thereto the Lender shall have executed a written
agreement regarding the confidentiality and use of such information.  The Borrower understands and confirms that
the Lender shall be relying on the foregoing representations in effecting
transactions in securities of the Borrower.

 

4.13.                        Use of
Proceeds.  The Borrower shall use
the net proceeds from the sale of the Securities hereunder for working capital
purposes and not for the satisfaction of any portion of the Borrower’s debt
(other than payment of trade payables and accrued expenses in the ordinary
course of the Borrower’s business and prior practices), to redeem any Common
Stock or Common Stock Equivalents or to settle any outstanding Action.

 

4.14.                        Restrictions
on Purchase of Common Stock from Third Parties.  The Lender agrees that neither the Lender nor its Affiliates
shall purchase from a party other than

 

20

 

the Borrower or otherwise
acquire from a party other than the Borrower any shares of Common Stock or
securities convertible into or exercisable for shares of Common Stock, other
than by acquiring and converting Debentures or acquiring and exercising
Warrants, unless after any such purchase the total shares of  Common Stock beneficially owned by the
Lender and its Affiliates (assuming full conversion of all outstanding
Debentures and full exercise of all outstanding Warrants) would represent less
than 19.999% of outstanding shares of Common Stock.  The Lender further agrees that, so long as it shall hold any
Securities, it shall not beneficially own more than 19.999% of the outstanding
Common Stock.

 

4.15.                        Stockholders
Meeting.

 

(a)                                  Promptly
following the Closing Date, the Borrower shall take all action necessary to
call a meeting of its stockholders (the “Stockholders Meeting”)
for the purpose of seeking approval of the Borrower’s stockholders for the
issuance to the Lenders of the Additional Securities, together with the
securities issuable thereunder (the “Proposal”).  In connection therewith, the Borrower will
promptly prepare and file with the Commission proxy materials (including a
proxy statement and form of proxy) for use at the Stockholders Meeting and,
promptly after receiving clearance from the Commission, shall promptly mail
such proxy materials to the stockholders of the Borrower.  The Borrower will comply with Section 14(a)
of the 1934 Act and the rules promulgated thereunder in relation to any proxy
statement (as amended or supplemented, the “Proxy
Statement”) and any form of proxy to be sent to the stockholders of
the Borrower in connection with the Stockholders Meeting.

 

(b)                                 The
Borrower’s Board of Directors shall recommend to the Borrower’s stockholders
that the stockholders vote in favor of and approve the Proposal and will set the
date of the Stockholders Meeting no later than 25 days after receiving
clearance of the proxy materials from the Commission, and shall cause the
Borrower to use its best efforts to solicit the approval of the stockholders
for the Proposal.  Notwithstanding
anything herein to the contrary, the Borrower’s Board of Directors shall only
be entitled to withdraw its recommendation that the stockholders vote in favor
of and approve the Proposal if such withdrawal is required by the Borrower’s
Board of Directors’ fiduciary duties, based on written advice of counsel that
such withdrawel is required.  If, prior
to the date of the Shareholders Meeting, the Borrower receives an offer to
enter into a transaction which is materially more beneficial to the Borrower
than the transactions contemplated by the Additional Closing, then the Lender
shall have the option to provide all or a portion, not less than $500,000, of
the funds contemplated by such offer on the same terms as such offer and based
on the timing and mechanical conditions set forth in Section 4.8(b)
hereof.  The Borrower is required to,
and will take, in accordance with applicable law and its Certificate of
Incorporation and Bylaws, all action necessary to convene the Stockholders
Meeting along the timeframe indicated herein to consider and vote upon the
approval of the Proposal.

 

4.16.                        Restriction
on Selling.  On any Trading Day
during the period between the later of: (i) the Lender’s receipt of a notice
indicating the record date for the Stockholder Meeting and (ii) the 30th
Trading Day immediately preceding the proposed Additional Closing Date; and the
earlier of: (x) the 30th Trading Day immediately following the
inception of such period and (y) the Additional Closing Date, the Lender shall
not sell shares of

 

21

 

Common Stock in excess of 20%
of the trading volume of the shares of Common Stock (as determined by Bloomberg
LP or any successor thereto) for such Trading Day.

 

ARTICLE V.

 

NEGATIVE COVENANTS

 

The Borrower covenants and agrees that from
and after the Closing Date and so long as any there remains any outstanding
principal amount under the Debentures, the Borrower shall not, and shall not
permit its Subsidiaries to, without the prior written consent of the Lender in
each instance:

 

5.1.                              Indebtedness.  Incur, create, assume, guarantee or suffer
to exist, or become or remain liable, directly or indirectly, for or on account
of any Indebtedness, except any Permitted Indebtedness (as defined in the
Security Agreement).

 

5.2.                              Liens.  Create, incur or assume any Lien on any
property or assets (including, without limitation, the Collateral and including
stock or other securities of any Person, including any Subsidiary), tangible or
intangible, now owned or hereafter acquired, or agree or become liable to do
so,  except Permitted Liens (as
defined in the Security Agreement).

 

5.3.                              Guaranties.  Directly or indirectly, become or be liable
in respect of any Guarantee, or assume, guarantee, become surety for, endorse or
otherwise agree, become or remain directly or contingently liable upon or with
respect to any obligation or liability of any other Person, except for
Guarantees of indebtedness of the Borrower permitted hereunder.

 

5.4.                              Dispositions
of Assets or Subsidiaries.  Except
pursuant to Section 13 of the Security Agreements and Section 11(c) of the
Debentures, sell, convey, assign, lease, abandon or otherwise transfer or
dispose of, voluntarily or involuntarily, any of its properties or assets,
tangible or intangible (including any spin-offs of any divisions, lines of
business or subsidiaries and also including sale, assignment, discount or other
disposition of accounts, contract rights, chattel paper, equipment or general
intangibles with or without recourse or of capital stock, shares of beneficial
interest, partnership interests or limited liability Borrower interests of a
Subsidiary of the Borrower), except:

 

(a)                                  transactions
involving the sale of inventory or upgrade or exchange of machinery, in either
case, in the ordinary course of business and for usual and ordinary prices;

 

(b)                                 any
sale, transfer or lease of assets by any wholly owned Subsidiary to the
Borrower or another Subsidiary;

 

(c)                                  any
sale, transfer or lease of assets in the ordinary course of business which are
replaced by substitute assets acquired or leased;

 

(d)                                 any
Permitted Transfer (as defined in the Debentures); or

 

22

 

(e)                                  any
sale, transfer or lease of assets, other than those specifically excepted
pursuant to clauses (a) through (d) above, the fair market value of which does
not exceed $100,000 in the aggregate during the term of this Agreement.

 

5.5.                              Dividends
and other Payments.  Declare or
distribute any dividends or any other payments or distributions of cash or
other property to its stockholders or officers or directors (other than in
compliance with existing Borrower stock option plans and salaries in the
ordinary course of business) with respect to its capital stock.

 

ARTICLE VI.

 

CONDITIONS

 

6.1.                              Conditions
Precedent to the Obligations of the Lender to Purchase Securities on the
Closing Date.   The obligation of
the Lender to acquire Securities at the Closing is subject to the satisfaction
or waiver by the Lender, at or before the Closing, of each of the following
conditions:

 

(a)                                  Representations
and Warranties.   The
representations and warranties of the Borrower contained herein shall be true
and correct in all material respects as of the date when made and as of the
Closing as though made on and as of such date;

 

(b)                                 Performance.   The Borrower shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by the Transaction Documents to be performed, satisfied
or complied with by it at or prior to the Closing;

 

(c)                                  No
Injunction.   No statute, rule,
regulation, executive order, decree, ruling or injunction shall have been
enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction that prohibits the consummation of any of
the transactions contemplated by the Transaction Documents;

 

(d)                                 Adverse
Changes.   Since the date of
execution of this Agreement, no event or series of events shall have occurred
that reasonably would be expected to have or result in a Material Adverse
Effect;

 

(e)                                  No
Suspensions of Trading in Common Stock; Listing.   Trading in the Common Stock shall not have been suspended by the
Commission or any Trading Market (except for any suspensions of trading of not
more than one Trading Day solely to permit dissemination of material
information regarding the Borrower) at any time since the date of execution of
this Agreement, and the Common Stock shall have been at all times since such
date listed for trading on an Eligible Market;

 

(f)                                    Nasdaq
Approval.   The Borrower shall have
obtained all necessary approvals, consents and/or waivers of the Nasdaq Stock
Market in order to fully consummate the transactions contemplated by the
Transaction Documents (including the listing of all Underlying Shares); and

 

23

 

6.2.                              Conditions
Precedent to the Obligations of the Borrower to sell Securities on the Closing
Date.   The obligation of the
Borrower to sell Securities at the Closing is subject to the satisfaction or
waiver by the Borrower, at or before the Closing, of each of the following
conditions:

 

(a)                                  Representations
and Warranties.   The
representations and warranties of the Lender contained herein shall be true and
correct in all material respects as of the date when made and as of the Closing
Date as though made on and as of such date;

 

(b)                                 Performance.   The Lender shall have performed, satisfied
and complied in all material respects with all covenants, agreements and
conditions required by the Transaction Documents to be performed, satisfied or
complied with by the Lender at or prior to the Closing;

 

(c)                                  No
Injunction.   No statute, rule,
regulation, executive order, decree, ruling or injunction shall have been
enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction that prohibits the consummation of any of
the transactions contemplated by the Transaction Documents; and

 

6.3.                              Conditions
Precedent to the Obligations of the Lender to Purchase Additional Securities on
the Additional Closing Date.   The
obligation of the Lender to acquire Additional Securities at the Additional
Closing is subject to the satisfaction or waiver by the Lender, at or before
the Additional Closing, of each of the following conditions:

 

(a)                                  Representations
and Warranties.   The
representations and warranties of the Borrower contained in section 3.1(c)-(f)
and (u) shall be true and correct in all material respects with respect to the
Additional Securities and the Underlying Shares issuable upon conversion or
exercise thereunder as of the date when made and as of the Additional Closing
as though made on and as of such date.

 

(b)                                 Performance.   The Borrower shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by the Transaction Documents to be performed, satisfied
or complied with by it at or prior to the Additional Closing;

 

(c)                                  No
Injunction.   No statute, rule,
regulation, executive order, decree, ruling or injunction shall have been
enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction that prohibits the consummation of any of
the transactions contemplated by the Transaction Documents;

 

(d)                                 Adverse
Changes.   Since the date of
execution of this Agreement, no event or series of events shall have occurred
that reasonably would be expected to have or result in a Material Adverse
Effect; and

 

(e)                                  No
Suspensions of Trading in Common Stock; Listing.   Trading in the Common Stock shall not have been suspended by the
Commission or any Trading Market (except for any suspensions of trading of not
more than one Trading Day each solely to permit dissemination of material
information regarding the Borrower) at any time since the date

 

24

 

of execution of this Agreement,
and the Common Stock shall have been at all times since such date listed for
trading on an Eligible Market.

 

(f)                                    MIA
Transaction.  The Borrower shall
have presented the Lender with evidence satisfactory to the Lender that it has
received an aggregate amount equal to no less than $2,500,000 pursuant to a
transaction with Medical Industries America, Inc. pursuant to that certain term
sheet dated August 15, 2003 between the Borrower and Medical Industries
America, Inc.

 

(g)                                 Stockholder
Approval.  The stockholders of the
Borrower shall have voted in favor of the Proposal.

 

(h)                                 Timing.        The Additional Closing
Shall occur no later than December 31, 2003.

 

6.4.                              Conditions
Precedent to the Obligations of the Borrower to sell Additional Securities on
the Additional Closing Date.   The
obligation of the Borrower to sell Additional Securities at the Additional
Closing is subject to the satisfaction or waiver by the Borrower, at or before
the Additional Closing, of each of the following conditions:

 

(a)                                  Representations
and Warranties.   The
representations and warranties of the Lender contained herein shall be true and
correct in all material respects as of the date when made and as of the
Additional Closing Date as though made on and as of such date;

 

(b)                                 Performance.   The Lender shall have performed, satisfied
and complied in all material respects with all covenants, agreements and
conditions required by the Transaction Documents to be performed, satisfied or
complied with by the Lender at or prior to the Additional Closing; and

 

(c)                                  No
Injunction.   No statute, rule,
regulation, executive order, decree, ruling or injunction shall have been
enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction that prohibits the consummation of any of
the transactions contemplated by the Transaction Documents.

 

(d)                                 Stockholder
Approval.  The stockholders of the
Borrower shall have voted in favor of the Proposal.

 

ARTICLE VII.

MISCELLANEOUS

 

7.1.                              Termination.   This Agreement may be terminated by the
Borrower or any Lender, by written notice to the other parties, if the Closing
has not been consummated by the 20th Trading Day following the date of this
Agreement; provided that no such termination will affect the right of
any party to sue for any breach by the other party (or parties).

 

25

 

7.2.                              Fees
and Expenses.   At the Closing, the
Borrower shall pay to Lender Counsel $20,000 in connection with the preparation
of the Transaction Documents, it being understood that Lender Counsel has not
rendered any legal advice to the Borrower in connection with the transactions
contemplated hereby and that the Borrower has relied for such matters on the
advice of its own counsel.  Except as
specified in the immediately preceding sentence and in the Registration Rights
Agreement, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of the Transaction Documents. 
The Borrower shall pay all stamp and other taxes and duties levied in
connection with the sale of the Securities.

 

7.3.                              Entire
Agreement.   The Transaction
Documents, together with the Exhibits and Schedules thereto, contain the entire
understanding of the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings, oral or written, with
respect to such matters, which the parties acknowledge have been merged into
such documents, exhibits and schedules. At or after the Closing, and without
further consideration, the Borrower will execute and deliver to the Lender such
further documents as may be reasonably requested in order to give practical
effect to the intention of the parties under the Transaction Documents.

 

7.4.                              Notices.   Any and all notices or other communications
or deliveries required or permitted to be provided hereunder shall be in
writing and shall be deemed given and effective on the earliest of (a) the date
of transmission, if such notice or communication is delivered via facsimile at
the facsimile number specified in this Section prior to 6:30 p.m. (New York
City time) on a Trading Day, (b) the next Trading Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile number specified in this Section on a day that is not a Trading Day
or later than 6:30 p.m. (New York City time) on any Trading Day, (c) the
Trading Day following the date of mailing, if sent by U.S. nationally
recognized overnight courier service, or (d) upon actual receipt by the party to
whom such notice is required to be given. 
The address for such notices and communications shall be as follows:

 

If to the Borrower:                                               Aerogen,
Inc.

2071 Stierlin Court

Mountain View, CA 94043

Facsimile No.: (650) 864-7433

Attn: Chief Financial Officer

 

With a copy to:

 

Cooley Godward LLP

Five Palo Alto Square

3000 El Camino Real

Palo Alto, CA 94306

Facsimile No.: (650) 849-7400

Attn: Robert J. Brigham, Esq.

 

26

 

If to the Lender:                                                           To
the address set forth under the Lender’s name on the

signature pages attached hereto.

 

or such other address as may be designated in
writing hereafter, in the same manner, by such Person.

 

7.5.                              Amendments;
Waivers.   No provision of this
Agreement may be waived or amended except in a written instrument signed, in
the case of an amendment, by the Borrower and the Lender or, in the case of a
waiver, by the party against whom enforcement of any such waiver is sought. No
waiver of any default with respect to any provision, condition or requirement
of this Agreement shall be deemed to be a continuing waiver in the future or a
waiver of any subsequent default or a waiver of any other provision, condition
or requirement hereof, nor shall any delay or omission of either party to
exercise any right hereunder in any manner impair the exercise of any such
right.

 

7.6.                              Construction.   The headings herein are for convenience
only, do not constitute a part of this Agreement and shall not be deemed to
limit or affect any of the provisions hereof. The language used in this
Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied
against any party.  This Agreement shall
be construed as if drafted jointly by the parties, and no presumption or burden
of proof shall arise favoring or disfavoring any party by virtue of the
authorship of any provisions of this Agreement or any of the Transaction
Documents.

 

7.7.                              Successors
and Assigns.   This Agreement shall
be binding upon and inure to the benefit of the parties and their successors
and permitted assigns. The Borrower may not assign this Agreement or any rights
or obligations hereunder without the prior written consent of the Lender. The
Lender may assign its rights under this Agreement to any Person to whom the
Lender assigns or transfers any Securities.

 

7.8.                              No
Third-Party Beneficiaries.   This
Agreement is intended for the benefit of the parties hereto and their
respective successors and permitted assigns and is not for the benefit of, nor
may any provision hereof be enforced by, any other Person, except that each
Related Person is an intended third party beneficiary of Section 4.12 and may
enforce the provisions of such Section directly against the Borrower.

 

7.9.                              Governing
Law.  All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by and construed and enforced in accordance with the internal laws
of the State of New York, without regard to the principles of conflicts of law
thereof.  Each party agrees that all
Proceedings concerning the interpretations, enforcement and defense of the
transactions contemplated by this Agreement and any other Transaction Documents
(whether brought against a party hereto or its respective Affiliates, employees
or agents) shall be commenced exclusively in the state and federal courts
sitting in the City of New York, Borough of Manhattan (the “New York Courts”).  Each party hereto hereby irrevocably submits
to the exclusive jurisdiction of the New York Courts for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein (including with respect to the
enforcement of the any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any

 

27

 

Proceeding, any claim that it
is not personally subject to the jurisdiction of any such New York Court, or
that such Proceeding has been commenced in an improper or inconvenient
forum.  Each party hereto hereby
irrevocably waives personal service of process and consents to process being
served in any such Proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such party
at the address in effect for notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof.  Nothing contained herein shall
be deemed to limit in any way any right to serve process in any manner
permitted by law.  Each party hereto
hereby irrevocably waives, to the fullest extent permitted by applicable law,
any and all right to trial by jury in any legal proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby.  If either party shall commence a Proceeding
to enforce any provisions of a Transaction Document, then the prevailing party
in such Proceeding shall be reimbursed by the other party for its attorney’s
fees and other costs and expenses incurred with the investigation, preparation
and prosecution of such Proceeding.

 

7.10.                        Survival.   The representations, warranties, agreements
and covenants contained herein shall survive the Closing and the Additional
Closing (if any) and the delivery, exercise and/or conversion of the
Securities, as applicable.

 

7.11.                        Execution.   This Agreement may be executed in two or
more counterparts, all of which when taken together shall be considered one and
the same agreement and shall become effective when counterparts have been
signed by each party and delivered to the other party, it being understood that
both parties need not sign the same counterpart. In the event that any
signature is delivered by facsimile transmission, such signature shall create a
valid and binding obligation of the party executing (or on whose behalf such
signature is executed) the same with the same force and effect as if such
facsimile signature page were an original thereof.

 

7.12.                        Severability.   If any provision of this Agreement is held
to be invalid or unenforceable in any respect, the validity and enforceability
of the remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefore, and upon
so agreeing, shall incorporate such substitute provision in this Agreement.

 

7.13.                        Rescission
and Withdrawal Right.  
Notwithstanding anything to the contrary contained in (and without
limiting any similar provisions of) the Transaction Documents, whenever the
Lender exercises a right, election, demand or option under a Transaction
Document and the Borrower does not timely perform its related obligations
within the periods therein provided, then the Lender may rescind or withdraw,
in its sole discretion from time to time upon written notice to the Borrower,
any relevant notice, demand or election in whole or in part without prejudice
to its future actions and rights.

 

7.14.                        Replacement
of Securities.   If any certificate
or instrument evidencing any Securities is mutilated, lost, stolen or
destroyed, the Borrower shall issue or cause to be issued in exchange and
substitution for and upon cancellation thereof, or in lieu of and substitution
therefore, a new certificate or instrument, but only upon receipt of evidence
reasonably satisfactory to the Borrower of such loss, theft or destruction and
customary and reasonable indemnity, if requested. The applicants for a new
certificate or instrument under such

 

28

 

circumstances shall also pay
any reasonable third-party costs associated with the issuance of such
replacement Securities.

 

7.15.                        Remedies.   In addition to being entitled to exercise
all rights provided herein or granted by law, including recovery of damages,
the Lender and the Borrower will be entitled to specific performance under the
Transaction Documents. The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations described in the foregoing sentence and hereby agrees to waive in
any action for specific performance of any such obligation the defense that a
remedy at law would be adequate.

 

7.16.                        Payment
Set Aside.   To the extent that the
Borrower makes a payment or payments to the Lender pursuant to any Transaction
Document or the Lender enforces or exercises its rights thereunder, and such
payment or payments or the proceeds of such enforcement or exercise or any part
thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside, recovered from, disgorged by or are required to be
refunded, repaid or otherwise restored to the Borrower, a trustee, receiver or
any other person under any law (including, without limitation, any bankruptcy
law, state or federal law, common law or equitable cause of action), then to
the extent of any such restoration the obligation or part thereof originally
intended to be satisfied shall be revived and continued in full force and
effect as if such payment had not been made or such enforcement or setoff had
not occurred.

 

7.17.                        Adjustments
in Share Numbers and Prices.   In
the event of any stock split, subdivision, dividend or distribution payable in
shares of Common Stock (or other securities or rights convertible into, or
entitling the holder thereof to receive directly or indirectly shares of Common
Stock), combination or other similar recapitalization or event occurring after
the date hereof, each reference in this Agreement to a number of shares or a
price per share shall be amended to appropriately account for such event.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK 

SIGNATURE PAGES FOLLOW]

 

29

 

IN WITNESS WHEREOF, the parties hereto have
caused this Loan and Securities Purchase Agreement to be duly executed by their
respective authorized signatories as of the date first indicated above.

 

	
  AEROGEN, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
  /s/ Jane S. Shaw

  	
   

  
	
   

  	
  Name:

  	
  Jane S. Shaw

  	
   

  
	
   

  	
  Title:

  	
  Chief Executive Officer

  	
   

  

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE OF LENDER FOLLOW]

 

30

 

	
   

  	
  SF CAPITAL
  PARTNERS, LTD.

  
	
   

  	
   

  
	
   

  	
  By:

  	
    /s/ Brian H. Davidson

  
	
   

  	
   

  	
  Name:

  	
  Brian H. Davidson

  
	
   

  	
   

  	
  Title:

  	
  Authorized Signatory

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address for Notice:

  
	
   

  	
  c/o Staro Asset Management, LLC

  
	
   

  	
  3600 South Lake Drive

  
	
   

  	
  St. Francis, Wisconsin 53235

  
	
   

  	
  Facsimile No.:  (414) 294-7700

  
	
   

  	
  Attn.:  Brian H. Davidson

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  With a copy to:

  
	
   

  	
  Bryan Cave LLP

  
	
   

  	
  1290 Avenue of the Americas

  
	
   

  	
  New York, NY  10104

  
	
   

  	
  Facsimile No.: (212) 541-4630 and (212) 541-1432

  
	
   

  	
  Attn:  Eric L. Cohen, Esq.

  

 

31

 

Exhibit A

 

[DEBENTURE]

 

[The Debenture is filed separately as Exhibit
10.14 of the Company’s

Current Report on Form 8-K, filed on October
7, 2003.]

 

 

Exhibit B

 

[REGISTRATION RIGHTS AGREEMENT]

 

[The Registration Rights Agreement is filed
separately as Exhibit 10.15 of the Company’s

Current Report on Form 8-K, filed on October 7, 2003.]

 

 

Exhibit C

 

[WARRANT]

 

[The Warrant is filed separately as Exhibit
10.16 of the Company’s

Current Report on Form 8-K, filed on October 7, 2003.]

 

 

Exhibit F

 

SECURITY
AGREEMENT

 

SECURITY AGREEMENT (the “Agreement”), dated as of September
    , 2003, among Aerogen, Inc., a Delaware corporation
(the “Borrower”), and the lenders signatory hereto (each lender
including their respective successors, endorsees, transferees and assigns, a “Secured
Party”, and collectively, the “Secured Parties”).

 

W I T N E S S
E T H:

 

WHEREAS, pursuant to the Loan and Securities
Purchase Agreement (“Loan Agreement”), dated the date hereof between the
Borrower and the parties thereto, the Secured Parties have agreed to extend
certain loans to the Borrower which shall be evidenced by the issuance on one
or more occasions to such Secured Parties of the Borrower’s Secured Convertible
Debentures, due December 31, 2003 in the aggregate principal amount of up to
$2,000,000 (the “Debentures”).

 

WHEREAS, in order to induce the Secured
Parties to enter into the contemplated transactions, the Borrower has agreed to
execute and deliver to the Secured Parties this Agreement for the benefit of
the Secured Parties and a separate agreement granting to them a first priority
security interest in the Collateral (as defined herein), to secure the prompt
payment, performance and discharge in full of all of the Borrower’s obligations
under this Agreement and the Debentures.

 

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

 

1.                                       Certain Definitions.  As used in this Agreement, the following
terms shall have the meanings set forth in this Section 1.  Terms used but not otherwise defined in this
Agreement that are defined in Article 9 of the UCC (such as “general
intangibles” and “proceeds”) shall have the respective meanings
given such terms in Article 9 of the UCC.

 

                                                (a)                                  “Agent” means
SF Capital Partners, Ltd., as agent for each of the Secured Parties pursuant to
this Agreement, or such other Person as shall have been subsequently appointed
as a successor agent pursuant to this Agreement.

 

                                                (b)                                 “Collateral”
means the collateral in which the Secured Party is granted a security interest
by this Agreement and which shall include the following, whether presently
owned or existing or hereafter acquired or coming into existence, and all
additions and accessions thereto and all substitutions and replacements
thereof, and all proceeds, products and accounts thereof, including, without
limitation, all proceeds from the sale or transfer of the Collateral and of
insurance covering the same and of any tort claims in connection therewith:

 

 

(i)                                     All
Goods of the Company, including, without limitations, all machinery, equipment,
computers, motor vehicles, trucks, tanks, boats, ships, appliances, furniture,
special and general tools, fixtures, test and quality control devices and other
equipment of every kind and nature and wherever situated, together with all
documents of title and documents representing the same, all additions and
accessions thereto, replacements therefor, all parts therefor, and all substitutes
for any of the foregoing and all other items used and useful in connection with
the Company’s businesses and all improvements thereto (collectively, the “Equipment”);
and

 

(ii)                                  All
Inventory of the Company; and

 

(iii)                               All
of the Company’s contract rights and general intangibles, including, without
limitation, all partnership interests, stock or other securities, licenses,
distribution and other agreements, computer software development rights,
leases, franchises, customer lists, quality control procedures, grants and
rights, goodwill, trademarks, service marks, trade styles, trade names,
patents, patent applications, copyrights, deposit accounts, and income tax
refunds (collectively, the “General Intangibles”); and

 

(iv)                              All
Receivables of the Company including all insurance proceeds, and rights to
refunds or indemnification whatsoever owing, together with all instruments, all
documents of title representing any of the foregoing, all rights in any
merchandising, goods, equipment, motor vehicles and trucks which any of the
same may represent, and all right, title, security and guaranties with respect
to each Receivable, including any right of stoppage in transit; and

 

(v)                                 All
of the Company’s documents, instruments and chattel paper, files, records,
books of account, business papers, computer programs and the products and
proceeds of all of the foregoing Collateral set forth in clauses (i)-(iv)
above.

 

                Notwithstanding anything to the contrary in the foregoing, at the time
of closing of the MIA transaction, the term “Collateral” shall no longer
include the Equipment needed to manufacture/assemble the OnQ Aerosol Generator,
as specifically set forth on Schedule B hereto, all of which are to be
conveyed pursuant to Borrower’s agreement with Medical Industries America, Inc.
consistent with the term sheet signed on August 15, 2003 (collectively, the “MIA
Assets”).

 

                Notwithstanding anything to the
contrary in the foregoing, the grant
of a security interest as provided herein shall not extend to, and the term “Collateral” shall not include, to the
extent such exclusion does not result in a Material Adverse Effect (as defined
in the Loan Agreement), any immaterial Contract, Instrument or Chattel Paper in
which the Borrower has any right, title or interest if and to the extent such
Contract, Instrument or Chattel Paper includes a provision containing a
restriction on assignment such that the creation of a security interest in the

 

2

 

right, title or interest of the
Borrower therein would be prohibited and would, in and of itself, cause or
result in a default thereunder enabling another person party to such Contract,
Instrument or Chattel Paper to enforce any remedy with respect thereto.

 

                                                (c)                                  “Obligations”
means all of the Borrower’s obligations under this Agreement and the
Debentures, in each case,
whether now or hereafter existing, voluntary or involuntary, direct or
indirect, absolute or contingent, liquidated or unliquidated, whether or not
jointly owed with others, and whether or not from time to time decreased or
extinguished and later increased, created or incurred, as such obligations may
be amended, supplemented, converted, extended or modified from time to time
pursuant to the terms of this Agreements or the Debentures, as applicable.

 

                                                (d)                                 “Permitted
Indebtedness” means:

 

(i)                                     Indebtedness
of Borrower in favor of the Secured Parties arising under this Agreement or any
other Transaction Document;

 

(ii)                                  Existing
Indebtedness as set forth in the Borrower’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2002 (including any extensions or renewals
thereof, provided, there is no increase in the principal amount thereof
or other significant change in the terms thereof);

 

(iii)                               Subordinated
debt in an aggregate principal amount which does not exceed $1,000,000, provided,
that it shall be a precondition of the Lenders’ consent to such debt that the
Borrower and the lender thereunder agree to make the repayment of such debt
subject to subordination provisions including, without limitation, stand-still
provisions, acceptable to the Lenders in their sole discretion;

 

(iv)                              Indebtedness
evidenced by Capital Lease Obligations;

 

(v)                                 Incursion
or payment of trade payables, licensing fees and bonds to secure work
contracts, in each case, incurred or paid in the ordinary course of business;
or

 

(vi)                              Indebtedness
of the Borrower with respect to letter of credit issued by Silicon Valley Bank
in favor of the Borrower’s landlord and described on Schedule A hereto.

 

                                                (e)                                  “Permitted Liens”
means the following:

 

(i)                                     Any
liens existing on the date hereof and specifically disclosed in the Schedule A
hereto and liens in favor of the Secured Parties;

 

(ii)                                  liens
for taxes, fees, assessments or other governmental charges or levies, either
not delinquent or being contested in good faith by appropriate proceedings and
for which Borrower maintains adequate reserves;

 

3

 

(iii)                               liens
(i) upon or in any Equipment or software acquired or held by Borrower or
any Subsidiary to secure the purchase price of such Equipment or software or
indebtedness incurred solely for the purpose of financing the acquisition of
such Equipment or software, including the financing of the costs of shipping, taxes
and installation, or (ii) existing on such Equipment or software at the
time of its acquisition, provided, in each case, that the lien is confined
solely to the property so acquired and improvements thereon, and the proceeds
of such Equipment or software;

 

(iv)                              liens
to secure payment of workers’ compensation, employment insurance, old age
pensions, social security or other like obligations incurred in the ordinary
course of business;

 

(v)                                 liens
incurred in connection with the extension, renewal or refinancing of the
indebtedness secured by liens of the type described in clauses (i) through
(iii) above, provided that any extension, renewal or replacement lien shall be
limited to the property encumbered by the existing lien and the principal
amount of the indebtedness being extended, renewed or refinanced does not
increase;

 

(vi)                              carriers’,
warehousemen’s, mechanic’s, materialmen’s, repairmen’s or other like liens
arising in the ordinary course of business and securing obligations that are
not due and payable or which are being contested in good faith for which
adequate reserves have been established; or

 

(vii)                           pledges
and deposits made in the ordinary course of business in compliance with
workmen’s compensation, unemployment insurance and other social security laws
or regulations.

 

                                                (f)                                    “Permitted
Transfer” means any conveyance, sale, lease, transfer, license or
disposition by Borrower of:

 

(i)                                     inventory
or upgrade or exchange of machinery, in either case, in the ordinary course of
business and for usual and ordinary prices;

 

(ii)                                  any
assets in the ordinary course of business which are replaced by substitute
assets acquired or leased; or

 

(iii)                               licenses
and similar arrangements for the use of the property of Borrower in the
ordinary course of business;

 

(iv)                              any
assets for fair market value with prior written consent of the Secured Parties,
not to be unreasonably withheld; or

 

(v)                                 the
MIA Assets pursuant to the terms of the MIA term sheet described in Section
6.3(f) of the Loan Agreement.

 

                                                (g)                                 “UCC” means the
Uniform Commercial Code and/or any other applicable law of each jurisdiction in
which the Borrower is incorporated or

 

4

 

organized (including, without limitation the
State of Delaware and the State of California) and any jurisdiction as to any
Collateral located therein.

 

2.                                       Grant of
Security Interest. 
As an inducement for the Secured Parties to enter into the contemplated
transactions and to secure the complete and timely payment, performance and
discharge in full, as the case may be, of all of the Obligations, the Borrower
hereby, unconditionally and irrevocably, pledges, grants and hypothecates to
the Secured Parties, a continuing first priority security interest in, and a
first lien upon  and a right of set-off
against all of the Borrower’s right, title and interest of whatsoever kind and
nature in and to the Collateral (the “Security Interest”).

 

3.                                       Representations, Warranties, Covenants and Agreements of the Borrower.  The Borrower represents and
warrants to, and covenants and agrees with, each of the Secured Parties as
follows:

 

(a)                                  The
Borrower has the requisite corporate power and authority to enter into this
Agreement and to otherwise carry out its obligations thereunder.  The execution, delivery and performance by
the Borrower of this Agreement and the filings contemplated therein have been
duly authorized by all necessary action on the part of the Borrower and no
further action is required by the Borrower.

 

(b)                                 Except
for the Security Interest granted hereunder and Permitted Liens, the Borrower
is the sole owner of its rights in the Collateral, free and clear of any liens,
security interests or encumbrances, and is fully authorized to grant the
Security Interest in and to pledge the Collateral.  There is not on file in any governmental or regulatory authority,
agency or recording office an effective financing statement, security agreement
or transfer or any notice of any of the foregoing (other than those that have
been filed in favor of the Secured Parties pursuant to this Agreement or in
connection with Permitted Liens) covering or affecting any of the
Collateral.  So long as this Agreement
shall be in effect, the Borrower shall not execute and shall not authorize the
filing of  in any such office or agency
any such financing statement or other document or instrument (except to the
extent filed or recorded in favor of the Secured Parties pursuant to the terms
of this Agreement or in connection with Permitted Liens) without the consent of
the Secured Parties.

 

(c)                                  The
Company represents and warrants that it has no place of business or offices
where its respective books of account and records are kept (other than
temporarily at the offices of its attorneys or accountants) or places where
Collateral is stored or located, except as set forth on Schedule A
attached hereto.

 

(d)                                 Borrower
has no knowledge of any claim that any of the Collateral or the Borrower’s use
of any Collateral violates the rights of any third party.  There has been no adverse decision of which
the Borrower is aware as to the Borrower’s exclusive (or nonexclusive, as the
case may be) rights to use the Collateral in any jurisdiction, and, to the
knowledge of the Borrower there is no proceeding involving said rights pending
or threatened before any court, judicial body, administrative or regulatory
agency, arbitrator or other governmental authority.

 

5

 

(e)                                  The
Borrower shall at all times maintain its books of account and records relating
to the Collateral at its principal place of business and its Collateral at the
locations set forth on Schedule A attached hereto and may not relocate
such books of account and records unless it delivers to each of the Secured
Parties at least 30 days prior to such relocation (i) written notice of such
relocation and the new location thereof (which must be within the United
States) and (ii) evidence that appropriate financing statements and other
necessary documents have been filed and recorded and other steps have been
taken to perfect the Security Interest to create in favor of each of the
Secured Parties a valid, perfected and continuing first priority lien in the
Collateral, subject to Permitted Liens.

 

(f)                                    This
Agreement creates in favor of each of the Secured Parties a valid security
interest in the Collateral, securing the payment and satisfaction of the
Obligations, and, upon making the filings described in the immediately
following sentence, a perfected first priority security interest in such
Collateral that is senior to all hereinafter created security interests, other
than Permitted Liens.  Except for the
filing of financing statements on Form UCC-1 under the UCC with the
jurisdictions indicated in Schedule A, attached hereto, and
registration of Security Interest in Copyrights with the Register of Copyrights
at the United States Copyright Office and, as to the Borrower’s foreign
intellectual property, making other filings as may be required under the
applicable foreign juridisctions, no authorization or approval of or filing
with or notice to any governmental authority or regulatory body is required
either: (i) for the grant by the Borrower of, or the effectiveness of, the
Security Interest granted hereby or for the execution, delivery and performance
of this Agreement by the Borrower or (ii) for the perfection of or exercise by
the Secured Parties of its rights and remedies hereunder.

 

(g)                                 On
the date of execution of this Agreement, the Borrower authorizes each Secured
Party to file one or more financing statements under the UCC with respect to
the Security Interest for filing with the jurisdictions indicated on Schedule A,
attached hereto and in such other jurisdictions as the Secured Parties deem
necessary.

 

(h)                                 The
execution, delivery and performance of this Agreement does not conflict with or
cause a breach or default, or an event that with or without the passage of time
or notice, shall constitute a breach or default, under any agreement to which
the Borrower is a party or by which the Borrower is bound.  No consent (including, without limitation,
from stock holders or creditors of the Borrower) is required for the Borrower
to enter into and perform its obligations hereunder, other than consents
already obtained by the Borrower.

 

(i)                                     The
Borrower shall at all times maintain the liens and Security Interest provided
for hereunder as valid and perfected first priority liens and security
interests in the Collateral (subject to Permitted Liens) in favor of each of
the Secured Parties and insure that such liens and Security Interests are and
remain senior to all not existing and hereafter created security interests and
liens, other than Permitted Liens.  The
Borrower shall safeguard and protect all Collateral.  The Borrower hereby agrees to defend the same against any and all
persons.  At the request of the Agent
and/or Secured Parties, the Borrower will sign and deliver to the Secured
Parties at any time or from time to time one or more financing statements
pursuant to the UCC in form reasonably satisfactory to the Secured Parties and
will pay the cost of filing the same in all public offices wherever filing is,
or is deemed by the Secured Parties to be, necessary to effect the rights and
obligations provided for herein. Without limiting the

 

6

 

generality of the foregoing,
the Borrower shall pay all fees, taxes and other amounts necessary to maintain
the Security Interest hereunder, and the Borrower shall obtain and furnish to
the Secured Parties from time to time, upon demand, such releases and/or
subordinations of claims and liens which may be required to maintain the
priority of the Security Interest hereunder.

 

(j)                                     The
Borrower will not allow any material Collateral to be abandoned, forfeited or
dedicated to the public without the prior written consent of the Secured
Parties.  Except pursuant to Section 13
hereof and other than Permitted Transfers, the Borrower will not transfer,
pledge, hypothecate, encumber, license, sell or otherwise dispose of any of the
Collateral without the prior written consent of the Secured Parties.

 

(k)                                  The
Borrower shall keep and preserve its Equipment, Inventory and other tangible
Collateral in good condition, repair and order, and shall not knowingly operate
or locate any such Collateral (or cause to be operated or located) in any area
excluded from insurance coverage, unless, in each case, where the failure to
comply with the foregoing provisions does not result in an adverse effect on
the value of the Collateral or on the Secured Parties’ security interest
therein.

 

(l)                                     The
Borrower shall, within ten (10) days of obtaining knowledge thereof, advise the
Agent, in sufficient detail, of any substantial change in the Collateral, and
of the occurrence of any event which would have a material adverse effect on
the value of the Collateral or on the Secured Parties’ security interest
therein.

 

(m)                               The
Borrower shall promptly execute and deliver to the Secured Party such further
deeds, mortgages, assignments, security agreements, financing statements or
other instruments, documents, certificates and assurances and take such further
action as necessary to perfect, protect or enforce its security interest in the
Collateral including, without limitation, the execution and delivery of a
separate security agreement with respect to the Company’s intellectual property
(“Intellectual Property Security Agreement”) in which the Secured Party
has been granted a security interest hereunder, substantially in a form
acceptable to the Secured Party, which Intellectual Property Security
Agreement, other than as stated therein, shall be subject to all of the terms
and conditions hereof.

 

(n)                                 The
Borrower shall permit the Secured Parties and its representatives and agents
upon prior written consent and at the expense of the Secured Parties to inspect
the Collateral at any time during normal business hours, and to make copies of
records pertaining to any material item of Collateral as may be reasonably
requested by the Secured Parties from time to time.

 

(o)                                 The
Borrower will take all steps it considers reasonably necessary to diligently
pursue and seek to preserve, enforce and collect any rights, claims, causes of
action and accounts receivable in respect of the Collateral.

 

(p)                                 The
Borrower shall promptly notify the Agent in sufficient detail upon becoming
aware of any attachment, garnishment, execution or other legal process levied
against any Collateral and of any other information received by the Borrower
that reasonably would be

 

7

 

expected to substantially
affect the value of the Collateral, the Security Interest or the rights and
remedies of the Secured Parties hereunder.

 

(q)                                 The
Borrower shall not use or permit any Collateral to be used unlawfully or in
violation of any provision of this Agreement  or
any applicable statute, regulation or ordinance or any policy of insurance
covering the Collateral where violation is reasonably likely to have a material
adverse effect on the Secured Parties’ rights in the Collateral or Secured
Parties’ ability to foreclose on the Collateral.

 

(r)                                    Other
than Permitted Liens, the Borrower shall not grant to any person or entity any
rights or interest in or to any of the Collateral that are senior to, or pari
passu with, the Secured Parties.

 

(s)                                  The
Borrower shall notify the Agent of any change in the Borrower’s name, identity,
chief place of business, chief executive office or residence within 30 days of
such change.

 

4.                                       Defaults.  The following
events shall be “Events of Default”:

 

(a)                                  The
occurrence of an Event of Default (as defined in the Debentures) under the
Debentures which shall not have been cured within 30 days, to the satisfaction
of the Agent;

 

(b)                                 Any
material representation or warranty of the Borrower in this Agreement or in the
Intellectual Property Security Agreement, shall prove to have been incorrect in
any material respect when made; and

 

(c)                                  The
failure by the Borrower to observe or perform any of its obligations hereunder
or in the Intellectual Property Security Agreement, for ten (10) Trading Days
(as defined in the Debentures) after receipt by the Borrower of written notice
of such failure from the Secured Parties.

 

5.                                       Duty To Hold In Trust.  Upon the occurrence and during the
continuation of any Event of Default, the Borrower shall, upon receipt by it of
any revenue, income or other sums subject to the Security Interest, or of any
check, draft, note, trade acceptance or other instrument evidencing an
obligation to pay any such sum, hold the same in trust for the Secured Parties
and shall upon request by the Secured Parties forthwith endorse and transfer
any such sums or instruments, or both, to the Secured Parties for application
to the satisfaction of the Obligations.

 

6.                                       Rights and Remedies Upon Default.  Upon the occurrence and
during the continuation of any Event of Default, the Agent (on behalf of, and
for the benefit of itself and each Secured Party) shall have the right to
exercise all of the remedies conferred hereunder, under the Debentures, and the
Agent and the Secured Parties shall have all the rights and remedies of a
secured party under the UCC.  Without
limitation, the Secured Parties shall have the following rights and powers upon
and during the continuance of an Event of Default:

 

(a)                                  The
Agent shall have the right to take possession of all tangible manifestations or
embodiments of the Collateral and, for that purpose, without breaching the

 

8

 

peace enter, with the aid and
assistance of any person previously identified to, and approved in writing by,
the Borrower, any premises where the Collateral, or any part thereof, is placed
and remove the same, and the Borrower shall assemble the Collateral and make it
available to the Agent at the Borrower’s premises.

 

(b)                                 The
Agent shall have the right to assign, sell, or otherwise dispose of and deliver
all or any part of the Collateral, at public or private sale or otherwise,
either with or without special conditions or stipulations, for cash or on
credit or for future delivery, in such parcel or parcels and at such time or
times and at such place or places, and upon such terms and conditions as the
Agent may deem commercially reasonable, all without (except as shall be
required by applicable statute and cannot be waived) advertisement or demand
upon or notice to the Borrower or right of redemption of the Borrower, which
are hereby expressly waived.  Upon each
such sale, assignment or other transfer of Collateral, the Agent may, unless
prohibited by applicable law which cannot be waived, purchase all or any part
of the Collateral being sold, free from and discharged of all trusts, claims,
right of redemption and equities of the Borrower, which are hereby waived and
released.

 

(c)                                  The
Agent may sublicense or, to the same extent the Borrower is permitted by law
and contract to do so, whether on an exclusive or non-exclusive basis, any of
the Collateral throughout the world for such period, on such conditions and in
such manner as the Agent shall, in its reasonable discretion, determine.

 

(d)                                 The
Agent may (without assuming any obligations or liabilities thereunder), at any
time, enforce (and shall have the exclusive right to enforce) against licensee
or sublicensee all rights and remedies of the Borrower in, to and under any
license agreement with respect to such Collateral, and take or refrain from
taking any action thereunder.

 

(e)                                  The
Agent may, in order to implement the assignment, license, sale or other
disposition of any of the Collateral pursuant to this Section, pursuant to the
authority provided for in Section 11, execute and deliver on behalf of the
Borrower one or more instruments of assignment of the Collateral in form
suitable for filing, recording or registration in any jurisdictions as the
Secured Parties may determine advisable.

 

(f)                                    In
the event that any Secured Party shall recover from the Borrower or the
Collateral more than its pro rata share of the Obligations owed to all Secured
Parties hereunder, whether by agreement, understanding or arrangement with the
Borrower or any other Person, set off or other means, such Secured Party shall
immediately deliver or pay over to the other Secured Parties their pro rata
portion of any such recovery in the form received.

 

(g)                                 Agent
may, at any time or times that an Event of Default exists or has occurred and
is continuing: (i) notify any or all accounts of the Borrower (“Accounts”) that
such Accounts have been assigned to Secured Parties and that Secured Parties
have a security interest therein and Agent may direct any or all accounts
Borrower to make payment of accounts directly to Secured Parties, (ii) extend
the time of payment of, compromise, settle or adjust for cash, credit, return
of merchandise or otherwise, and upon any terms or conditions, any and all Accounts
or other obligations included in the Collateral and thereby discharge or
release the account debtor or any other party or parties in any way liable for
payment thereof without

 

9

 

affecting any of the
Obligations, (iii) demand, collect or enforce payment of any Accounts or such
other obligations, but without any duty to do so, and Agent shall not be liable
for its failure to collect or enforce the payment thereof nor for the
negligence of its agents or attorneys with respect thereto and (iv) take
whatever other action Agent may deem necessary or desirable for the protection
of its interests.

 

7.                                       Applications of Proceeds; Expenses.  (a)  The proceeds
of any such sale, sublicense or other disposition of the Collateral hereunder
shall be applied first, to the expenses of retaking, holding, storing,
processing and preparing for sale, selling, and the like (including, without
limitation, any taxes, fees and other costs incurred in connection therewith)
of the Collateral, to the reasonable attorneys’ fees and expenses incurred by
the Agent and/or Secured Parties in enforcing its rights hereunder and in
connection with collecting, storing and disposing of the Collateral, and then
to satisfaction of the Obligations, and to the payment of any other amounts
required by applicable law, after which the Secured Parties shall pay to the
Borrower any surplus proceeds.  If, upon
the sale, license or other disposition of the Collateral, the proceeds thereof
are insufficient to pay all amounts to which the Secured Parties are legally
entitled, the Borrower will be liable for the deficiency.  To the extent permitted by applicable law,
the Borrower waives all claims, damages and demands against the Secured Parties
arising out of the repossession, removal, retention or sale of the Collateral,
unless due to the gross negligence or willful misconduct of the Agent and/or
Secured Parties.

 

(b)                                 The
Borrower agree to pay all out-of-pocket fees, costs and expenses reasonably
incurred in connection with any filing required hereunder, including, without
limitation, any financing statements, continuation statements, partial releases
and/or termination statements related thereto or any expenses of any searches
reasonably required by the Agent.  The
Borrower shall also pay all other claims and charges which in the reasonable
opinion of the Agent and/or Secured Parties would reasonably be expected to
prejudice, imperil or otherwise affect the Collateral or the Security Interest
therein.  The Borrower will also, upon
demand, pay to the Agent and/or Secured Parties the amount of any and all
reasonable expenses, including the reasonable fees and expenses of its counsel
and of any experts and agents, which the Agent and/or Secured Parties may incur
in connection with the custody or preservation of, or the sale of, collection
from, or other realization upon, any of the Collateral.

 

8.                                       Responsibility for Collateral.  The Borrower assumes all
liabilities and responsibility in connection with all Collateral, and the
obligations of the Borrower hereunder or under the Debentures shall in no way
be affected or diminished by reason of the loss, destruction, damage or theft
of any of the Collateral or its unenforceability or unavailability for any
reason.

 

9.                                       Security Interest Absolute.  All rights of the Secured Parties and all
Obligations of the Borrower hereunder, shall be absolute and unconditional,
irrespective of: (a) any lack of validity or enforceability of this Agreement,
the Debentures or any agreement entered into in connection with the foregoing,
or any portion hereof or thereof; (b) any change in the time, manner or place
of payment or performance of, or in any other term of, all or any of the
Obligations, or any other amendment or waiver of or any consent to any
departure from the Debentures or any other agreement entered into in connection
with the foregoing; (c) any exchange, release or nonperfection of any of the
Collateral, or any release or amendment or waiver of or consent to departure from
any other collateral for, or any guaranty, or any other

 

10

 

security, for all or any of the
Obligations; (d) any action by the Secured Parties to obtain, adjust, settle
and cancel in its sole discretion any insurance claims or matters made or
arising in connection with the Collateral; or (e) any other circumstance which
might otherwise constitute any legal or equitable defense available to the
Borrower, or a discharge of all or any part of the Security Interest granted
hereby.  Until the Obligations shall
have been paid and performed in full, the rights of the Secured Parties shall
continue even if the Obligations are barred for any reason, including, without
limitation, the running of the statute of limitations or bankruptcy.  The Borrower expressly waives presentment,
protest, notice of protest, demand, notice of nonpayment and demand for
performance. In the event that at any time any transfer of any Collateral or any
payment received by the Secured Parties hereunder shall be deemed by final
order of a court of competent jurisdiction to have been a voidable preference
or fraudulent conveyance under the bankruptcy or insolvency laws of the United
States, or shall be deemed to be otherwise due to any party other than the
Secured Parties, then, in any such event, the Borrower’s obligations hereunder
shall survive cancellation of this Agreement, and shall not be discharged or
satisfied by any prior payment thereof and/or cancellation of this Agreement,
but shall remain a valid and binding obligation enforceable in accordance with
the terms and provisions hereof.  The
Borrower waives all right to require the Secured Parties to proceed against any
other person or to apply any Collateral which the Secured Parties may hold at
any time, or to marshal assets, or to pursue any other remedy.  The Borrower waives any defense arising by
reason of the application of the statute of limitations to any obligation
secured hereby.

 

10.                                 Term of Agreement.  This Agreement and the Security Interest
shall terminate on the date on which all payments under the Debentures have
been made in full or otherwise converted pursuant to the terms thereof and all
other Obligations have been paid or discharged in full.  Upon such termination, the Secured Parties,
at the request and at the expense of the Borrower, will join in executing any
termination statement and other filings with respect to any financing statement
executed and filed pursuant to this Agreement or required for evidencing
termination of the Security Interest or this Agreement.

 

11.                                 Power of Attorney; Further Assurances.  (a)  The Borrower
authorizes the Secured Parties, and does hereby make, constitute and appoint
it, and its respective officers, agents, successors or assigns with full power
of substitution, as the Borrower’s true and lawful attorney-in-fact, with
power, in its own name or in the name of the Borrower, to, after the occurrence
and during the continuance of an Event of Default, (i) endorse any notes,
checks, drafts, money orders, or other instruments of payment (including
payments payable under or in respect of any policy of insurance) in respect of
the Collateral that may come into possession of the Secured Parties; (ii) to
sign and endorse any UCC financing statement or any invoice, freight or express
bill, bill of lading, storage or warehouse receipts, drafts against Borrower,
assignments, verifications and notices in connection with accounts, and other
documents relating to the Collateral; (iii) to pay or discharge taxes, liens,
security interests or other encumbrances at any time levied or placed on or
threatened against the Collateral; (iv) to demand, collect, receipt for,
compromise, settle and sue for monies due in respect of the Collateral; and (v)
generally, to do, at the option of the Secured Parties, and at the Borrower’s
expense, at any time, or from time to time, all acts and things which the
Secured Parties deem necessary to protect, preserve and realize upon the
Collateral and the Security Interest granted therein, in order to effect the
intent of this Agreement and the Debentures, all as fully and effectually as
the Borrower might or could

 

11

 

do; and the Borrower hereby
ratifies all that said attorney shall lawfully do or cause to be done by virtue
hereof.  This power of attorney is
coupled with an interest and shall be irrevocable for the term of this
Agreement and thereafter as long as any of the Obligations shall be
outstanding.

 

(b)                                 On
a continuing basis, the Borrower will make, execute, acknowledge, deliver, file
and record, as the case may be, with the proper filing and recording places in
any jurisdiction, including, without limitation, the jurisdictions indicated on
Schedule A, attached hereto, all such instruments, and take all
such action as necessary to perfect the Security Interest granted hereunder and
otherwise to carry out the intent and purposes of this Agreement, or for
assuring and confirming to the Secured Parties the grant or perfection of a
first priority security interest in all the Collateral, subject to Permitted
Liens.

 

(c)                                  The
Borrower hereby irrevocably appoints the Secured Parties as the Borrower’s
attorney-in-fact, with full authority in the place and stead of the Borrower
and in the name of the Borrower, from time to time in the Secured Parties’
discretion, to file, in its sole discretion, one or more financing or
continuation statements and amendments thereto, relative to any of the
Collateral.

 

12.                                 Agent.

 

(a)                                  Actions  The Agent shall at all times act upon and in
accordance with written instructions received from a Two-Thirds-in-Interest (as
defined in Section 15) time to time. The Agent shall be deemed to be authorized
on behalf of each Secured Party to act on behalf of such Secured Party under
this Agreement and, in the absence of written instructions from a
Two-Thirds-in-Interest (with respect to which the Agent agrees that it will,
subject to the last two sentences of this Section, comply, except as otherwise
advised by counsel), to exercise such powers hereunder and thereunder as are
specifically delegated to or required of the Agent by the terms hereof and
thereof, together with such powers as may be reasonably incidental
thereto.  The Agent shall have no duty
to ascertain or inquire as to the performance or observance of any of the terms
of this Agreement by the Borrower. By accepting their Debentures each Secured
Party shall be deemed to have agreed to indemnify the Agent (which agreement
shall survive any termination of such Secured Party’ percentage), from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever which may at any time be imposed on, incurred by, or asserted
against the Agent in any way relating to or arising out of this Agreement and
the Debentures, including the reimbursement of the Agent for all out-of-pocket
expenses (including attorneys’ fees) incurred by the Agent hereunder or in
connection herewith or in enforcing the Obligations of the Borrower under this
Agreement or the Debentures, in all cases as to which the Agent is not
reimbursed by the Borrower; provided that no Secured Party shall be
liable for the payment of any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
determined by a court of competent jurisdiction in a final proceeding to have
resulted solely from the Agent’s gross negligence or willful misconduct.  The Agent shall not be required to take any
action hereunder or under the Debentures, or to prosecute or defend any suit in
respect of this Agreement or under the Debentures, unless the Agent is
indemnified to its reasonable satisfaction by the Secured Parties against loss,
costs, liability and expense.  If any
indemnity in favor of the Agent shall

 

12

 

become impaired, it may call
for additional indemnity and cease to do the acts indemnified against until
such additional indemnity is given.

 

(b)                                 Exculpation.  Neither the Agent nor any of its directors,
officers, partners, members, shareholders, employees or agents shall be liable
to any Secured Party for any action taken or omitted to be taken by it under
this Agreement or the Debentures, or in connection herewith or therewith,
except for its own willful misconduct or gross negligence or be responsible for
the consequences of any error in judgment. Neither the Agent nor any of its
directors, officers, partners, members, shareholders, employees or agents has
any fiduciary relationship with any Secured Party by virtue of this Agreement.
The Agent shall not be responsible to any Secured Party for any recitals,
statements, representations or warranties herein or in any certificate or other
document delivered in connection herewith or for the authorization, execution,
effectiveness, genuineness, validity, enforceability, perfection,
collectibility, or sufficiency this Agreement or the Debentures, the financial condition
of the Borrower or the condition or value of any of the Collateral, or be
required to make any inquiry concerning either the performance or observance of
any of the terms, provisions or conditions of this Agreement or the Debentures,
the financial condition of the Borrower or the existence or possible existence
of any default or event of default.  The
Agent shall be entitled to rely upon advice of counsel concerning legal matters
and upon any notice, consent, certificate, statement or writing which it
believes to be genuine and to have presented by a proper person.

 

(c)                                  Obligations
Held by the Agent.  The Agent shall
have the same rights and powers with respect to any Debentures held by it or
any of its affiliates, as any Secured Party and may exercise the same as if it
were not the Agent.  Each of the
Borrower and each Secured Party hereby waives, and each successor to any
Secured Party shall be deemed to waive, any right to disqualify any Secured
Party from serving as the Agent or any claim against that Secured Party for
serving as Agent.

 

(d)                                 Copies,
etc.  The Agent shall give prompt notice to each
Secured Party of each notice or request required or permitted to be given to
the Agent by the Borrower pursuant to the terms of this Agreement.  The Agent will distribute to each Secured
Party each instrument and other agreement received for its account and copies
of all other communications received by the Agent from a Borrower for
distribution to the Secured Party by the Agent in accordance with the terms of
this Agreement.  Notwithstanding
anything herein contained to the contrary, all notices to and communications
with the Borrower under this Agreement shall be effected by the Secured Party
through the Agent.

 

(e)                                  Resignation
of Agent.  The Agent may resign as such at any time
upon at least thirty (30) days’ prior notice to the Borrower and all the
Secured Parties, such resignation not to be effective until a successor Agent
is in place.  If the Agent at any time shall
resign, a  Two-Thirds-in-Interest may
jointly appoint another Secured Party as a successor Agent which shall
thereupon become the Agent hereunder. Upon the acceptance of any appointment as
Agent hereunder by a successor Agent, such successor Agent shall be entitled to
receive from the retiring Agent such documents of transfer and assignment as
such successor Agent may reasonably request, and shall thereupon succeed to and
become vested with all rights, powers, privileges, and duties of the retiring
Agent, and the retiring Agent shall be discharged from its duties and
obligations under this Agreement.

 

13

 

(f)                                    Replacement
of Agent.  A Two-Thirds-in-Interest
may at any time and for any reason replace the Agent with a successor Agent
jointly selected by them, upon at least five (5) days written notice to the
Borrower and the other Secured Parties. Upon the acceptance of any appointment
as Agent hereunder by a successor Agent, such successor Agent shall be entitled
to receive from the terminated Agent such documents of transfer and assignment
as such successor Agent may reasonably request, and shall thereupon succeed to
and become vested with all rights, powers, privileges, and duties of the
retiring Agent, and the terminated Agent shall be discharged from its duties
and obligations under this Agreement.

 

13.                                 Conditions
for Sale of Collateral by Borrower. 
The Borrower shall be entitled to sell all or a portion of the
Collateral to an unaffiliated purchaser for a net purchase price which is equal
to or greater than the fair market value of such Collateral (the “Purchase
Price”) if such purchaser shall deliver the Purchase Price (or
portion thereof, if applicable) to each Secured Party (on a pro-rata basis) in
payment of the Borrower Prepayment Price (as defined in the Debentures) for the
prepayment in full, pursuant to Section 11 of the Debenture, of such portion of
the outstanding principal amount of Debentures held by such Secured Party for
which such Borrower Prepayment Price shall apply.  Upon Secured Parties’ unconditional receipt of the Purchase
Price, the Secured Parties’ liens in any item of Collateral that is subject of
the foregoing sale shall automatically terminate and the Secured Parties shall
cooperate with the Borrower in making all appropriate filings including UCC
filings in order to evidence such termination. 
Notwithstanding anything herein to the contrary, if, as a  result of a potential sale of Collateral
pursuant to the immediately preceding sentence, there shall remain an
outstanding principal amount of Debentures (including accrued interest thereon)
then held by the Secured Parties, then such sale shall only be permitted if the
Borrower shall deliver a Borrower Prepayment Notice (as defined in the
Debentures) to such Secured Parties pursuant to which it shall pay to such
Secured Parties (on a pro-rata basis) a Borrower Prepayment Price equal to no
less than 50% of the Purchase Price.

 

14.                                 Notices.  All notices, requests, demands and other
communications hereunder shall be in writing, with copies to all the other
parties hereto, and shall be deemed to have been duly given when (i) if
delivered by hand, upon receipt, (ii) if sent by facsimile, upon receipt of
proof of sending thereof, (iii) if sent by nationally recognized overnight delivery
service (receipt requested), the next business day or (iv) if mailed by
first-class registered or certified mail, return receipt requested, postage
prepaid, four days after posting in the U.S. mails, in each case if delivered
to the following addresses:

 

If to the
Borrower:

 

Aerogen, Inc.

2071 Stierlin Court

Mountain View, CA 94043

Facsimile No.: (650) 864-7433

Attn: Chief Financial Officer

 

With a copy
to:

 

Cooley Godward LLP

 

14

 

Five Palo Alto Square

3000 El Camino Real

Palo Alto, CA 94306-2155

Facsimile No.: (650) 849-7400

Attn: Robert J. Brigham, Esq.

 

If to Secured
Parties:   To the address set forth under such Secured Parties’
name on the signature pages hereto.

 

15.                                 Other Security.  To the extent that the Obligations are now
or hereafter secured by property other than the Collateral or by the guarantee,
endorsement or property of any other person, firm, corporation or other entity,
then the Secured Parties shall have the right, in their sole discretion, to
pursue, relinquish, subordinate, modify or take any other action with respect
thereto, without in any way modifying or affecting any of the Secured Parties’
rights and remedies hereunder.

 

16.                                 Actions by Secured Parties.  Any action required or permitted hereunder
to be taken by or on behalf of the Secured Parties shall, for such action to be
valid, require the approval of the Two-Thirds-in-Interest prior to the taking
of such action.  If the consent, approval
or disapproval of the Secured Parties is required or permitted pursuant to this
Agreement, such consent, approval or disapproval shall only be valid if given
by the Two-Thirds-in-Interest.  “Two-Thirds-in-Interest”
means the Secured Party or Secured Parties (as the case may be) holding in excess
of 2/3 of the outstanding aggregate principal amount under the Debentures,
determined on a cumulative basis.

 

17.                                 Miscellaneous.  (a)  No course of dealing between
the Borrower and the Secured Parties, nor any failure to exercise, nor any
delay in exercising, on the part of the Secured Parties, any right, power or
privilege hereunder, under the Debentures or under this Agreement shall operate
as a waiver thereof; nor shall any single or partial exercise of any right,
power or privilege hereunder or thereunder preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.

 

(b)                                 All
of the rights and remedies of the Secured Parties with respect to the
Collateral, whether established hereby, by the Debentures or by any other
agreements, instruments or documents or by law shall be cumulative and may be
exercised singly or concurrently.

 

(c)                                  This
Agreement constitutes the entire agreement of the parties with respect to the
subject matter hereof and is intended to supersede all prior negotiations,
understandings and agreements with respect thereto.  Except as specifically set forth in this Agreement, no provision
of this Agreement may be modified or amended except by a written agreement
signed by the parties hereto.

 

(d)                                 In
the event that any provision of this Agreement is held to be invalid,
prohibited or unenforceable in any jurisdiction for any reason, unless such
provision is narrowed by judicial construction, this Agreement shall, as to
such jurisdiction, be construed as if such invalid, prohibited or unenforceable
provision had been more narrowly drawn so as not to be

 

15

 

invalid, prohibited or
unenforceable.  If, notwithstanding the
foregoing, any provision of this Agreement is held to be invalid, prohibited or
unenforceable in any jurisdiction, such provision, as to such jurisdiction,
shall be ineffective to the extent of such invalidity, prohibition or
unenforceability without invalidating the remaining portion of such provision
or the other provisions of this Agreement and without affecting the validity or
enforceability of such provision or the other provisions of this Agreement in
any other jurisdiction.

 

(e)                                  No
waiver of any breach or default or any right under this Agreement shall be
considered valid unless in writing and signed by the party giving such waiver,
and no such waiver shall be deemed a waiver of any subsequent breach or default
or right, whether of the same or similar nature or otherwise.

 

(f)                                    This
Agreement shall be binding upon and inure to the benefit of each party hereto
and its successors and assigns.

 

(g)                                 Each
party shall take such further action and execute and deliver such further
documents as may be necessary or appropriate in order to carry out the
provisions and purposes of this Agreement.

 

(h)                                 This
Agreement shall be construed in accordance with the laws of the State of New
York, except to the extent the validity, perfection or enforcement of a
security interest hereunder in respect of any particular Collateral which are
governed by a jurisdiction other than the State of New York in which case such
law shall govern.  Each of the parties
hereto irrevocably submits to the exclusive jurisdiction of any New York State
or United States Federal court sitting in New York county over any action or
proceeding arising out of or relating to this Agreement, and the parties hereto
hereby irrevocably agree that all claims in respect of such action or
proceeding may be heard and determined in such New York State or Federal
court.  The parties hereto agree that a
final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law.  The parties hereto
further waive any objection to venue in the State of New York and any objection
to an action or proceeding in the State of New York on the basis of forum non
conveniens.

 

(i)                                     EACH
PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT.  THE SCOPE OF THIS WAIVER IS INTENDED TO BE
ALL ENCOMPASSING OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE
TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND
STATUTORY CLAIMS.  EACH PARTY HERETO
ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR EACH PARTY TO ENTER
INTO A BUSINESS RELATIONSHIP, THAT EACH PARTY HAS ALREADY RELIED ON THIS WAIVER
IN ENTERING INTO THIS AGREEMENT AND THAT EACH PARTY WILL CONTINUE TO RELY ON
THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY FURTHER WARRANTS AND
REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT
SUCH PARTY KNOWINGLY

 

16

 

AND VOLUNTARILY WAIVES ITS
RIGHTS TO A JURY TRIAL FOLLOWING SUCH CONSULTATION.  THIS WAIVER IS IRREVOCABLE, MEANING THAT, NOTWITHSTANDING
ANYTHING HEREIN TO THE CONTRARY, IT MAY NOT BE MODIFIED EITHER ORALLY OR IN
WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS AND
SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT.  IN THE EVENT OF A LITIGATION, THIS AGREEMENT MAY BE FILED AS A
WRITTEN CONSENT TO A TRIAL BY THE COURT.

 

(j)                                     This
Agreement may be executed in any number of counterparts, each of which when so
executed shall be deemed to be an original and, all of which taken together
shall constitute one and the same Agreement. 
In the event that any signature is delivered by facsimile transmission,
such signature shall create a valid binding obligation of the party executing
(or on whose behalf such signature is executed) the same with the same force
and effect as if such facsimile signature were the original thereof.

 

17

 

IN WITNESS WHEREOF, the parties hereto have
caused this Security Agreement to be duly executed on the day and year first
above written.

 

	
   

  	
  Aerogen, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

18

 

IN WITNESS WHEREOF, the parties hereto have
caused this Security Agreement to be duly executed on the day and year first
above written.

 

 

	
   

  	
  SF CAPITAL
  PARTNERS, LTD.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:  Brian H. Davidson

  
	
   

  	
   

  	
  Title:    Authorized Signatory

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address for Notice:

  
	
   

  	
   

  
	
   

  	
  c/o Staro Asset Management, LLC

  
	
   

  	
  3600 South Lake Drive

  
	
   

  	
  St. Francis, Wisconsin 53235

  
	
   

  	
  Facsimile No.:  (414) 294-7700

  
	
   

  	
  Attn.:  Brian H. Davidson

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  With a copy to:

  
	
   

  	
  Bryan Cave LLP

  
	
   

  	
  1290 Avenue of the Americas

  
	
   

  	
  New York, NY  10104

  
	
   

  	
  Facsimile No.: (212) 541-4630 and (212) 541-1432

  
	
   

  	
  Attn:  Eric L. Cohen, Esq.

  

 

19

 

Exhibit G

 

INTELLECTUAL
PROPERTY SECURITY AGREEMENT

 

INTELLECTUAL PROPERTY SECURITY AGREEMENT (the “Agreement”),
dated as of September __, 2003, among Aerogen, Inc., a Delaware corporation
(the “Borrower”), and the lenders signatory hereto (each lender
including their respective successors, endorsees, transferees and assigns, a “Secured
Party”, and collectively, the “Secured Parties”).

 

W  I  T  N  E  S
S  E  T  H:

 

WHEREAS, pursuant to the Loan and Securities
Purchase Agreement, dated the date hereof between the Borrower and the parties
thereto, the Secured Parties have agreed to extend certain loans to the
Borrower which shall be evidenced by the issuance on one or more occasions to
such Secured Parties of the Borrower’s Secured Convertible Debentures (the “Debentures”),
due on the Maturity Date (as defined in the Debentures) in the aggregate
principal amount of up to $2,000,000.

 

WHEREAS, in order to induce the Secured
Parties to enter into the contemplated transactions, the Borrower has agreed to
execute and deliver to the Secured Parties this Agreement for the benefit of
the Secured Parties and a separate agreement granting to them a first priority
security interest in the Collateral (as defined herein), to secure the prompt
payment, performance and discharge in full of all of the Borrower’s obligations
under this Agreement and the Debentures.

 

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

 

1.                                       Certain Definitions.  As used in this Agreement, the following
terms shall have the meanings set forth in this Section 1.  Terms used but not otherwise defined in this
Agreement that are defined in Article 9 of the UCC (such as “general
intangibles” and “proceeds”) shall have the respective meanings
given such terms in Article 9 of the UCC; Other terms used but not otherwise
defined in this Agreement shall have the respective meanings given such terms
in the Security Agreement.

 

(a)                                  “Agent”
means SF Capital Partners, Ltd., as agent for each of the Secured Parties
pursuant to this Agreement, or such other Person as shall have been
subsequently appointed as a successor agent pursuant to this Agreement.

 

(b)                                 “Collateral”
means all of the Borrower’s right, title and interest in and to all of
Trademarks, Patents, Copyrights, and other general intangible property of the
Borrower, all trade secrets, intellectual property rights in computer software
and computer software products, design rights which may be available to the
Borrower, rights to proceeds arising from any and all claims for damages by way
of past, present and future infringement of any Collateral with the right but
not the obligation to sue on behalf of and collect such damages for said use or

 

 

infringement, licenses to use any
of the Copyrights, Patents or Trademarks, and all license fees and royalties
arising from such use to the extent permitted by such license or rights.  The term “Collateral” shall include
all of the foregoing items, whether presently owned or existing or hereafter
acquired or coming into existence,  all
additions and accessions thereto, all substitutions and replacements thereof,
and all proceeds, products and accounts thereof, including without limitation
all proceeds from the licensing or sale or other transfer of Collateral and of
insurance covering the same and of any tort claims in connection therewith.

 

Notwithstanding anything to the contrary in
the foregoing, at the time of closing of the MIA transaction, the term
“Collateral” shall no longer include the Equipment needed to
manufacture/assemble the OnQ Aerosol Generator, as specifically set forth on Schedule
B hereto, all of which are to be conveyed pursuant to Borrower’s agreement
with Medical Industries America, Inc. consistent with the term sheet signed on
August 15, 2003 (collectively, the “MIA Assets”).

 

Notwithstanding
anything to the contrary in the foregoing, the grant of a security interest as
provided herein shall not extend to, and the term “Collateral” shall not include, to the extent such exclusion
does not result in a Material Adverse Effect (as defined in the Loan
Agreement), any immaterial Contract, Instrument or Chattel Paper in which the
Borrower has any right, title or interest if and to the extent such Contract,
Instrument or Chattel Paper includes a provision containing a restriction on
assignment such that the creation of a security interest in the right, title or
interest of the Borrower therein would be prohibited and would, in and of
itself, cause or result in a default thereunder enabling another person party
to such Contract, Instrument or Chattel Paper to enforce any remedy with
respect thereto.

 

(c)                                  “Copyrights”
means any and all copyrights, copyright applications, copyright registration
and like protections in each work or authorship and derivative work thereof
that is created by the Borrower, whether published or unpublished and whether
or not the same also constitutes a trade secret, now or hereafter existing,
created, acquired or held, including, without limitation, those set forth on Exhibit
A attached hereto.

 

(d)                                 “Obligations”
means all of the Borrower’s obligations under this Agreement and the
Debentures, in each case, whether now or hereafter existing, voluntary or
involuntary, direct or indirect, absolute or contingent, liquidated or
unliquidated, whether or not jointly owed with others, and whether or not from
time to time decreased or extinguished and later increased, created or
incurred, as such obligations may be amended, supplemented, converted, extended
or modified from time to time pursuant to the terms of this Agreements or the
Debentures, as applicable.

 

(e)                                  “Patents”
means all of the Borrower’s patents, patent applications, letters patent and
like protections, including, without limitation, improvements, divisions,
continuations, renewals, reissues, extensions and continuations-in-part of the
same, and including, without limitation, those set forth on Exhibit B
attached hereto.

 

(f)                                    “Security
Agreement” means that certain Security Agreement of even date herewith
executed by the Borrower in favor of the Secured Parties.

 

2

 

(g)                                 “Trademarks”
means any trademark, service mark right, whether or not registered,
applications to register and registrations of the same and like protections,
and the entire goodwill of the business of the Borrower connected with or
symbolized by such trademarks, including, without limitation, those set forth
on Exhibit C attached hereto.

 

(h)                                 “UCC”
means the Uniform Commercial Code and/or any other applicable law of each
jurisdiction in which the Borrower is incorporated or organized (including,
without limitation the State of Delaware and the State of California) and any
jurisdiction as to any Collateral located therein.

 

2.                                       Grant of
Security Interest. As an inducement for the Secured
Parties to enter into the contemplated transactions and to secure the complete
and timely payment, performance and discharge in full, as the case may be, of
all of the Obligations, the Borrower hereby, unconditionally and irrevocably,
pledges, grants and hypothecates to the Secured Parties, a continuing first
priority security interest in, and a first lien upon  and a right of set-off against all of the
Borrower’s right, title and interest of whatsoever kind and nature in and to
the Collateral (the “Security Interest”).

 

3.                                       Representations, Warranties, Covenants and Agreements of the Borrower.  The Borrower represents and
warrants to, and covenants and agrees with, each of the Secured Parties as
follows:

 

(a)                                  The
Borrower has the requisite corporate power and authority to enter into this
Agreement and to otherwise carry out its obligations thereunder.  The execution, delivery and performance by
the Borrower of this Agreement and the filings contemplated therein have been
duly authorized by all necessary action on the part of the Borrower and no
further action is required by the Borrower.

 

(b)                                 Except
for the Security Interest granted hereunder and Permitted Liens, the Borrower
is the sole owner of its rights in the Collateral, free and clear of any liens,
security interests or encumbrances, and is fully authorized to grant the
Security Interest in and to pledge the Collateral.  There is not on file in any governmental or regulatory authority,
agency or recording office an effective financing statement, security agreement
or transfer or any notice of any of the foregoing (other than those that have
been filed in favor of the Secured Parties pursuant to this Agreement or in
connection with Permitted Liens) covering or affecting any of the
Collateral.  So long as this Agreement
shall be in effect, the Borrower shall not execute and shall not authorize the
filing of  in any such office or agency
any such financing statement or other document or instrument (except to the extent
filed or recorded in favor of the Secured Parties pursuant to the terms of this
Agreement or in connection with Permitted Liens) without the consent of the
Secured Parties.

 

(c)                                  Exhibit
A sets forth a true and complete list of all Copyrights in existence as of
the date of this Agreement.  Exhibit
B sets forth a true and complete list of all Patents that have been filed
as of the date of this Agreement.  Exhibit
C sets forth a true and complete list of all Trademarks filed as of the
date of this Agreement.  The Borrower
shall, within thirty (30) days of obtaining knowledge thereof, advise the
Secured Parties in writing of any change in the

 

3

 

composition of any material
item of the Collateral, including, without limitation, any subsequent ownership
rights of the Borrower in or to any material Copyright, Patent or Trademark.

 

(d)                                 Borrower
has no knowledge of any claim that any of the Collateral or the Borrower’s use
of any Collateral violates the rights of any third party.  There has been no adverse decision of which
the Borrower is aware as to the Borrower’s exclusive (or nonexclusive, as the
case may be) rights to use the Collateral in any jurisdiction, and, to the
knowledge of the Borrower there is no proceeding involving said rights pending
or threatened before any court, judicial body, administrative or regulatory
agency, arbitrator or other governmental authority.

 

(e)                                  The
Borrower shall at all times maintain its books of account and records relating
to material Collateral at its principal place of business and may not relocate
such books of account and records unless it delivers to each of the Secured
Parties at least 30 days prior to such relocation (i) written notice of such
relocation and the new location thereof (which must be within the United
States) and (ii) evidence that appropriate financing statements and other
necessary documents have been filed and recorded and other steps have been
taken to perfect the Security Interest to create in favor of each of the
Secured Parties a valid, perfected and continuing first priority lien in the
Collateral, subject to Permitted Liens.

 

(f)                                    This
Agreement creates in favor of each of the Secured Parties a valid security
interest in the Collateral, securing the payment and satisfaction of the
Obligations, and, upon making the filings described in the immediately
following sentence, a perfected first priority security interest in such
Collateral that is senior to all hereinafter created security interests, other than
Permitted Liens.  Except for (x) the
filing of this Agreement with the United States Patent and Trademark Office
with respect to the Patents and Trademarks and the filing of this Agreement
with the  United States Copyrights
Office with respect to the Copyrights, and (y) the filing of financing
statements on Form UCC-1 under the UCC with the jurisdictions indicated in Schedule A,
attached hereto, and (z) making other filings as may be required under the
applicable foreign juridisctions, no authorization or approval of or filing
with or notice to any governmental authority or regulatory body is required
either: (i) for the grant by the Borrower of, or the effectiveness of, the
Security Interest granted hereby or for the execution, delivery and performance
of this Agreement by the Borrower or (ii) for the perfection of or exercise by
the Secured Parties of its rights and remedies hereunder.

 

(g)                                 On
the date of execution of this Agreement, the Borrower authorizes each Secured
Party to: (i) file one or more financing statements under the UCC with respect
to the Security Interest for filing with the jurisdictions indicated on Schedule A,
attached hereto and (ii) record one or more executed recordation sheets
relating to the filing and recording of this Agreement with each of the United
States Patent and Trademark Office and the United States Copyrights Office with
respect to the Patents, Trademarks and Copyrights that are now in existence.

 

(h)                                 The
execution, delivery and performance of this Agreement does not conflict with or
cause a breach or default, or an event that with or without the passage of time
or notice, shall constitute a breach or default, under any agreement to which
the Borrower is a party

 

4

 

or by which the Borrower is
bound.  No consent (including, without
limitation, from stock holders or creditors of the Borrower) is required for
the Borrower to enter into and perform its obligations hereunder, other than
consents already obtained by the Borrower.

 

(i)                                     The
Borrower shall at all times maintain the liens and Security Interest provided
for hereunder as valid and perfected first priority liens and security
interests in the Collateral (subject to Permitted Liens) in favor of each of
the Secured Parties and insure that such liens and Security Interests are and
remain senior to all not existing and hereafter created security interests and
liens.  The Borrower hereby agrees to
defend the same against any and all persons. 
The Borrower shall safeguard and protect all Collateral.  At the request of the Agent and/or Secured
Parties, the Borrower will sign and deliver to the Secured Parties at any time
or from time to time one or more financing statements pursuant to the UCC in
form reasonably satisfactory to the Secured Parties and will pay the cost of
filing the same in all public offices wherever filing is, or is deemed by the
Secured Parties to be, necessary to effect the rights and obligations provided
for herein. Without limiting the generality of the foregoing, the Borrower
shall pay all fees, taxes and other amounts necessary to maintain the Security
Interest hereunder, and the Borrower shall obtain and furnish to the Secured
Parties from time to time, upon demand, such releases and/or subordinations of claims
and liens which may be required to maintain the priority of the Security
Interest hereunder.

 

(j)                                     The
Borrower will not allow any material Collateral to be abandoned, forfeited or
dedicated to the public without the prior written consent of the Secured
Parties.  Except pursuant to Section 13
hereof and other than Permitted Transfers, the Borrower will not transfer,
pledge, hypothecate, encumber, license, sell or otherwise dispose of any of the
Collateral without the prior written consent of the Secured Parties.

 

(k)                                  The
Borrower shall, within ten (10) days of obtaining knowledge thereof, advise the
Agent, in sufficient detail, of any substantial change in the Collateral, and
of the occurrence of any event which would have a material adverse effect on the
value of the Collateral or on the Secured Parties’ security interest therein.

 

(l)                                     The
Borrower shall permit the Secured Parties and its representatives and agents
upon prior written consent and at the expense of the Secured Parties to inspect
the Collateral at any time during normal business hours, and to make copies of
records pertaining to any material item of Collateral as may be reasonably
requested by the Secured Parties from time to time.

 

(m)                               The
Company shall promptly execute and deliver to the Secured Party such further
deeds, mortgages, assignments, security agreements, financing statements or
other instruments, documents, certificates and assurances and take such further
action as necessary to perfect, protect or enforce its security interest in the
Collateral including, without limitation, the execution and delivery of the
Security Agreement.

 

(n)                                 The
Borrower will take all steps it considers reasonably necessary to diligently
pursue and seek to preserve, enforce and collect any rights, claims, causes of
action and accounts receivable in respect of the Collateral.

 

5

 

(o)                                 The
Borrower shall promptly notify the Agent in sufficient detail upon becoming
aware of any attachment, garnishment, execution or other legal process levied
against any Collateral and of any other information received by the Borrower
that reasonably would be expected to substantially affect the value of the
Collateral, the Security Interest or the rights and remedies of the Secured
Parties hereunder.

 

(p)                                 The
Borrower shall not use or permit any Collateral to be used unlawfully or in
violation of any provision of this Agreement  or
any applicable statute, regulation or ordinance or any policy of insurance
covering the Collateral where violation is reasonably likely to have a material
adverse effect on the Secured Parties’ rights in the Collateral or Secured
Parties’ ability to foreclose on the Collateral.

 

(q)                                 Other
than Permitted Liens, the Borrower shall not grant to any person or entity any
rights or interest in or to any of the Collateral that are senior to, or pari
passu with, the Secured Parties..

 

(r)                                    The
Borrower shall notify the Agent of any change in the Borrower’s name, identity,
chief place of business, chief executive office or residence within 30 days of
such change.

 

4.                                       Defaults.  The following events shall be “Events of
Default”:

 

(a)                                  The
occurrence of an Event of Default (as defined in the Debentures) under the
Debentures which shall not have been cured within 30 days, to the satisfaction
of the Agent;

 

(b)                                 Any
material representation or warranty of the Borrower in this Agreement or in the
Security Agreement, shall prove to have been incorrect in any material respect
when made; and

 

(c)                                  The failure
by the Borrower to observe or perform any of its obligations hereunder or in
the Security Agreement, for ten (10) Trading Days (as defined in the
Debentures) after receipt by the Borrower of written notice of such failure
from the Secured Parties.

 

5.                                       Duty To Hold In Trust.  Upon the occurrence and during the
continuation of any Event of Default, the Borrower shall, upon receipt by it of
any revenue, income or other sums subject to the Security Interest, or of any
check, draft, note, trade acceptance or other instrument evidencing an
obligation to pay any such sum, hold the same in trust for the Secured Parties
and shall upon request by the Secured Parties forthwith endorse and transfer
any such sums or instruments, or both, to the Secured Parties for application
to the satisfaction of the Obligations.

 

6.                                       Rights and Remedies Upon Default.  Upon the occurrence and
during the continuation of any Event of Default, the Agent (on behalf of, and
for the benefit of itself and each Secured Party) shall have the right to
exercise all of the remedies conferred hereunder, under the Debentures, and the
Agent and the Secured Parties shall have all the rights and remedies of a
secured party under the UCC.  Without
limitation, upon and during the

 

6

 

continuance of an Event of
Default, the Secured Parties and the Agent shall have the rights and powers set
forth in Section 6 of the Security Agreement.

 

7.                                       Applications of Proceeds; Expenses.  (a)  The proceeds
of any such sale, sublicense or other disposition of the Collateral hereunder
shall be applied as set forth in Section 7 of the Security Agreement.

 

(b)                                 The
Borrower agree to pay all out-of-pocket fees, costs and expenses reasonably
incurred in connection with any filing required hereunder, including, without
limitation, any financing statements, continuation statements, partial releases
and/or termination statements related thereto or any expenses of any searches
reasonably required by the Agent.  The
Borrower shall also pay all other claims and charges which in the reasonable
opinion of the Agent and/or Secured Parties would reasonably be expected to
prejudice, imperil or otherwise affect the Collateral or the Security Interest
therein.  The Borrower will also, upon
demand, pay to the Agent and/or Secured Parties the amount of any and all
reasonable expenses, including the reasonable fees and expenses of its counsel
and of any experts and agents, which the Agent and/or Secured Parties may incur
in connection with the custody or preservation of, or the sale of, collection
from, or other realization upon, any of the Collateral.

 

8.                                       Responsibility for Collateral.  The Borrower assumes all
liabilities and responsibility in connection with all Collateral, and the
obligations of the Borrower hereunder or under the Debentures shall in no way
be affected or diminished by reason of the loss, destruction, damage or theft
of any of the Collateral or its unenforceability or unavailability for any
reason.

 

9.                                       Security Interest Absolute.  All rights of the Secured Parties and all
Obligations of the Borrower hereunder, shall be absolute and unconditional,
irrespective of: (a) any lack of validity or enforceability of this Agreement,
the Debentures or any agreement entered into in connection with the foregoing,
or any portion hereof or thereof; (b) any change in the time, manner or place
of payment or performance of, or in any other term of, all or any of the
Obligations, or any other amendment or waiver of or any consent to any
departure from the Debentures or any other agreement entered into in connection
with the foregoing; (c) any exchange, release or nonperfection of any of the
Collateral, or any release or amendment or waiver of or consent to departure
from any other collateral for, or any guaranty, or any other security, for all
or any of the Obligations; (d) any action by the Secured Parties to obtain,
adjust, settle and cancel in its sole discretion any insurance claims or
matters made or arising in connection with the Collateral; or (e) any other
circumstance which might otherwise constitute any legal or equitable defense
available to the Borrower, or a discharge of all or any part of the Security
Interest granted hereby.  Until the
Obligations shall have been paid and performed in full, the rights of the
Secured Parties shall continue even if the Obligations are barred for any
reason, including, without limitation, the running of the statute of
limitations or bankruptcy.  The Borrower
expressly waives presentment, protest, notice of protest, demand, notice of
nonpayment and demand for performance. In the event that at any time any
transfer of any Collateral or any payment received by the Secured Parties
hereunder shall be deemed by final order of a court of competent jurisdiction
to have been a voidable preference or fraudulent conveyance under the
bankruptcy or insolvency laws of the United States, or shall be deemed to be
otherwise due to any party other than the Secured Parties, then, in any such
event, the

 

7

 

Borrower’s obligations
hereunder shall survive cancellation of this Agreement, and shall not be
discharged or satisfied by any prior payment thereof and/or cancellation of
this Agreement, but shall remain a valid and binding obligation enforceable in
accordance with the terms and provisions hereof.  The Borrower waives all right to require the Secured Parties to
proceed against any other person or to apply any Collateral which the Secured
Parties may hold at any time, or to marshal assets, or to pursue any other
remedy.  The Borrower waives any defense
arising by reason of the application of the statute of limitations to any
obligation secured hereby.

 

10.                                 Term of Agreement.  This Agreement and the Security Interest
shall terminate on the date on which all payments under the Debentures have
been made in full or otherwise converted pursuant to the terms thereof and all
other Obligations have been paid or discharged in full.  Upon such termination, the Secured Parties,
at the request and at the expense of the Borrower, will join in executing any
termination statement and other filings with respect to any financing statement
executed and filed pursuant to this Agreement or required for evidencing
termination of the Security Interest or this Agreement.

 

11.                                 Power of Attorney; Further Assurances.  (a)  The Borrower
authorizes the Secured Parties, and does hereby make, constitute and appoint
it, and its respective officers, agents, successors or assigns with full power
of substitution, as the Borrower’s true and lawful attorney-in-fact, with
power, in its own name or in the name of the Borrower, to, after the occurrence
and during the continuance of an Event of Default, (i) endorse any notes,
checks, drafts, money orders, or other instruments of payment (including
payments payable under or in respect of any policy of insurance) in respect of
the Collateral that may come into possession of the Secured Parties; (ii) to
sign and endorse any UCC financing statement or any invoice, freight or express
bill, bill of lading, storage or warehouse receipts, drafts against Borrower,
assignments, verifications and notices in connection with accounts, and other
documents relating to the Collateral; (iii) to pay or discharge taxes, liens,
security interests or other encumbrances at any time levied or placed on or
threatened against the Collateral; (iv) to demand, collect, receipt for,
compromise, settle and sue for monies due in respect of the Collateral; and (v)
generally, to do, at the option of the Secured Parties, and at the Borrower’s
expense, at any time, or from time to time, all acts and things which the
Secured Parties deem necessary to protect, preserve and realize upon the
Collateral and the Security Interest granted therein, in order to effect the
intent of this Agreement and the Debentures, all as fully and effectually as
the Borrower might or could do; and the Borrower hereby ratifies all that said
attorney shall lawfully do or cause to be done by virtue hereof.  This power of attorney is coupled with an
interest and shall be irrevocable for the term of this Agreement and thereafter
as long as any of the Obligations shall be outstanding.

 

(b)                                 On
a continuing basis, the Borrower will make, execute, acknowledge, deliver, file
and record, as the case may be, with the proper filing and recording places in
any jurisdiction, including, without limitation, the jurisdictions indicated on
Schedule A, attached hereto, all such instruments, including
appropriate financing and continuation statements and collateral agreements and
filings with the United States Patent and Trademark Office, and take all such
action as necessary to perfect the Security Interest granted hereunder and
otherwise to carry out the intent and purposes of this Agreement, or for
assuring and confirming to the Secured Parties the grant or perfection of a
first priority security interest in all the Collateral, subject to Permitted
Liens.

 

8

 

(c)                                  The
Borrower hereby irrevocably appoints the Secured Parties as the Borrower’s
attorney-in-fact, with full authority in the place and stead of the Borrower
and in the name of the Borrower, from time to time in the Secured Parties’
discretion, to file, in its sole discretion, one or more financing or
continuation statements and amendments thereto, relative to any of the
Collateral.

 

12.                                 Agent.

 

(a)                                  Actions  The Agent shall at all times act upon and in
accordance with written instructions received from a Two-Thirds-in-Interest (as
defined in Section 15) time to time. The Agent shall be deemed to be authorized
on behalf of each Secured Party to act on behalf of such Secured Party under
this Agreement and, in the absence of written instructions from a
Two-Thirds-in-Interest (with respect to which the Agent agrees that it will, subject
to the last two sentences of this Section, comply, except as otherwise advised
by counsel), to exercise such powers hereunder and thereunder as are
specifically delegated to or required of the Agent by the terms hereof and
thereof, together with such powers as may be reasonably incidental
thereto.  The Agent shall have no duty
to ascertain or inquire as to the performance or observance of any of the terms
of this Agreement by the Borrower. By accepting their Debentures each Secured
Party shall be deemed to have agreed to indemnify the Agent (which agreement
shall survive any termination of such Secured Party’ percentage), from and
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever which may at any time be imposed on, incurred by, or asserted
against the Agent in any way relating to or arising out of this Agreement and
the Debentures, including the reimbursement of the Agent for all out-of-pocket
expenses (including attorneys’ fees) incurred by the Agent hereunder or in
connection herewith or in enforcing the Obligations of the Borrower under this
Agreement or the Debentures, in all cases as to which the Agent is not
reimbursed by the Borrower; provided that no Secured Party shall be
liable for the payment of any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
determined by a court of competent jurisdiction in a final proceeding to have
resulted solely from the Agent’s gross negligence or willful misconduct.  The Agent shall not be required to take any
action hereunder or under the Debentures, or to prosecute or defend any suit in
respect of this Agreement or under the Debentures, unless the Agent is
indemnified to its reasonable satisfaction by the Secured Parties against loss,
costs, liability and expense.  If any
indemnity in favor of the Agent shall become impaired, it may call for
additional indemnity and cease to do the acts indemnified against until such
additional indemnity is given.

 

(b)                                 Exculpation.  Neither the Agent nor any of its directors,
officers, partners, members, shareholders, employees or agents shall be liable
to any Secured Party for any action taken or omitted to be taken by it under
this Agreement or the Debentures, or in connection herewith or therewith,
except for its own willful misconduct or gross negligence or be responsible for
the consequences of any error in judgment. Neither the Agent nor any of its
directors, officers, partners, members, shareholders, employees or agents has
any fiduciary relationship with any Secured Party by virtue of this Agreement.
The Agent shall not be responsible to any Secured Party for any recitals,
statements, representations or warranties herein or in any certificate or other
document delivered in connection herewith or for the authorization,

 

9

 

execution, effectiveness,
genuineness, validity, enforceability, perfection, collectibility, or
sufficiency this Agreement or the Debentures, the financial condition of the
Borrower or the condition or value of any of the Collateral, or be required to
make any inquiry concerning either the performance or observance of any of the
terms, provisions or conditions of this Agreement or the Debentures, the
financial condition of the Borrower or the existence or possible existence of
any default or event of default.  The
Agent shall be entitled to rely upon advice of counsel concerning legal matters
and upon any notice, consent, certificate, statement or writing which it
believes to be genuine and to have presented by a proper person.

 

(c)                                  Obligations
Held by the Agent.  The Agent shall
have the same rights and powers with respect to any Debentures held by it or
any of its affiliates, as any Secured Party and may exercise the same as if it
were not the Agent.  Each of the
Borrower and each Secured Party hereby waives, and each successor to any
Secured Party shall be deemed to waive, any right to disqualify any Secured
Party from serving as the Agent or any claim against that Secured Party for
serving as Agent.

 

(d)                                 Copies,
etc.  The Agent shall give prompt notice to each
Secured Party of each notice or request required or permitted to be given to
the Agent by the Borrower pursuant to the terms of this Agreement.  The Agent will distribute to each Secured
Party each instrument and other agreement received for its account and copies
of all other communications received by the Agent from a Borrower for
distribution to the Secured Party by the Agent in accordance with the terms of
this Agreement.  Notwithstanding
anything herein contained to the contrary, all notices to and communications
with the Borrower under this Agreement shall be effected by the Secured Party
through the Agent.

 

(e)                                  Resignation
of Agent.  The Agent may resign as such at any time
upon at least thirty (30) days’ prior notice to the Borrower and all the
Secured Parties, such resignation not to be effective until a successor Agent
is in place.  If the Agent at any time
shall resign, a  Two-Thirds-in-Interest
may jointly appoint another Secured Party as a successor Agent which shall
thereupon become the Agent hereunder. Upon the acceptance of any appointment as
Agent hereunder by a successor Agent, such successor Agent shall be entitled to
receive from the retiring Agent such documents of transfer and assignment as
such successor Agent may reasonably request, and shall thereupon succeed to and
become vested with all rights, powers, privileges, and duties of the retiring
Agent, and the retiring Agent shall be discharged from its duties and
obligations under this Agreement.

 

(f)                                    Replacement
of Agent.  A Two-Thirds-in-Interest
may at any time and for any reason replace the Agent with a successor Agent
jointly selected by them, upon at least five (5) days written notice to the
Borrower and the other Secured Parties. Upon the acceptance of any appointment
as Agent hereunder by a successor Agent, such successor Agent shall be entitled
to receive from the terminated Agent such documents of transfer and assignment
as such successor Agent may reasonably request, and shall thereupon succeed to
and become vested with all rights, powers, privileges, and duties of the
retiring Agent, and the terminated Agent shall be discharged from its duties
and obligations under this Agreement.

 

10

 

13.                                 Conditions
for Sale of Collateral by Borrower. 
The Borrower shall be entitled to sell all or a portion of the
Collateral to an unaffiliated purchaser for a net purchase price which is equal
to or greater than the fair market value of such Collateral (the “Purchase
Price”) if such purchaser shall deliver the Purchase Price (or
portion thereof, if applicable) to each Secured Party (on a pro-rata basis) in
payment of the Borrower Prepayment Price (as defined in the Debentures) for the
prepayment in full, pursuant to Section 11 of the Debenture, of such portion of
the outstanding principal amount of Debentures held by such Secured Party for
which such Borrower Prepayment Price shall apply.  Upon Secured Parties’ unconditional receipt of the Purchase
Price, the Secured Parties’ liens in any item of Collateral that is subject of
the foregoing sale shall automatically terminate and the Secured Parties shall
cooperate with the Borrower in making all appropriate filings including UCC
filings in order to evidence such termination. 
Notwithstanding anything herein to the contrary, if, as a  result of a potential sale of Collateral
pursuant to the immediately preceding sentence, there shall remain an
outstanding principal amount of Debentures (including accrued interest thereon)
then held by the Secured Parties, then such sale shall only be permitted if the
Borrower shall deliver a Borrower Prepayment Notice (as defined in the
Debentures) to such Secured Parties pursuant to which it shall pay to such
Secured Parties (on a pro-rata basis) a Borrower Prepayment Price equal to no
less than 50% of the Purchase Price.

 

14.                                 Notices.  All notices, requests, demands and other
communications hereunder shall be in writing, with copies to all the other
parties hereto, and shall be deemed to have been duly given when (i) if
delivered by hand, upon receipt, (ii) if sent by facsimile, upon receipt of
proof of sending thereof, (iii) if sent by nationally recognized overnight
delivery service (receipt requested), the next business day or (iv) if mailed
by first-class registered or certified mail, return receipt requested, postage
prepaid, four days after posting in the U.S. mails, in each case if delivered
to the following addresses:

 

If to the
Borrower:

 

Aerogen, Inc.

2071 Stierlin Court

Mountain View, CA 94043

Facsimile No.: (650) 864-7433

Attn: Chief Financial Officer

 

With a copy
to:

 

Cooley Godward LLP

Five Palo Alto Square

3000 El Camino Real

Palo Alto, CA 94306-2155

Facsimile No.: (650) 849-7400

Attn: Robert J. Brigham, Esq.

 

If to Secured
Parties:   To the address set forth under such Secured Parties’
name on the signature pages hereto.

 

11

 

15.                                 Other Security.  To the extent that the Obligations are now
or hereafter secured by property other than the Collateral or by the guarantee,
endorsement or property of any other person, firm, corporation or other entity,
then the Secured Parties shall have the right, in their sole discretion, to
pursue, relinquish, subordinate, modify or take any other action with respect
thereto, without in any way modifying or affecting any of the Secured Parties’
rights and remedies hereunder.

 

16.                                 Actions by Secured Parties.  Any action required or permitted hereunder
to be taken by or on behalf of the Secured Parties shall, for such action to be
valid, require the approval of the Two-Thirds-in-Interest prior to the taking
of such action.  If the consent,
approval or disapproval of the Secured Parties is required or permitted
pursuant to this Agreement, such consent, approval or disapproval shall only be
valid if given by the Two-Thirds-in-Interest. 
“Two-Thirds-in-Interest” means the Secured Party or Secured
Parties (as the case may be) holding in excess of 2/3 of the outstanding
aggregate principal amount under the Debentures, determined on a cumulative
basis.

 

17.                                 Miscellaneous.  (a)  No course of dealing between
the Borrower and the Secured Parties, nor any failure to exercise, nor any
delay in exercising, on the part of the Secured Parties, any right, power or
privilege hereunder, under the Debentures or under this Agreement shall operate
as a waiver thereof; nor shall any single or partial exercise of any right,
power or privilege hereunder or thereunder preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.

 

(b)                                 All
of the rights and remedies of the Secured Parties with respect to the
Collateral, whether established hereby, by the Debentures or by any other
agreements, instruments or documents or by law shall be cumulative and may be
exercised singly or concurrently.

 

(c)                                  This
Agreement constitutes the entire agreement of the parties with respect to the
subject matter hereof and is intended to supersede all prior negotiations,
understandings and agreements with respect thereto.  Except as specifically set forth in this Agreement, no provision
of this Agreement may be modified or amended except by a written agreement
signed by the parties hereto.

 

(d)                                 In
the event that any provision of this Agreement is held to be invalid,
prohibited or unenforceable in any jurisdiction for any reason, unless such
provision is narrowed by judicial construction, this Agreement shall, as to
such jurisdiction, be construed as if such invalid, prohibited or unenforceable
provision had been more narrowly drawn so as not to be invalid, prohibited or
unenforceable.  If, notwithstanding the
foregoing, any provision of this Agreement is held to be invalid, prohibited or
unenforceable in any jurisdiction, such provision, as to such jurisdiction,
shall be ineffective to the extent of such invalidity, prohibition or
unenforceability without invalidating the remaining portion of such provision
or the other provisions of this Agreement and without affecting the validity or
enforceability of such provision or the other provisions of this Agreement in
any other jurisdiction.

 

12

 

(e)                                  No
waiver of any breach or default or any right under this Agreement shall be
considered valid unless in writing and signed by the party giving such waiver,
and no such waiver shall be deemed a waiver of any subsequent breach or default
or right, whether of the same or similar nature or otherwise.

 

(f)                                    This
Agreement shall be binding upon and inure to the benefit of each party hereto
and its successors and assigns.

 

(g)                                 Each
party shall take such further action and execute and deliver such further
documents as may be necessary or appropriate in order to carry out the
provisions and purposes of this Agreement.

 

(h)                                 This
Agreement shall be construed in accordance with the laws of the State of New
York, except to the extent the validity, perfection or enforcement of a
security interest hereunder in respect of any particular Collateral which are
governed by a jurisdiction other than the State of New York in which case such
law shall govern.  Each of the parties
hereto irrevocably submits to the exclusive jurisdiction of any New York State
or United States Federal court sitting in New York county over any action or
proceeding arising out of or relating to this Agreement, and the parties hereto
hereby irrevocably agree that all claims in respect of such action or
proceeding may be heard and determined in such New York State or Federal
court.  The parties hereto agree that a
final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law.  The parties hereto
further waive any objection to venue in the State of New York and any objection
to an action or proceeding in the State of New York on the basis of forum non
conveniens.

 

(i)                                     EACH
PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT.  THE SCOPE OF THIS WAIVER IS INTENDED TO BE
ALL ENCOMPASSING OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE
TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND
STATUTORY CLAIMS.  EACH PARTY HERETO
ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR EACH PARTY TO ENTER
INTO A BUSINESS RELATIONSHIP, THAT EACH PARTY HAS ALREADY RELIED ON THIS WAIVER
IN ENTERING INTO THIS AGREEMENT AND THAT EACH PARTY WILL CONTINUE TO RELY ON
THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY FURTHER WARRANTS AND
REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT
SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS RIGHTS TO A JURY TRIAL
FOLLOWING SUCH CONSULTATION.  THIS
WAIVER IS IRREVOCABLE, MEANING THAT, NOTWITHSTANDING ANYTHING HEREIN TO THE
CONTRARY, IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER
SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS AND SUPPLEMENTS OR

 

13

 

MODIFICATIONS TO THIS
AGREEMENT.  IN THE EVENT OF A
LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE
COURT.

 

(j)                                     This
Agreement may be executed in any number of counterparts, each of which when so
executed shall be deemed to be an original and, all of which taken together
shall constitute one and the same Agreement. 
In the event that any signature is delivered by facsimile transmission,
such signature shall create a valid binding obligation of the party executing
(or on whose behalf such signature is executed) the same with the same force
and effect as if such facsimile signature were the original thereof.

 

 

* * * * * * * * * * *

 

14

 

IN WITNESS WHEREOF, the parties hereto have
caused this Intellectual Property Security Agreement to be duly executed on the
day and year first above written.

 

	
   

  	
  AEROGEN, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

IN WITNESS WHEREOF, the parties hereto have
caused this Intellectual Property Security Agreement to be duly executed on the
day and year first above written.

 

 

	
   

  	
  SF CAPITAL
  PARTNERS, LTD.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:  Brian H. Davidson

  
	
   

  	
   

  	
  Title:    Authorized Signatory

  
	
   

  	
   

  
	
   

  	
  Address for Notice:

  
	
   

  	
   

  
	
   

  	
  c/o Staro Asset Management, LLC

  
	
   

  	
  3600 South Lake Drive

  
	
   

  	
  St. Francis, Wisconsin 53235

  
	
   

  	
  Facsimile No.:  (414) 294-7700

  
	
   

  	
  Attn.:  Brian H. Davidson

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  With a copy to:

  
	
   

  	
  Bryan Cave LLP

  
	
   

  	
  1290 Avenue of the Americas

  
	
   

  	
  New York, NY  10104

  
	
   

  	
  Facsimile No.: (212) 541-4630 and (212) 541-1432

  
	
   

  	
  Attn:  Eric L. Cohen, Esq.

  

 

2

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