Document:

exv10w1

 

EXHIBIT 10.1

SENIOR SECURED TERM LOAN AGREEMENT

U.S.$15,000,000

Dated as of September 26, 2005

between

EMISPHERE TECHNOLOGIES, INC.,

as Borrower

and

MHR INSTITUTIONAL PARTNERS IIA LP,

as Lender

 

Table of Contents

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	1.	 	 	
    DEFINITIONS; INTERPRETATION	 	 	1	 
	 	 	 	 	 	1.1.	 	 	
    Definitions	 	 	1	 
	 	 	 	 	 	1.2.	 	 	
    Interpretation	 	 	11	 
	 	2.	 	 	
    COMMITMENTS; DISBURSEMENT	 	 	11	 
	 	 	 	 	 	2.1.	 	 	
    Commitment to Lend	 	 	11	 
	 	 	 	 	 	2.2.	 	 	
    Disbursement	 	 	11	 
	 	3.	 	 	
    REPAYMENT	 	 	11	 
	 	 	 	 	 	3.1.	 	 	
    Repayment	 	 	11	 
	 	 	 	 	 	3.2.	 	 	
    Illegality	 	 	11	 
	 	4.	 	 	
    REDEMPTION	 	 	12	 
	 	 	 	 	 	4.1.	 	 	
    Redemption	 	 	12	 
	 	5.	 	 	
    INTEREST	 	 	12	 
	 	 	 	 	 	5.1.	 	 	
    Basic Rate	 	 	12	 
	 	 	 	 	 	5.2.	 	 	
    Default Interest	 	 	12	 
	 	 	 	 	 	5.3.	 	 	
    Interest Payments	 	 	12	 
	 	6.	 	 	
    TAXES	 	 	12	 
	 	 	 	 	 	6.1.	 	 	
    Withholding	 	 	12	 
	 	 	 	 	 	6.2.	 	 	
    Gross-up	 	 	12	 
	 	 	 	 	 	6.3.	 	 	
    Stamp Taxes	 	 	13	 
	 	7.	 	 	
    PAYMENTS; COMPUTATIONS	 	 	13	 
	 	 	 	 	 	7.1.	 	 	
    Making of Payments	 	 	13	 
	 	 	 	 	 	7.2.	 	 	
    Computations	 	 	13	 
	 	8.	 	 	
    CONDITIONS PRECEDENT	 	 	13	 
	 	 	 	 	 	8.1.	 	 	
    Conditions to the Making of the Loan	 	 	13	 
	 	9.	 	 	
    REPRESENTATIONS AND WARRANTIES	 	 	14	 
	 	 	 	 	 	9.1.	 	 	
    Representations and Warranties	 	 	14	 
	 	10.	 	 	
    COVENANTS	 	 	21	 
	 	 	 	 	 	10.1.	 	 	
    Use of Proceeds	 	 	21	 
	 	 	 	 	 	10.2.	 	 	
    Disbursement Account	 	 	21	 
	 	 	 	 	 	10.3.	 	 	
    Governmental Authorizations	 	 	21	 
	 	 	 	 	 	10.4.	 	 	
    Financial Statements; Reporting	 	 	21	 
	 	 	 	 	 	10.5.	 	 	
    ERISA	 	 	23	 
	 	 	 	 	 	10.6.	 	 	
    Maintenance of Property	 	 	23	 
	 	 	 	 	 	10.7.	 	 	
    Maintenance of Existence; Lines of Business	 	 	23	 
	 	 	 	 	 	10.8.	 	 	
    Compliance with Laws	 	 	23	 
	 	 	 	 	 	10.9.	 	 	
    Books and Records; Inspection Rights	 	 	23	 
	 	 	 	 	 	10.10.	 	 	
    Notices of Default	 	 	23	 
	 	 	 	 	 	10.11.	 	 	
    Liens and Encumbrances	 	 	23	 
	 	 	 	 	 	10.12.	 	 	
    Insurance	 	 	23	 
	 	 	 	 	 	10.13.	 	 	
    Proxy Statement	 	 	24	 
	 	 	 	 	 	10.14.	 	 	
    Consolidations, Mergers	 	 	24	 
	 	 	 	 	 	10.15.	 	 	
    Asset Sales	 	 	24	 
	 	 	 	 	 	10.16.	 	 	
    Transactions With Affiliates	 	 	25	 

i

 

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	10.17.	 	 	
    Notice of Tax Exemption	 	 	25	 
	 	 	 	 	 	10.18.	 	 	
    Payment of Taxes	 	 	25	 
	 	 	 	 	 	10.19.	 	 	
    Stockholder Approval	 	 	25	 
	 	 	 	 	 	10.20.	 	 	
    Limitation on Indebtedness	 	 	25	 
	 	 	 	 	 	10.21.	 	 	
    Restricted Payments	 	 	26	 
	 	 	 	 	 	10.22.	 	 	
    Notices	 	 	26	 
	 	 	 	 	 	10.23.	 	 	
    Cancellation of Indebtedness	 	 	26	 
	 	 	 	 	 	10.24.	 	 	
    Subsidiaries	 	 	26	 
	 	 	 	 	 	10.25.	 	 	
    Limitation on Issuance of Equity Interests of Subsidiaries	 	 	26	 
	 	 	 	 	 	10.26.	 	 	
    Maintenance of NOLs	 	 	26	 
	 	 	 	 	 	10.27.	 	 	
    Intellectual Property	 	 	27	 
	 	 	 	 	 	10.28.	 	 	
    Investments	 	 	27	 
	 	 	 	 	 	10.29.	 	 	
    Subsidiary Indebtedness	 	 	28	 
	 	 	 	 	 	10.30.	 	 	
    Restrictive Agreements	 	 	28	 
	 	 	 	 	 	10.31.	 	 	
    Limitation on Layering	 	 	28	 
	 	 	 	 	 	10.32.	 	 	
    Novartis Note	 	 	28	 
	 	 	 	 	 	10.33.	 	 	
    Clinical Trials	 	 	28	 
	 	 	 	 	 	10.34.	 	 	
    Additional Disclosure	 	 	28	 
	 	 	 	 	 	10.35.	 	 	
    SEC Filing Compliance	 	 	29	 
	 	 	 	 	 	10.36.	 	 	
    Post-Closing Actions	 	 	29	 
	 	11.	 	 	
    EXCHANGE FOR CONVERTIBLE NOTES	 	 	30	 
	 	 	 	 	 	11.1.	 	 	
    Exchange of Notes	 	 	30	 
	 	 	 	 	 	11.2.	 	 	
    Additional Conditions to Exchange	 	 	30	 
	 	12.	 	 	
    EVENTS OF DEFAULT	 	 	30	 
	 	 	 	 	 	12.1.	 	 	
    Events of Default	 	 	30	 
	 	 	 	 	 	12.2.	 	 	
    Default Remedies	 	 	32	 
	 	 	 	 	 	12.3.	 	 	
    Right of Setoff	 	 	34	 
	 	 	 	 	 	12.4.	 	 	
    Rights Not Exclusive	 	 	34	 
	 	13.	 	 	
    INDEMNIFICATION	 	 	34	 
	 	 	 	 	 	13.1.	 	 	
    Amendment and Enforcement Expenses	 	 	34	 
	 	 	 	 	 	13.2.	 	 	
    Other Expenses	 	 	34	 
	 	 	 	 	 	13.3.	 	 	
    Indemnification	 	 	34	 
	 	 	 	 	 	13.4.	 	 	
    Increased Costs	 	 	35	 
	 	 	 	 	 	13.5.	 	 	
    Waiver of Consequential Damages, Etc	 	 	35	 
	 	 	 	 	 	13.6.	 	 	
    Nature of Indemnity	 	 	36	 
	 	14.	 	 	
    GENERAL	 	 	36	 
	 	 	 	 	 	14.1.	 	 	
    Choice of Law	 	 	36	 
	 	 	 	 	 	14.2.	 	 	
    Jurisdiction	 	 	36	 
	 	 	 	 	 	14.3.	 	 	
    Application and Distribution of Payments	 	 	36	 
	 	 	 	 	 	14.4.	 	 	
    Replacement of Notes	 	 	36	 
	 	 	 	 	 	14.5.	 	 	
    Notices	 	 	37	 
	 	 	 	 	 	14.6.	 	 	
    Waivers	 	 	37	 
	 	 	 	 	 	14.7.	 	 	
    Amendment	 	 	37	 
	 	 	 	 	 	14.8.	 	 	
    Assignments and Participations	 	 	38	 
	 	 	 	 	 	14.9.	 	 	
    Determinations by the Lender	 	 	38	 

ii

 

	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	14.10.	 	 	
    Survival	 	 	38	 
	 	 	 	 	 	14.11.	 	 	
    Severability of Provisions	 	 	38	 
	 	 	 	 	 	14.12.	 	 	
    Counterparts	 	 	38	 
	 	 	 	 	 	14.13.	 	 	
    Confidentiality	 	 	38	 
	 	 	 	 	 	14.14.	 	 	
    Binding Effect	 	 	38	 
	 	 	 	 	 	14.15.	 	 	
    Integration of Terms	 	 	38	 
	 	 	 	 	 	14.16.	 	 	
    WAIVER OF RIGHT TO TRIAL BY JURY	 	 	38	 
	 	 	 	 	 	14.17.	 	 	
    Nature of Obligations	 	 	38	 

Exhibits

	 	 	 
	
    
    EXHIBIT A:

    	 	
    Form of Promissory Note
	
    
    EXHIBIT B:

    	 	
    Form of Certificate of the Borrower
	
    
    EXHIBIT C:

    	 	
    Form of Opinion of Counsel to the Borrower
	
    
    EXHIBIT D:

    	 	
    Budget of Borrower
	
    
    EXHIBIT E:

    	 	
    Third-Party Notices
	
    
    EXHIBIT F:

    	 	
    Investment Guidelines
	
    
    EXHIBIT G:

    	 	
    Form of Compliance Certificate
	
    
    EXHIBIT H:

    	 	
    Account Information

iii

 

     
This SENIOR SECURED TERM LOAN AGREEMENT (this
“Agreement”) dated as of
September 26, 2005 between Emisphere Technologies, Inc., a
Delaware corporation (the “Borrower”)
and MHR Institutional Partners IIA LP, a Delaware limited
partnership (the “Lender”).

     
WHEREAS, the Borrower proposes to borrow from the Lender in
order to fund certain operating expenses as further set forth in
the Budget (as defined below); and

     
WHEREAS, the Lender proposes to lend to the Borrower,
$15,000,000 for such purpose on the terms and subject to the
conditions set forth in this Agreement.

     
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained herein, the parties agree as
follows:

		
	1.	
    DEFINITIONS; INTERPRETATION

     
1.1.     Definitions. For
purposes of this Agreement, the terms defined in the recitals of
the parties shall have the meanings given to them therein and
the following terms shall have the following respective meanings.

     
“18-Month Budget” means, with respect to any
Asset Sale proposed to be made pursuant to
Section 10.15(c), the Borrower’s operating budget
covering the period from the date of the consummation of such
Asset Sale to the date 18 months thereafter.

     
“Affiliate” means, as to any Person, any other
Person (i) that, directly or indirectly through one or more
intermediaries, controls, is controlled by, or is under common
control with, such Person; (ii) who is a director or
officer (A) of such Person; (B) of any Subsidiary of
such Person; or (C) of any Person described in
clause (i) above with respect to such Person; or
(iii) which, directly or indirectly through one or more
intermediaries, is the beneficial or record owner (as defined in
Rule 13d-3 of the Exchange Act, as is in effect on the date
hereof) of 10% or more of any class of the outstanding voting
stock, securities or other equity or ownership interests of such
Person; provided that notwithstanding anything else
herein to the contrary, any Permitted Holder shall be deemed not
to be an Affiliate of the Borrower or any Subsidiary. For
purposes of this definition, the term “control” (and
the correlative terms, “controlled by” and “under
common control with”) shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of
the management or policies, whether through ownership of
securities or other interests, by contract or otherwise.

     
“Affiliate Transaction” has the meaning
ascribed to such term in Section 10.16.

     
“Asset Sale” means (i) the sale, lease,
conveyance or other disposition of any assets or rights
(including, without limitation, a sale/leaseback transaction,
and the sale or transfer of any FDA licenses or approvals) other
than any sale, lease, conveyance or other disposition involving
assets or rights (or a series of related sales, leases,
conveyances or other dispositions) having a fair market value
less than $50,000 individually and $100,000 in the aggregate
during the period from the Closing Date until the Repayment Date
(which fair market value shall in each case be determined as of
the date of such disposition), and other than sales, conveyances
or transfers of inventory in the ordinary course of business
consistent with past practices with the prior written consent of
the Lender (which shall not be unreasonably withheld); and
(ii) the issuance or sale by the Borrower or any of its
Subsidiaries of Equity Interests of any of the Borrower’s
Subsidiaries. Notwithstanding the foregoing, the following items
shall not be deemed to be Asset Sales: (i) a transfer of
assets by the Borrower to a Subsidiary or by a Subsidiary to the
Borrower or to another Subsidiary; (ii) an issuance or sale
of Equity Interests by a Subsidiary to the Borrower or to
another Subsidiary; (iii) a sale or other disposition of
property or equipment that has become worn out, obsolete or
otherwise unsuitable for its purpose; (iv) a disposition of
Cash Equivalents; (v) transactions consummated in
compliance with Section 10.15 or Restricted Payments in
accordance with Section 10.21; and (vi) the exercise
of rights (including foreclosure), in respect of any Lien
permitted by Section 10.11.

     
“Atticus” means Atticus European Fund LTD.

     
“Atticus Consent” means that certain letter
agreement dated as of August 19, 2005 by and between the
Borrower and Atticus.

 

     
“Bank” means a financial institution at which
the Borrower and the Lender shall mutually agree to maintain the
Disbursement Account.

     
“Bankruptcy Code” means the Bankruptcy Code of
the United States, and all other liquidation, conservatorship,
bankruptcy, assignment for the benefit of creditors, moratorium,
rearrangement, receivership, insolvency, reorganization, or
similar debtor relief Laws of the United States or other
applicable jurisdictions from time to time in effect and
affecting the rights of creditors generally.

     
“Board of Directors” means the board of
directors of the Borrower.

     
“Borrower 2004 10-K” means Emisphere
Technologies, Inc.’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2004, as amended and
filed with the SEC prior to the Closing Date.

     
“Borrower Intellectual Property” constitutes
all present and future Intellectual Property owned, controlled,
licensed or used by the Borrower or necessary to the conduct of
the business of the Borrower.

     
“Borrower SEC Documents” has the meaning
ascribed to such term in Section 9.1(k).

     
“Borrower Ongoing SEC Documents” has the
meaning ascribed to such term in Section 10.35.

     
“Budget” has the meaning ascribed to such term
in Section 10.1, as updated and amended from time to time
pursuant to Section 10.04(c) and Section 10.15.

     
“Business Day” means any day that is not a
Saturday, a Sunday or a day on which banks are required or
permitted to be closed in the State of New York.

     
“Capital Lease” means, for any Person, a lease
of any interest in any kind of property (whether real, personal
or mixed) or asset by such Person as lessee that is, should be
or should have been recorded as a “capital lease” on
the balance sheet of such Person in accordance with GAAP.

     
“Cash Equivalents” means (i) Dollars,
(ii) securities issued or directly and fully guaranteed or
insured by the United States government or any agency or
instrumentality thereof (provided that the full faith and
credit of the United States is pledged in support thereof)
having maturities of not more than 6 months from the date
of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of 6 months or
less from the date of acquisition, bankers’ acceptances
with maturities not exceeding 6 months and overnight bank
deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500,000,000 and a Thompson
Bank Watch Rating of “B” or better,
(iv) repurchase obligations with a term of not more than
7 days for underlying securities of the types described in
clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in
clause (iii) above, (v) commercial paper having the
highest rating obtainable from Moody’s Investors Service,
Inc. or Standard & Poor’s Ratings Group and in
each case maturing within 6 months after the date of
acquisition and (vi) money market funds at least 95% of the
assets of which constitute Cash Equivalents of the kinds
described in clauses (i) - (v) of this definition.

     
“Change of Control” shall be deemed to have
occurred when (i) any person (as defined in
Section 13(d)(3) or Section 14(d)(2) of the Exchange
Act), other than one or more Permitted Holders, becomes the
beneficial owner (as the term “beneficial owner” is
defined under Rule 13d-3 under the Exchange Act) of a
majority of the combined voting power of the Common Stock;
(ii) the Borrower merges or consolidates with or into
another Person as a result of which the shareholders of the
Borrower immediately prior to the consummation of such
transaction do not own at least 50% of the outstanding voting
securities of the remaining, consolidated or successor entity,
as the case may be, or the Borrower sells or disposes of all or
substantially all of its assets to any Person; (iii) the
liquidation, dissolution, or the winding up of the affairs of
the Borrower; or (iv) during any 12 month-period
following the date hereof, individuals who at the beginning of
such period constituted the Board of Directors (and any new
members of the Board of Directors whose election by the Board of
Directors or whose nomination for election by the
Borrower’s shareholders was approved by (A) a vote of
a majority of the members of the Board of Directors then still
in office who either were directors at the beginning of such
period or whose election or nomination for election was
previously so

2

 

approved or (B) the Permitted Holders), cease for any
reason to constitute a majority of the Board of Directors.

     
“Closing Date” means the date of this
Agreement, or such other date mutually agreed by the parties in
writing on which the conditions precedent set forth in
Article 8 shall be first satisfied or waived and the
transactions contemplated hereby to occur on such date are
consummated.

     
“Code” or “UCC” means the
Uniform Commercial Code in effect in the State of New York;
provided, that in the event that, by reason of mandatory
provisions of law, any or all of the attachment, perfection or
priority of, or remedies with respect to the Lender’s Lien
on any Collateral is governed by the Uniform Commercial Code as
enacted and in effect in a jurisdiction other than the State of
New York, the term “Code” shall mean the Uniform
Commercial Code as enacted and in effect in such other
jurisdiction solely for purposes of the provisions thereof
relating to such attachment, perfection, priority or remedies
and for purposes of definitions related to such provisions.

     
“Collateral” has the meaning ascribed to such
term in Section 2.1 of the Security Agreement.

     
“Common Stock” means the Borrower’s common
stock, par value $0.01 per share.

     
“Confidential Information” means all
proprietary and confidential information or materials possessed
or developed, whether developed before or after the Closing
Date; including without limitation, information or materials on
substances, formulations, technology, equipment, data, reports,
Know-How, sources for supply, patent position and business
plans, inventions, discoveries, improvements and methods,
marketing techniques or plans, manufacturing and other plant
designs, location of operations, and any other information
regarding business operations.

     
“Convertible Note” has the meaning ascribed to
such term in the Investment Agreement.

     
“Copyright Licenses” means all written
agreements granting any right under any Copyright, including the
grant of rights to manufacture, distribute, exploit and sell
materials derived from any Copyright.

     
“Copyrights” means all copyrights arising under
the laws of the United States, any other country or any
political subdivision thereof, whether registered or
unregistered and whether published or unpublished, all
registrations and recordings thereof, and all applications in
connection therewith, including all registrations, recordings
and applications in the United States Copyright Office, and the
right to obtain all renewals of any of the foregoing.

     
“Daily Market Price” shall mean, as of any date
of determination, the closing sale price for the Common Stock,
for the Trading Day of such date of determination (subject to
equitable adjustment for any stock splits, stock dividends,
reclassifications or similar events during such Trading Day or
that are not otherwise reflected in such closing price and
further subject to adjustment as provided herein) on the
principal United States securities exchange or trading market
where the Common Stock is listed or traded as reported by
Bloomberg, or if the foregoing does not apply, the closing sale
price for the Common Stock on the OTC Bulletin Board for
such security as reported by Bloomberg, or, if no sale price is
reported for such security by Bloomberg, the closing sale price
as reported in the “pink sheets” by the Pink Sheets
LLC, in each case for such date or, if such date was not a
Trading Day for such security, on the next preceding date which
was a Trading Day. If the Daily Market Price cannot be
calculated for such security as of either of such dates on any
of the foregoing bases, the Daily Market Price of such security
on such date shall be the fair market value as reasonably
determined by an investment banking firm selected by the Lender
and reasonably acceptable to the Borrower, with the costs of
such appraisal to be borne by the Borrower.

     
“Default” means any event that, with the giving
of notice or the lapse of time or both, would constitute an
Event of Default.

     
“Designated Account” means the bank account
previously designated by Lender into which the Lender shall
disburse, pursuant to Sections 2.2 and 8.1(j) hereof, the
full amount required by this Agreement to be so disbursed for
and on behalf of the Borrower pursuant to Section 8.1(j)
hereof.

3

 

     
“Disbursement Account” means (a) an
investment account (i) maintained at Bank in the name of
the Borrower, and (ii) as to which the right to transfer,
withdraw or otherwise disburse funds therefrom shall reside,
pursuant to the terms hereof and the terms of any account
control agreement if one was entered into, solely with the
Lender to the exclusion of the Borrower, as such investment
account may be reconstituted or replaced pursuant to
Section 10.36, or (b) such other deposit account as
the Lender and Borrower shall reasonably agree, and in each case
subject to an account control agreement in form and substance
acceptable to the Lender and the Borrower.

     
“Disqualified Equity Interests” means any
Equity Interests that, by their terms (or by the terms of any
security into which they are convertible, or for which they are
exchangeable, at the option of the holder thereof), or upon the
happening of any event, mature or are mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or are
redeemable at the option of the holder thereof, in whole or in
part, on or prior to the date that is 91 days after the
Maturity Date.

     
“Dollars” or “$” means lawful
money of the United States.

     
“Environmental Law” means any present and
future federal, state, local or foreign laws, statutes,
ordinances, rules, regulations and the like, as well as common
law, relating to protection of human health or the environment,
including but not limited to those relating to Hazardous
Substances.

     
“Equity Interest” means, (i) with respect
to any Person that is a corporation, any and all shares,
interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock,
including each class of common stock and preferred stock of such
Person and all options, warrants or other rights to purchase or
acquire any of the foregoing; and (ii) with respect to any
Person that is not a corporation, any and all partnership,
membership or other equity interests of such Person, and all
options, warrants or other rights to purchase or acquire any of
the foregoing.

     
“ERISA” means the Employee Retirement Income
Security Act of 1974.

     
“ERISA Affiliate” means, with respect to the
Borrower or any Subsidiary, any trade or business (whether or
not incorporated) that, together with the Borrower or
Subsidiary, is treated as a single employer within the meaning
of Sections 414(b), (c), (m) or (o) of the IRC.

     
“ERISA Event” means, with respect to the
Borrower or any Subsidiary or ERISA Affiliate, (i) the
complete or partial withdrawal (as such terms are defined in
Sections 4203 and 4205 of ERISA, respectively) of the
Borrower or any Subsidiary or ERISA Affiliate from any
Multiemployer Plan; (ii) the institution of proceedings to
terminate a Multiemployer Plan by the PBGC; (iii) the
failure by the Borrower or any Subsidiary or ERISA Affiliate to
make when due required contributions to a Multiemployer Plan
unless such failure is cured within 30 days; (iv) any
other event or condition that might reasonably be expected to
constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer,
any Multiemployer Plan or for the imposition of liability under
Section 4069 or 4212(c) of ERISA; (v) the termination
of a Multiemployer Plan under Section 4041A of ERISA or the
reorganization or insolvency of a Multiemployer Plan under
Section 4241 or 4245 of ERISA; (vi) the loss of a
Qualified Plan’s qualification or tax exempt status; or
(vii) any other event or condition that could constitute
grounds for the imposition of material liability with respect to
any Plan and which, if curable, is not cured within 30 days.

     
“Event of Default” has the meaning ascribed to
such term in Section 12.1.

     
“Exchange” has the meaning ascribed to such
term in Section 11.1.

     
“Exchange Act” means the Securities Exchange
Act of 1934.

     
“Exchange Date” has the meaning ascribed to
such term in Section 11.1.

     
“Exchange Notice” has the meaning ascribed to
such term in Section 11.1.

     
“Excluded Taxes” means, with respect to the
Lender or any other recipient of any payment to be made by or on
account of any Obligation, (i) income or franchise taxes
imposed on (or measured by) its net income by the United States
of America, or by the jurisdiction under the laws of which such
recipient is organized or

4

 

in which its principal office is located or in which its
applicable lending office is located, (ii) any branch
profits taxes imposed by the United States of America or any
similar tax imposed by any other jurisdiction in which the
Borrower is located and (iii) any value-added tax imposed
by any governmental authority.

     
“FDA” means the Food and Drug Administration,
as from time to time constituted, created under the Food and
Drug Act of 1906.

     
“Final Withdrawal Date” means the date
immediately following the date on which all proceeds have been
disbursed from the Disbursement Account at the direction of the
Borrower and in accordance with the applicable provisions hereof.

     
“GAAP” means generally accepted accounting
principles in the United States of America in effect from time
to time as applied by nationally recognized accounting firms.

     
“Guarantee” by any Person means 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,
without limitation, any obligation of such Person: (i) 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; (ii) to purchase property, securities
or services for the purpose of assuring the holder of such
Indebtedness of the payment of such Indebtedness; or
(iii) 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 (and “Guaranteed,”
“Guaranteeing” and “Guarantor” shall have
meanings correlative to the foregoing); provided,
however, that the Guarantee by any Person shall not include
endorsements by such Person for collection or deposit, in either
case, in the ordinary course of business.

     
“Guarantors” means each Subsidiary of the
Borrower that executes a guaranty in accordance with
Section 10.24.

     
“Hazardous Substances” includes, but is not
limited to, any and all substances defined, listed or otherwise
classified as pollutants, hazardous wastes, medical wastes,
hazardous substances, radiological substances, hazardous
materials, extremely hazardous wastes or words of similar
meaning or regulatory effect under any present or future
Environmental Laws, or that may have a negative impact on human
health or the environment.

     
“Hedge Agreement” means any and all
transactions, agreements or documents now existing or hereafter
entered into by the Borrower which provide for an interest rate,
credit, commodity or equity swap, cap, floor, collar, forward
foreign exchange transaction, currency swap, cross currency rate
swap, currency option, or any combination of, or option with
respect to, these or similar transactions, for the purpose of
hedging exposure to fluctuations in interest or exchange rates,
loan, credit exchange, security or currency valuations or
commodity prices.

     
“Indebtedness” of any Person means, without
duplication, (i) all obligations of such Person for
borrowed money; (ii) all obligations of such Person
evidenced by bonds, debentures, notes or other similar
instruments and all reimbursement or other obligations in
respect of letters of credit, bankers acceptances, interest rate
swaps, hedges, derivatives or other financial products;
(iii) all obligations of such Person as a lessee under
Capital Leases; (iv) all obligations or liabilities of
others secured by a Lien on any asset of such Person,
irrespective of whether such obligation or liability is assumed;
(v) all obligations of such Person to pay the deferred
purchase price of assets; (vi) all obligations of such
Person owing under Hedge Agreements; and (vii) any
obligations of such Person Guaranteeing or intended to Guarantee
(whether directly or indirectly Guaranteed, endorsed, co-made,
discounted, or sold with recourse) any obligation of any other
Person that constitutes Indebtedness of such other Person under
any of clauses (i) through (vi) above.

     
“Indemnifiable Taxes” means any Taxes other
than Excluded Taxes.

     
“Indemnified Party” has the meaning ascribed to
such term in Section 13.3.

5

 

     
“Intellectual Property” means the collective
reference to all rights, priorities and privileges relating to
intellectual property, whether arising under United States,
multinational or foreign laws or otherwise, including the
Know-How, Copyrights, the Copyright Licenses, the Patents, the
Patent Licenses, the Trademarks and the Trademark Licenses, and
all rights to sue at law or in equity for any infringement or
other impairment thereof, including the right to receive all
proceeds and damages therefrom.

     
“Interest Payment Date” means March 31,
June 30, September 30 and December 31 of each
year.

     
“Investment Agreement” means Investment and
Exchange Agreement, dated the Closing Date, among the Borrower,
the Lender, MHR Capital Partners (500) LP, MHR Capital
Partners (100) LP, and MHR Institutional Partners II
LP.

     
“Investment Guidelines” means the
Borrower’s Corporate Investment Policy, a copy of which is
attached hereto as Exhibit F.

     
“Investments” means, (i) any direct or
indirect purchase or other acquisition by the Borrower or any
Subsidiary of any Equity Interest, or other ownership interest
in, any other Person, and (ii) any direct or indirect loan,
advance or capital contribution by the Borrower or any
Subsidiary to any other Person, including all indebtedness and
accounts receivable from that other Person that are not current
assets or did not arise from sales to that other Person in the
ordinary course of business.

     
“IRC” means the Internal Revenue Code of 1986.

     
“Know-How” means any and all proprietary
unpatented technical information, data, ideas, test results,
inventions, instructions, processes, knowledge, techniques,
discoveries, formulae, specifications, designs, regulatory
filings, and biological or other materials (including, without
limitation, biological, chemical, toxicological, physical and
analytical, safety, manufacturing and quality control data and
information).

     
“Knowledge” means, with respect to the
knowledge of the Borrower, the knowledge of the chief executive
officer or the chief financial officer of the Borrower after due
and diligent inquiry.

     
“Lien” means any mortgage or deed of trust,
pledge, hypothecation, assignment, security deposit arrangement,
lien, charge, claim, security interest, easement or encumbrance,
or preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever
(including any lease or title retention agreement, any financing
lease having substantially the same economic effect as any of
the foregoing, and the filing of, or agreement to give, any
financing statement perfecting a security interest under the
Code or comparable law of any jurisdiction).

     
“Line of Business” means (a) the
Borrower’s development of improved dosage forms of drugs,
either alone or with corporate partners, by applying its
proprietary eligen® technology to those drugs or licensing
its eligen® technology to partners who typically apply it
directly to their marketed drugs (which has included oral
delivery of proteins, peptides, macromolecules and charged
organics), (b) the Borrower’s and its partners’
clinical trials of oral formulations or prototypes of salmon
calcitonin, heparin, insulin, parathyroid hormone, human growth
hormone and cromolyn sodium, and (c) the continued
development of any studies being actively undertaken by the
Borrower as of the Closing Date that are related to the
activities of the Borrower under clauses (a) and
(b) (including improved oral dosage forms of already orally
bioavailable drugs, trans and intra dermal delivery, and buccal
delivery).

     
“Loan” means the loan made pursuant to
Article 2.

     
“Loan Documents” means this Agreement, the
Note, the Security Documents and any certificates, instruments,
agreements or other documents executed in connection herewith or
therewith.

     
“Loan Repayment Amount” has the meaning
ascribed to such term in Section 12.2(b)(i).

     
“Make Whole Amount” has the meaning ascribed to
such term in Section 12.2(b).

     
“Material Adverse Effect” means, individually
or together with other adverse effects, any material adverse
effect on the liabilities, operations, financial condition,
tangible or intangible properties, business or results of
operations of the Borrower and its Subsidiaries taken as a whole
or the ability of the Borrower to

6

 

consummate the transactions contemplated hereby or by the other
Loan Documents, or the Proposed Transactions; provided,
however, that any such effects resulting from (i) any
change affecting the pharmaceutical industry generally,
(ii) any change in general United States economic
conditions, (iii) any change in law, rule or regulation or
GAAP; except, in the case of each of (i), (ii) and (iii),
to the extent that such changes affect the Borrower
disproportionately to the pharmaceutical industry taken as a
whole; (iv) any change, event, occurrence or state of facts
directly arising out of or resulting from any action taken, or
the failure to take an action, by the Borrower with the
Lender’s express written consent or in accordance with the
express written instructions of the Lender or as otherwise
expressly required or explicitly and specifically permitted to
be taken by the Borrower pursuant to the terms of this
Agreement, the other Loan Documents or the Investment Agreement;
or (v) any change in the Borrower’s stock price or any
failure by the Borrower to meet revenue or earnings projections
published by industry analysts (provided that this
clause (v) shall not be construed as providing, or be used
or relied upon for any determination, that the change, event,
occurrence or state of facts giving rise to such change or
failure does not constitute, cause, contribute to or result in a
Material Adverse Effect), shall in each case not be considered
when determining if a Material Adverse Effect has occurred.

     
“Material Adverse Event” has the meaning
ascribed to such term in Section 10.34.

     
“Maturity Date” means September 26, 2012.

     
“MHR” means MHR Fund Management LLC and any
successor thereto.

     
“Multiemployer Plan” means a
“multiemployer plan” as defined in
Section 4001(a)(3) of ERISA, and to which the Borrower or
any Subsidiary or ERISA Affiliate is making, is obligated to
make or has made or been obligated to make, contributions on
behalf of participants who are or were employed by any of them.

     
“Net Cash Proceeds” with respect to any
issuance or sale of Equity Interests or Indebtedness, means the
cash proceeds of such issuance or sale net of all reasonable and
customary attorneys’ fees, accountants’ fees,
underwriters’ or placement agents’ fees, discounts or
commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale; and net of
taxes actually paid as a result thereof.

     
“Non-Domestic Intellectual Property” means any
and all Intellectual Property other than Intellectual Property
arising under the laws of the United States.

     
“Note” means the $15,000,000 Senior Secured
Note issued by the Borrower and payable to the order of the
Lender, dated the Closing Date and substantially in the form of
Exhibit A.

     
“Novartis” means Novartis Pharma AG, a company
registered in Switzerland.

     
“Novartis Note” means the Convertible
Promissory Note Due December 1, 2009, Issued by
Borrower for the benefit of Novartis, as delivered to the Lender
on the Closing Date.

     
“Novartis Option and License Agreement” means
the Research Collaboration Option and License Agreement by and
between the Borrower and Novartis, dated as of December 1,
2004, as delivered to the Lender on the Closing Date.

     
“Obligation” means all principal of and
interest (including all interest that accrues after the
commencement of any case or proceeding by or against Lender in
bankruptcy, whether or not allowed in such case or proceeding)
on the Loan, and any penalties, fees, charges, expenses,
indemnification payments, reimbursements and any other sum
chargeable to the Borrower under this Agreement or any of the
other Loan Documents.

     
“Offering Proceeds” has the meaning ascribed to
such term in Section 12.2(b)(ii).

     
“Offering Shares” has the meaning ascribed to
such term in Section 12.2(b)(ii).

     
“Officers’ Certificate” means a
certificate signed by the chief executive officer and the chief
financial officer of the Borrower, and delivered to the Lender.

     
“Ownership Change” has the meaning ascribed to
such term in Section 9.1(y).

7

 

     
“Patent Licenses” means all agreements, whether
written or oral, providing for the grant of any right to
manufacture, use or sell any invention covered in whole or in
part by a Patent.

     
“Patents” means (i) all letters patent of
the United States, any other country or any political
subdivision thereof, all reissues and extensions thereof and all
goodwill associated therewith; (ii) all applications for
letters patent of the United States or any other country and all
divisions, continuations and continuations-in-part thereof; and
(iii) all rights to obtain any reissues or extensions of
the foregoing.

     
“PBGC” means the Pension Benefit Guaranty
Corporation.

     
“Peak Equity Amount” has the meaning ascribed
to such term in Section 12.2(b)(ii).

     
“Pension Plan” means a Plan described in
Section 3(2) of ERISA.

     
“Perfected Lien” means a legal, valid and
enforceable perfected, first priority lien and security interest
under the internal laws of the relevant state in the
United States (without reference to conflicts of law) for
the benefit of the Lender, pursuant to the Security Documents.

     
“Peril” means, collectively, fire, lightning,
flood, windstorm, hail, earthquake, explosion, riot and civil
commotion, vandalism and malicious mischief, damage from
aircraft, vehicles and smoke and all other perils covered by the
“all-risk” endorsement then in use in the
jurisdictions where the properties of the Borrower and its
Subsidiaries are located.

     
“Permitted Holders” means MHR and any Related
Party or Affiliate of MHR.

     
“Permitted Liens” means the following:
(i) Liens granted to secure payment of the Obligations;
(ii) Liens imposed by law for taxes (other than payroll
taxes), assessments or charges of any governmental authority for
claims not yet due or which are being contested in good faith by
appropriate proceedings and with respect to which adequate
reserves or other appropriate provisions are being maintained in
accordance with GAAP to the satisfaction of the Lender, in its
sole discretion; (iii) (A) statutory Liens of
landlords (provided that any such landlord has executed a
landlord waiver and consent in form and substance satisfactory
to the Lender, in its sole discretion); and (B) other Liens
imposed by law or that arise by operation of law in the ordinary
course of business from the date of creation thereof, in each
case only for amounts not yet due or which are being contested
in good faith by appropriate proceedings and with respect to
which adequate reserves or other appropriate provisions are
being maintained in accordance with GAAP to the satisfaction of
the Lender, in its sole discretion; (iv) Liens
(A) incurred or deposits made in the ordinary course of
business (including, without limitation, surety bonds and appeal
bonds) in connection with workers’ compensation,
unemployment insurance and other types of social security
benefits or to secure the performance of tenders, bids, leases,
contracts (other than for the repayment of Indebtedness),
statutory obligations and other similar obligations; or
(B) arising as a result of progress payments under
government contracts; (v) purchase money Liens in
connection with the purchase by the grantor of such Lien of
equipment in the normal course of business, including without
limitation the Lien securing Indebtedness under the Master Lease
Agreement between the Borrower and General Electric Capital
Corporation dated as of March 14, 2004 (including related
schedules); (vi) Liens subordinated in all respects to the
Lien securing payment of the Obligations on terms and conditions
and pursuant to an agreement in form and substance satisfactory
to the Lender in its sole discretion; (vii) Liens to secure
the financing of insurance premiums for insurance policies
obtained pursuant to and in compliance with Section 10.12,
provided, that such Liens are limited to the proceeds
(including loss payments) of the insurance policies so financed,
un-earned premiums on and dividends under such insurance
policies, and the Borrower’s interest under any state
insurance guarantee funds that may arise relating to such
insurance policies, and (viii) to the extent constituting a
Lien, the transfer of technology licenses in the ordinary course
of business of the Borrower and otherwise permitted or disclosed
hereunder.

     
“Person” means any corporation, limited
liability company, natural person, firm, joint venture,
partnership, trust, unincorporated organization or government,
or any political subdivision, department or agency of any
government.

8

 

     
“Plan” means, at any time, an “employee
benefit plan,” as defined in Section 3(3) of ERISA,
that the Borrower or any Subsidiary or ERISA Affiliate
maintains, contributes to or has an obligation to contribute to
on behalf of participants who are or were employed by the
Borrower or any Subsidiary.

     
“Proceeds Payment” has the meaning ascribed to
such term in Section 12.2(b).

     
“Proposed Transactions” means the transactions
contemplated by the Investment Agreement.

     
“Recalculation Date” has the meaning ascribed
to such term in Section 12.2(b).

     
“Redemption Payment Amount” has the
meaning ascribed to such term in Section 4.1.

     
“Registered Repayment Offering” has the meaning
ascribed to such term in Section 12.2(b)(ii).

     
“Registration Rights Agreement” means the
Registration Rights Agreement, dated as of the Closing Date, by
and among the Borrower, the Lender, MHR Capital Partners
(500) LP, MHR Capital Partners (100) LP, and MHR
Institutional Partners II LP.

     
“Related Party” means (1) any controlling
stockholder, controlling member, general partner, majority owned
Subsidiary, or spouse or immediate family member (in the case of
an individual) of any Permitted Holder, (2) any estate,
trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or Persons holding
a controlling interest of which consist solely of one or more
Permitted Holders and/or such other Persons referred to in the
immediately preceding clause (1), (3) any executor,
administrator, trustee, manager, director or other similar
fiduciary of any Person referred to in the immediately preceding
clause (2) acting solely in such capacity, (4) any
investment fund or other entity controlled by, or under common
control with, MHR or the principals that control MHR, or
(5) upon the liquidation of any entity of the type
described in the immediately preceding clause (4), the
former partners or beneficial owners thereof to the extent any
Voting Stock may still be held by such entity.

     
“Repayment Date” means the date on which all
Obligations are irrevocably repaid in full, in Dollars, to the
Lender.

     
“Restricted Payment” means, with respect to the
Borrower or any Subsidiary, (i) the declaration or payment
of any dividend or the incurrence of any liability to make any
other payment or distribution of cash or other property or
assets in respect of any Equity Interest of such Person, other
than a payment or distribution of Equity Interests in connection
with the exercise of any warrant, option or other right to
acquire Equity Interests permitted under or issued pursuant to
any Transaction Document; (ii) any payment on account of
the purchase, redemption, defeasance, sinking fund or other
retirement of the Equity Interests of such Person or any other
payment or distribution made in respect thereof, either directly
or indirectly, other than a payment made in Equity Interests in
connection with the exercise of any warrant, option or other
right to acquire Equity Interests permitted under or issued
pursuant to any Transaction Document; (iii) any payment
made to redeem, purchase, repurchase or retire, or to obtain the
surrender of, any outstanding warrants, options or other rights
to acquire Equity Interests of such Person now or hereafter
outstanding, other than a payment made in Equity Interests in
connection with the exercise of any warrant, option or other
right to acquire Equity Interests permitted under or issued
pursuant to any Transaction Document; (iv) any payment of a
claim for the rescission of the purchase or sale of, or for
material damages arising from the purchase or sale of, any
Equity Interests of such Person or of a claim for reimbursement,
indemnification or contribution arising out of or related to any
such claim for damages or rescission; (v) any payment,
loan, contribution, or other transfer of funds or other property
to any stockholder of such Person, except as otherwise permitted
hereunder, in the other Loan Documents, the Investment Agreement
or the other Transaction Documents, and other than payment of
compensation in the ordinary course of business to stockholders
who are employees of such Person; and (vi) any payment of
management fees (or other fees of a similar nature) or
out-of-pocket expenses in connection therewith by such Person to
any Stockholder.

     
“Retiree Welfare Plan” means, at any time, a
welfare plan that provides for continuing coverage or benefits
for any participant or any beneficiary of a participant after
such participant’s termination of employment (other than
(i) coverage mandated by applicable laws, including without
limitation, COBRA continuation coverage; (ii) death
benefits or retirement benefits under any “employee pension
plan”, as that

9

 

term is defined in Section 3(2) of ERISA;
(iii) deferred compensation benefits accrued as liabilities
on the books of the Borrower or any Subsidiary or ERISA
Affiliate; or (iv) benefits, the full direct cost of which
is borne by current or former employees (or beneficiary
thereof)).

     
“SEC” means the United States Securities and
Exchange Commission.

     
“Securities Act” means the Securities Act of
1933.

     
“Security Agreement” means the Pledge and
Security Agreement, dated September 26, 2005, between the
Borrower and the Lender.

     
“Security Documents” means the collective
reference to the Security Agreement (including without
limitation, if any, the Security Agreement (Copyrights);
Security Agreement (Patents); Security Agreement (Trademarks)
and Security Agreement (Domain Name Registrations) attached as
Exhibit K through Exhibit N thereto, inclusive), any
account control agreements delivered pursuant to the Loan
Documents, any Subsidiary Guaranty, any Subsidiary Security
Agreement, the UCC financing statements required to be filed and
all other security documents hereafter delivered to the Lender
in connection with granting a Lien on any of the assets of the
Borrower or a Subsidiary to secure the Obligations.

     
“Share Price” has the meaning ascribed to such
term in Section 12.2(b).

     
“Stockholder” means, with respect to any
Person, each holder of Equity Interests of such Person.

     
“Stockholder Approval” has the meaning ascribed
to such term in Section 10.19.

     
“Stockholder Approval Default” has the meaning
ascribed to such term in Section 12.1(d).

     
“Stockholder Default Balance” has the meaning
ascribed to such term in Section 12.2(b).

     
“Subsidiary” means (i) as to the Borrower,
any Person in which more than 25% of all equity, membership,
partnership or other ownership interests is owned directly or
indirectly by the Borrower or one or more of its Subsidiaries;
and (ii) as to any other Person, any Person in which more
than 25% of all equity, membership, partnership or other
ownership interests is owned directly or indirectly by such
Person or by one or more of such Person’s Subsidiaries.
Unless otherwise specified in this Agreement or any Loan
Document, references to a Subsidiary refer to a Subsidiary of
the Borrower.

     
“Subsidiary Guaranty” means a guaranty
agreement executed by a Subsidiary pursuant to
Section 10.24, in form and substance satisfactory to the
Lender, the Borrower and such Subsidiary, guaranteeing payment
of the Obligations and providing, without limitation, that such
Subsidiary shall be bound by the covenants set forth in this
Agreement, and shall make such representations and warranties as
the Lender may require.

     
“Subsidiary Security Agreement” means a pledge
and security agreement executed by a Subsidiary pursuant to
Section 10.24, substantially in the form of the Security
Agreement, and otherwise in form and substance satisfactory to
the Lender, the Borrower and such Subsidiary, securing payment
of the Obligations.

     
“Taxes” means any present or future tax, levy,
impost, duty, charge, assessment or fee of any nature that is
imposed by any government or taxing authority.

     
“Trademark Licenses” means, collectively, each
agreement, whether written or oral, providing for the grant of
any right to use any Trademark.

     
“Trading Day” shall mean any day on which the
principal United States securities exchange or trading market
where the Common Stock is then listed or traded, is open for
trading.

     
“Trademarks” means (i) all trademarks,
trade names, corporate names, company names, business names,
fictitious business names, trade styles, service marks, logos
and other source or business identifiers, and all goodwill
associated therewith, now existing or hereafter adopted or
acquired, all registrations and recordings thereof, and all
applications in connection therewith, whether in the United
States Patent and Trademark Office or in any similar office or
agency of the United States, any State thereof or any other
country or any political subdivision thereof, or otherwise, and
all common-law rights related thereto; and (ii) the right
to obtain all renewals thereof.

10

 

     
“Transaction Documents” shall have the meaning
ascribed thereto in the Investment Agreement.

     
“United States” means the United States of
America.

     
“Voting Stock” of a Person means all classes of
Equity Interests or other interests of such Person then
outstanding and normally entitled (without regard to the
occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof.

     
1.2.     Interpretation. The
table of contents and the headings of the articles and sections
of this Agreement are included for convenience of reference.
They shall not affect the construction of any provision of this
Agreement. References herein to articles, sections, subsections
or exhibits without further identification of the document to
which reference is made are references to provisions or parts of
this Agreement. The words “herein,”
“hereof” and “hereunder” are used
in this Agreement to refer to this Agreement as a whole
including all Exhibits and Schedules, as the same may from time
to time be amended, restated, modified, or supplemented and not
to any particular section, subsection, or clause contained in
this Agreement or any such Exhibit or Schedule. The meaning
given to terms defined herein shall be equally applicable to
both the singular and plural forms of such terms. Whenever the
context may require, any pronoun shall include the corresponding
masculine, feminine and neuter forms. The words
“include,” “includes,” and
“including”shall be deemed to be followed by
the phrase “without limitation.” The word
“will” shall be construed to have the same
meaning and effect as the word “shall”. Unless
the context requires otherwise (a) any definition of or
reference to any agreement, instrument or other document herein
shall be construed as referring to such agreement, instrument or
document as from time to time amended, supplemented or otherwise
modified (subject to any restrictions on such amendments,
supplements or modifications set forth herein); (b) any
reference to statute shall be construed to refer to such statute
as amended from time to time, and any rules and regulations
promulgated thereunder; and (c) any reference herein to any
Person shall be construed to include such Person’s
successors and permitted assigns.

		
	2.	
    COMMITMENTS; DISBURSEMENT

     
2.1.     Commitment to Lend. On
the terms and subject to the conditions set forth herein, upon
satisfaction (or waiver by the Lender) of the conditions to
effectiveness set forth in Section 8.1, on the Closing Date
the Lender shall make a Loan to the Borrower in principal amount
equal to $15,000,000.

     
2.2.     Disbursement. All
proceeds of the Loan shall be distributed by the Lender in
immediately available funds, in Dollars, to the Designated
Account and the Disbursement Account as provided hereunder, from
which Disbursement Account the Lender shall, from time to time,
withdraw funds and transfer such funds to the Borrower in
accordance with the terms of this Agreement.

		
	3.	
    REPAYMENT

     
3.1.     Repayment. The Loan
shall become due and payable in full on the Maturity Date, and
the Borrower shall immediately repay the outstanding principal
of the Loan on the Maturity Date unless the Exchange shall be
consummated prior to the Maturity Date in which case the Loan
shall be converted to a Convertible Note as part of the Exchange
in accordance with the provisions of the Investment Agreement.

     
3.2.     Illegality. If the
Lender reasonably determines at any time that any law,
regulation or treaty or any change therein or in the
interpretation or application thereof makes or will make it
unlawful for the Lender to fulfill its commitment in accordance
with Section 2.1, to maintain the Loan or to claim or
receive any amount payable to it hereunder, the Lender shall
give notice of that determination to the Borrower, whereupon the
obligations of the Lender hereunder shall terminate. If any such
notice is given after the Closing Date, the Borrower shall
prepay the Loan in full on the second Business Day following
delivery of such notice by the Lender; provided, however,
that, if the Lender certifies to the Borrower that earlier
prepayment is necessary in order to enable the Lender to comply
with the relevant law, regulation, treaty or change and
specifies an earlier date for the prepayment, the Borrower shall
use its best efforts to make the prepayment on the date so
specified. Prepayment pursuant to this Section shall be made
without premium but

11

 

together with interest accrued and unpaid on the Loan to the
date of prepayment and all other obligations then payable to the
Lender under the Loan Documents.

		
	4.	
    REDEMPTION

     
4.1.     Redemption.
Notwithstanding anything to the contrary herein or in any Loan
Document, at any time upon the occurrence of a Change of
Control, the Lender shall have the right to require the Borrower
to redeem the Loan and to repay the Loan in full in a principal
amount (the “Redemption Payment
Amount”) equal to 104% of the then outstanding
principal amount of the Loan together with any accrued and
unpaid interest thereon, calculated on the
Redemption Payment Amount at the Interest Rate from the
Closing Date through the Repayment Date.

		
	5.	
    INTEREST

     
5.1.     Basic Rate. Interest
shall accrue on the outstanding principal amount of the Loan,
from the Closing Date until the Repayment Date, at an interest
rate equal to 11.00% per annum, compounded monthly, in
arrears (the “Interest Rate”).

     
5.2.     Default Interest. So
long as an Event of Default (other than as defined in
Section 12.1(d)) has occurred and is continuing, at the
election of the Lender, interest shall accrue on the Loan and
all outstanding Obligations at a rate equal to 2% per annum
above the Interest Rate (“Default
Rate”). Interest at the Default Rate shall accrue
from the initial date of such Event of Default until that Event
of Default is cured or waived and shall be payable upon demand
and, if not paid when due, shall itself bear interest as
provided in this Section.

     
5.3.     Interest Payments.
Interest shall be payable on the then-outstanding principal
amount of the Loan (a) in cash, in arrears, on each
Interest Payment Date and on each date that any principal of the
Loan is repaid (on the amount so repaid) and (b) in a
Convertible Note as part of the Exchange in accordance with the
provisions of the Investment Agreement.

		
	6.	
    TAXES

     
6.1.     Withholding.
(a) Each payment by the Borrower under this Agreement or
any other Loan Document shall be made without withholding on
account of Taxes unless withholding is required by applicable
law. If applicable law requires withholding, the Borrower shall
give notice to that effect to the Lender, make the necessary
withholding and make timely payment of the amount withheld to
the appropriate governmental authority. All Taxes so withheld
shall be paid before penalties attach thereto or interest
accrues thereon. If any such penalties or interest nonetheless
become due, the Borrower shall make prompt payment thereof to
the appropriate governmental authority. If the Lender pays any
amount in respect of Indemnifiable Taxes on any payment due from
the Borrower hereunder, or penalties or interest thereon, the
Borrower shall reimburse the Lender in Dollars for that payment
on demand. If the Borrower pays any such Taxes or penalties or
interest thereon, it shall deliver official tax receipts
evidencing the payment or certified copies thereof to the Lender
not later than the thirtieth day after payment.

     
(b) If the Lender is or becomes entitled under any
applicable law or treaty to a reduced withholding rate, or a
complete exemption from withholding, with respect to Taxes on
payments to it by the Borrower made pursuant to this Agreement
or any of the Loan Documents, the Lender shall complete and
deliver from time to time to the Borrower, reasonably soon after
the Borrower’s request therefor, any form that the Borrower
is required to obtain from the Lender in order to give effect to
the reduced rate or exemption (whether that form relates to the
Lender or to any Person to which it has sold a participation or
other beneficial interest in any of its rights hereunder).

     
6.2.     Gross-up. (a) If
any Taxes withheld in accordance with Section 6.1(a) are
Indemnifiable Taxes, the Borrower shall forthwith pay the Lender
such additional amount as is necessary to ensure that the net
amount actually received by the Lender free and clear of
Indemnifiable Taxes is equal to the amount that the Lender would
have received had no Indemnifiable Taxes been withheld.

12

 

     
(b) Lender agrees to deliver to the Borrower on the Closing
Date, and thereafter to the extent necessary to maintain such
exemptions, upon the Borrower’s written request, copies of
all duly executed form(s) and associated documentation which are
necessary to establish in accordance with United States Treasury
Regulations such Person’s complete exemption from United
States backup and foreign withholding taxes with respect to all
payments to be made to or for the account of such Person under
this Agreement.

     
6.3.     Stamp Taxes. The
Borrower shall pay any registration or transfer taxes, stamp
duties or similar levies, and any penalties or interest that may
be due with respect thereto, that may be imposed by any
jurisdiction in connection with this Agreement or any other Loan
Document. If the Lender pays any amount in respect of any such
taxes, duties, levies, penalties or interest referred to in the
previous sentence, the Borrower shall reimburse the Lender in
Dollars for that payment on demand.

		
	7.	
    PAYMENTS; COMPUTATIONS

     
7.1.     Making of Payments.
Except as otherwise provided herein, each payment by the
Borrower under this Agreement or any other Loan Document shall
be made in Dollars, by deposit of immediately available funds by
11:00 a.m. (New York City time) on the date such payment is
due, to the account of Lender set forth on
Exhibit H, or such other account designated from
time to time by the Lender by written notice to the Borrower.
Each such payment shall be made without setoff or counterclaim.

     
7.2.     Computations. Interest
and fees payable hereunder shall be computed on the basis of a
360-day year and actual days elapsed.

		
	8.	
    CONDITIONS PRECEDENT

     
8.1.     Conditions to the Making of
the Loan. The obligation of the Lender to make the Loan is
subject to the condition that the Lender receive the following
(in the case of any document, dated the Closing Date unless
otherwise indicated) in each case, in form and substance
satisfactory to the Lender in its sole discretion:

     
(a) Duly executed copies of this Agreement, each other Loan
Document and any other documents, instruments, agreements and
legal opinions that Lender shall reasonably request in
connection with the transactions contemplated by this Agreement
and the other Loan Documents, each in form and substance
reasonably satisfactory to Lender.

     
(b) A duly executed Note evidencing the Loan, payable to
the Lender and dated the Closing Date, in aggregate principal
amount equal to $15,000,000.

     
(c) Subject to the provisions of Section 10.36, duly
executed copies of the Security Agreement and each other
Security Document, including without limitation, satisfactory
evidence that it has taken such other action (including, without
limitation, the filing of UCC financing statements and the
execution of account control agreements for all pledged
accounts) as the Lender requested in order to perfect the
security interests created pursuant to the Security Agreement.

     
(d) Duly executed copies of the Investment Agreement and
the Registration Rights Agreement.

     
(e) A certificate of the Borrower, substantially in the
form of Exhibit B, together with the attachments
specified therein.

     
(f) An opinion of Brown Rudnick Berlack Israels LLP,
counsel to the Borrower, substantially in the form of
Exhibit C.

     
(g) Evidence that the Borrower obtained all required
consents and approvals of all Persons, including all requisite
governmental authorities, in connection with the execution,
delivery and performance of this Agreement and the other Loan
Documents and the Proposed Transactions (other than the
Stockholder Approval which shall be obtained in accordance with
the provisions of the Investment Agreement).

     
(h) Evidence (in the form of the Certificate delivered by
the Borrower pursuant to Section 8.1(e)) that no event has
occurred that could constitute a Default or Event of Default, or
could occur as a result of the making of the Loan by the Lender.

13

 

     
(i) Evidence satisfactory to the Lender that the Borrower
has duly delivered the third-party notice to Kingsbridge Capital
Limited attached as Exhibit E.

     
(j) Notwithstanding anything to the contrary contained in
the reimbursement letter or agreement between the Borrower and
any counsel to the Lender, payment of all fees and expenses
incurred by the Lender and billed on or prior to the Closing
Date (including fees and expenses of all counsel to the Lender
and accounting fees) in connection with the transactions
contemplated hereby and the other Proposed Transactions, in
accordance with this Agreement, the other Loan Documents, the
Investment Agreement and any other document relating to the
Proposed Transactions. Such fees and expenses, to the extent
invoiced but not paid prior to the Closing, shall be paid by
Lender on the Borrower’s behalf out of funds disbursable
pursuant to and in accordance with Section 2.2 hereof into
the Designated Account, and Borrower specifically agrees hereby
that the amount of all such fees and expenses so paid shall be
Obligations hereunder to the same extent as if disbursed to the
Disbursement Account.

     
(k) Certificates of insurance evidencing the existence of
all insurance required pursuant to Section 10.12 and the
designation of the Lender as the loss payee or additional named
insured, as the case may be, thereunder. In addition, the
Borrower shall have delivered a certificate of the chief
financial officer of the Borrower setting forth the insurance
obtained by it in accordance with the requirements of
Section 10.12 and stating that such insurance is in full
force and effect and that all premiums then due and payable
thereon have been paid.

     
(l) Satisfactory evidence that all obligations of the
Borrower to be performed, all documents to be delivered, and all
conditions to be fulfilled, in each case to the extent required
to be performed, delivered or fulfilled prior to or
contemporaneously with the Closing Date, pursuant to the
Investment Agreement any other documents related to the Proposed
Transactions, shall have been performed delivered or fulfilled,
as applicable, in compliance with the provisions of the
Investment Agreement and such other documents.

     
(m) Copies of the following, in each case certified as
true, complete and correct as of the Closing Date:
(i) Novartis Note; (ii) Novartis Option and License
Agreement; (iii) the written consent of Atticus to the
transactions contemplated in this Agreement, the other Loan
Documents and the Transaction Documents, in form and substance
satisfactory to the Lender, (iv) evidence satisfactory to
the Lender of the termination of the agreements between the
Borrower and Kingsbridge Capital Limited, (v) the Budget,
(vi) the financial statements required to be delivered
pursuant to Section 10.4(a) and (b) for the fiscal
year ended December 31, 2004 and the fiscal quarters ended
March 31 and June 30, 2005, and (vi) each
resignation letter from each person who has resigned from the
Board of Directors during the thirty day period prior to the
Closing Date, together with any waiver letters, indemnity
agreements and other documents or instruments executed or
delivered in connection with each such resignation.

     
(n) A duly executed and certified copy of the leases
(including all amendments and supplements thereto) corresponding
to the properties set forth on Schedule 8.1(n) and
an estoppel certificate from the lessor under each such lease in
a form satisfactory to Lender.

		
	9.	
    REPRESENTATIONS AND WARRANTIES

     
9.1.     Representations and
Warranties. The Borrower hereby represents and warrants to
the Lender, as of the Closing Date and each other date required
to be made hereunder or under the other Loan Documents (except
to the extent such representations and warranties expressly
relate only to an earlier date, in which case such
representations and warranties shall be correct and accurate in
all material respects on and as of such earlier date), the
following:

		
	 	     
    (a) The Borrower is (i) duly organized, validly
    existing and in good standing under the laws of the State of
    Delaware and has all requisite corporate or similar power and
    authority to own and operate its properties and assets and to
    carry on its business as presently conducted, and
    (ii) qualified to do business and is in good standing as a
    foreign corporation in each jurisdiction where the ownership or
    operation of its properties or conduct of its business requires
    such qualification, except where the failure to be so qualified
    would not have a Material Adverse Effect.

14

 

		
	 	     
    (b) The execution, delivery and performance by the Borrower
    of this Agreement and the other Loan Documents, and its
    obligations hereunder and thereunder and the other Proposed
    Transactions, have been duly authorized; and this Agreement and
    each other Loan Document to be executed by the Borrower will
    constitute the valid and legally binding obligation of the
    Borrower, enforceable against it in accordance with its terms,
    subject to bankruptcy, insolvency, fraudulent transfer,
    reorganization, moratorium and similar laws of general
    applicability, relating to or affecting creditors’ rights
    generally.
	 
	 	     
    (c) The execution, delivery and performance by the Borrower
    of the Loan Documents do not, and the performance by it of its
    obligations contemplated thereunder will not, (i) breach,
    violate, constitute a violation under or contravene any
    provision of the Borrower’s articles of incorporation,
    bylaws or similar organizational documents; (ii) except as
    set forth on Schedule 9.1(c)(ii), constitute or
    result in a breach or violation of, or a default under, the
    acceleration of any obligations of, or the creation of any Lien
    on the assets of, the Borrower or any of its Subsidiaries (with
    or without notice, lapse of time or both) pursuant to any
    contract that is binding upon the Borrower or any of its
    Subsidiaries, or any change in the rights or obligations of any
    party under any of such contracts; (iii) except pursuant to
    the Loan Documents, and except as set forth on
    Schedule 9.1(c)(iii), require the Borrower or any of
    its Subsidiaries to obtain the consent, waiver, authorization or
    approval of any person which has not already been obtained; or
    (iv) violate, contravene or conflict with any award,
    judgment, decree or other order of any governmental entity, any
    statute, law, rule, regulation or other requirement of any
    governmental entity in the United States or elsewhere, or any
    permit, license, registration or other approval or authorization
    of any governmental entity. Without limitation to the provisions
    of the foregoing sentence, the provisions of the Atticus Consent
    are sufficient to prevent Atticus and its Affiliates from having
    any right to participate in the Loans or any of the other
    transactions contemplated by the Investment Agreement,
    including, without limitation, the acquisition of the
    Convertible Notes or any Common Stock into which such
    Convertible Notes may be convertible.
	 
	 	     
    (d) Other than filings pursuant to federal and state
    securities laws or filings required to be made with the NASD or
    Nasdaq directly related to the execution and delivery of the
    Transaction Documents, no notices, reports or other filings are
    required to be made by the Borrower or any of its Subsidiaries
    with, nor are any consents, registrations, approvals, permits or
    authorizations required to be obtained by the Borrower or any of
    its Subsidiaries from, any court or governmental authority or
    regulatory or self-regulatory entity in connection with the
    execution and delivery of this Agreement, the other Loan
    Documents or the Proposed Transactions.
	 
	 	     
    (e) No event has occurred that could constitute a Default
    or Event of Default, or could cause a default or event of
    default to occur, under any agreement or instrument evidencing
    any Indebtedness of the Borrower as a result of the making of
    the Loan by the Lender or the Proposed Transactions.
	 
	 	     
    (f) No consent or approval of, or notice to, any creditor
    of the Borrower or any Subsidiary (other than the Lender and the
    “Investor” under the Investment Agreement) is required
    by the terms of any agreement or instrument evidencing any
    Indebtedness of the Borrower or any Subsidiary for the
    Borrower’s execution or delivery of, or the performance of
    the obligations of the Borrower under, this Agreement or the
    Loan Documents or the consummation of the transactions
    contemplated hereby or thereby or the consummation of the other
    Proposed Transactions.
	 
	 	     
    (g) There are no (i) except as disclosed on
    Schedule 9.1(g), material civil, criminal or administrative
    actions, suits, claims, hearings, investigations or proceedings
    pending or threatened against the Borrower or any of its
    Subsidiaries; or (ii) except as otherwise specifically
    disclosed in accordance herewith or as otherwise permitted
    herein, material obligations or liabilities, whether or not
    accrued, contingent or otherwise and whether or not required to
    be disclosed, including those relating to environmental and
    occupational safety and health matters, or any other facts or
    circumstances that could result in any claims against, or
    obligations or liabilities of, the Borrower or any of its
    Subsidiaries.
	 
	 	     
    (h) Each of the Borrower and its Subsidiaries has good and
    marketable title to, or leasehold interest in, all real property
    and other property and assets owned by it, free and clear of all
    Liens or other encumbrances securing Indebtedness (other than
    Permitted Liens), and, subject to Section 10.20, its

15

 

		
	 	
    obligations under both this Agreement and the other Loan
    Documents rank senior to all other existing Indebtedness and
    future Indebtedness of the Borrower in all respects, including
    in right of payment in full in cash.
	 
	 	     
    (i) The Borrower’s (i) audited financial
    statements dated December 31, 2004 and for the fiscal year
    ended on that date; and (ii) consolidated balance sheet
    dated June 30, 2005 and the related consolidated statements
    of income and cash flows for the portion of the Borrower’s
    fiscal year ended on that date, each as heretofore delivered to
    the Lender are complete and correct, have been prepared in
    accordance with GAAP. The audited financial statements of the
    Borrower dated December 31, 2004 and for the fiscal year
    ended on that date have been certified by a firm of independent
    accountants as fairly presenting the financial condition of the
    Borrower as at that date and the results of its operations for
    that fiscal year or portion thereof.
	 
	 	     
    (j) Since December 31, 2004, there has not been
    (i) any material damage, destruction or other casualty loss
    with respect to any material asset or property owned, leased or
    otherwise used by the Borrower or any of its Subsidiaries,
    whether or not covered by insurance; (ii) any declaration,
    setting aside or payment of any dividend or other distribution
    in respect of the capital stock of the Borrower; or
    (iii) any change by the Borrower or any of its Subsidiaries
    in accounting principles, practices or methods.
	 
	 	     
    (k) The Borrower has filed all required reports, schedules,
    registration statements and other documents with the SEC since
    April 30, 2002. The Borrower 2004 10-K and all other
    reports, registration statements, definitive proxy statements or
    information statements, including any certifications pursuant to
    Section 302 or Section 906 of the Sarbanes-Oxley Act
    of 2002 or similar certifications, filed by the Borrower or any
    Subsidiary subsequent to April 30, 2002, under the
    Securities Act or under Sections 13(a), 13(c), 14 and 15(d)
    of the Exchange Act in the form filed (collectively, the
    “Borrower SEC Documents”), with the SEC,
    (i) complied in all material respects as to form with the
    applicable requirements under the Securities Act or the Exchange
    Act, as the case may be; and (ii) as of its filing date,
    did not or will not contain any untrue statement of a material
    fact or omit to state a material fact required to be stated
    therein or necessary to make the statements made therein, in
    light of the circumstances under which they were made, not
    misleading; and each of the balance sheets contained in or
    incorporated by reference into any such Borrower SEC Document
    (including the related notes and schedules thereto) fairly
    presents or will fairly present the financial position of the
    entity or entities to which it relates as of its date, and each
    of the statements of operations and changes in
    stockholders’ equity and cash flows or equivalent
    statements in such Borrower SEC Documents (including any related
    notes and schedules thereto) fairly presents or will fairly
    present the results of operations, changes in stockholders’
    equity and changes in cash flows, as the case may be, of the
    entity or entities to which it relates for the periods to which
    it relates, in each case in accordance with GAAP consistently
    applied during the periods involved, except, in each case, as
    may be noted therein, subject to normal year-end audit
    adjustments in the case of unaudited statements.
	 
	 	     
    (l) The Borrower has designed and maintains a system of
    internal controls over financial reporting (as defined in
    Rules 13a-15(f) and 15d-15(f) of the Exchange Act)
    sufficient to provide reasonable assurances regarding the
    reliability of financial reporting and the preparation of
    financial statements for external purposes in accordance with
    GAAP. The Borrower (i) has designed and maintains
    disclosure controls and procedures (as defined in
    Rules 13a-15(e) and 15d-15(e) of the Exchange Act) to
    ensure that material information required to be disclosed by the
    Borrower in the reports that it files or submits under the
    Exchange Act is recorded, processed, summarized and reported
    within the time periods specified in the SEC’s rules and
    forms and is accumulated and communicated to Borrower’s
    management as appropriate to allow timely decisions regarding
    required disclosure; and (ii) has disclosed, based on its
    most recent evaluation of such disclosure controls and
    procedures prior to the date of this Agreement, to the
    Borrower’s auditors and the audit committee of the Board of
    Directors (A) any significant deficiencies and material
    weaknesses in the design or operation of internal controls over
    financial reporting that are reasonably likely to adversely
    affect in any material respect the Borrower’s ability to
    record, process, summarize and report financial information; and
    (B) any fraud, whether or not material,

16

 

		
	 	
    that involves management or other employees who have a
    significant role in the Borrower’s internal controls over
    financial reporting.
	 
	 	     
    (m) Since January 1, 2004, the Borrower has not
    received written notice from the SEC or any other governmental
    entity that any of its accounting policies or practices, or any
    of the documents filed by the Borrower or filed or furnished by
    its officers, are or may be the subject of any review, inquiry,
    investigation or challenge by the SEC or other governmental
    entity, other than comments received by the Borrower from the
    SEC in connection with registration statements filed by the
    Borrower under the Securities Act prior to the date hereof.
    Since January 1, 2004, neither the Borrower’s
    independent public accounting firm, nor any employee, director,
    advisor or other agent or Affiliate of the Borrower has informed
    the Borrower that such Person has any material questions,
    challenges or disagreements regarding or pertaining to the
    Borrower’s accounting policies or practices or the
    Borrower’s internal controls over financial reporting.
	 
	 	     
    (n) Schedule 9.1(n) contains a true and
    complete list of, and the Borrower has delivered to the Lender
    copies of all documents creating or governing, all
    securitization transactions and “off-balance sheet
    arrangements” (as defined in Item 303(a)(4)(ii) of
    Regulation S-K of the SEC) effected by or to which the
    Borrower is a party since January 1, 2004.
	 
	 	     
    (o) Except as set forth on Schedule 9.1(o), the
    Borrower has not, since July 30, 2002, extended or
    maintained credit, arranged for the extension of credit, or
    renewed an extension of credit, in the form of a personal loan
    to or for any director or executive officer (or equivalent
    thereof) of the Borrower or any Affiliate.
	 
	 	     
    (p) To the Knowledge of the Borrower,
    PricewaterhouseCoopers LLP, which has expressed its opinion with
    respect to the financial statements of the Borrower audited by
    it and included in the Borrower SEC Reports (including the
    related notes), is and has been throughout the period covered by
    such financial statements, (i) a registered public
    accounting firm (as defined in Section 2(a)(12) of the
    Sarbanes-Oxley Act); (ii) “independent” with
    respect to the Borrower within the meaning of Rule 2-01 of
    Regulation S-X of the SEC; (iii) in compliance with
    subsections (g) through (l) of Section 10A of the
    Exchange Act and the related Rules of the SEC; and (iv) in
    compliance with the rules of the Public Company Accounting
    Oversight Board. Schedule 9.1(p) contains a true and
    complete list of all non-audit services performed by
    PricewaterhouseCoopers LLP for the Borrower since
    January 1, 2004.
	 
	 	     
    (q) The execution and delivery of this Agreement and the
    other Loan Documents is not subject to any tax, duty, fee or
    other charge, including, without limitation, any registration or
    transfer tax, stamp duty or similar levy.
	 
	 	     
    (r) (i) Schedule 9.1(r) lists all Plans
    and separately identifies all Pension Plans, Multiemployer Plans
    and Welfare Plans, including all Retiree Welfare Plans as of the
    Closing Date. Copies of all such listed Plans, together with a
    copy of the most recently filed Form IRS/ DOL 5500 for each
    such Plan have been made available to the Lender prior to the
    Closing Date. Except with respect to Multiemployer Plans, each
    Qualified Plan has been determined by the IRS to qualify under
    Section 401 of the IRC, the trusts created thereunder have
    been determined to be exempt from tax under the provisions of
    Section 501 of the IRC, and, to the Knowledge of the
    Borrower, nothing has occurred that would cause the loss of such
    qualification or tax-exempt status. Each Plan is in material
    compliance with the applicable provisions of ERISA and the IRC,
    including the timely filing of all reports required under the
    IRC or ERISA, including the statement required by 29 CFR
    Section 2520.104-23. Neither the Borrower, nor any
    Subsidiary, nor any ERISA Affiliate has failed to make any
    material contribution or pay any amount due as required by
    either Section 412 of the IRC or Section 302 of ERISA
    or the terms of any Plan. Neither the Borrower, nor any
    Subsidiary, nor any ERISA Affiliate has engaged in a
    “prohibited transaction,” as defined in
    Section 406 of ERISA and Section 4975 of the IRC, in
    connection with any Plan, that would subject the Borrower or any
    Subsidiary to a material tax on prohibited transactions imposed
    by Section 502(i) of ERISA or Section 4975 of the IRC.

17

 

		
	 	     
    (ii) (A) Except as disclosed on
    Schedule 9.1(r), neither the Borrower, nor any
    Subsidiary, nor any ERISA Affiliate has ever maintained,
    established, sponsored, participated in or contributed to any
    Title IV Plan; (B) there are no pending, or to the
    Knowledge of the Borrower or any Subsidiary, threatened claims
    (other than claims for benefits in the normal course),
    sanctions, actions or lawsuits, asserted or instituted against
    any Plan or any Person as fiduciary or sponsor of any Plan; and
    (C) neither the Borrower, nor any Subsidiary, nor any ERISA
    Affiliate has incurred or reasonably expects to incur any
    liability as a result of a complete or partial withdrawal from a
    Multiemployer Plan.
	 
	 	     
    (s) The Borrower’s use, storage, treatment and
    disposal of Hazardous Substances is and has been in full
    compliance with Environmental Law; (i) there has been no
    unpermitted release, discharge, emission or escape into the
    environment of Hazardous Substances; (ii) Borrower has all
    permits necessary and required for its use, storage, treatment
    and disposal of Hazardous Substances; and (iii) Borrower
    does not know of, and has not received, any written notice or
    other communication from any person or entity (including but not
    limited to a governmental entity) of a possible claim or
    liability pursuant to any Environmental Law, or any actual or
    potential administrative or judicial proceedings in connection
    with any of the foregoing.
	 
	 	     
    (t) (i) The Borrower owns, either exclusively or
    jointly, all right, title and interest in and to (free and clear
    of all Liens other than Permitted Liens) or is licensed to use
    all Borrower Intellectual Property, including, without
    limitation, the Patents, Trademarks and Copyrights listed on
    Schedule 9.1(t), and, except as set forth on
    Schedule 9.1(t), has exclusive rights to use, sell,
    license, assign, transfer, convey, dispose of, or otherwise
    commercially exploit the Borrower Intellectual Property.
	 
	 	     
    (ii) Schedule 9.1(t) lists all of
    Borrower’s Patents, Trademarks and registered Copyrights
    and material Know-How, and, to the extent applicable, the
    jurisdiction(s) in which each item of Borrower Intellectual
    Property was or is filed or registered, including the respective
    application or registration numbers and dates, and an indication
    as to whether each such item of Borrower Intellectual Property
    is owned exclusively or jointly. Each item of Borrower
    Intellectual Property is in compliance with all formal legal
    requirements (including payment of filing, examination, annuity
    and maintenance fees and proofs of use) and is valid and
    subsisting. In connection with all Borrower Intellectual
    Property owned, either exclusively or jointly by the Borrower,
    the Borrower represents and warrants, and in connection with all
    third-party Borrower Intellectual Property, the Borrower
    represents and warrants to Borrower’s Knowledge, that all
    necessary registration, maintenance and renewal fees have been
    paid and all necessary documents and certificates in connection
    with such Borrower Intellectual Property have been filed with
    the relevant patent, copyright, trademark or other authorities
    in the United States or foreign jurisdictions, as the case may
    be, for the purposes of perfecting, prosecuting and maintaining
    such Borrower Intellectual Property.
	 
	 	     
    (iii) The operation of the business of the Borrower as
    currently conducted or currently contemplated to be conducted
    does not and will not infringe or misappropriate the
    Intellectual Property of any third party, violate any right of
    any third party or constitute unfair competition or trade
    practices under the laws of any jurisdiction.
	 
	 	     
    (iv) Other than as described in
    Schedule 9.1(t), no Person has asserted or
    threatened to assert any claims (A) contesting the right of
    the Borrower to use, exercise, sell, license, transfer or
    dispose of any Borrower Intellectual Property or any products,
    processes or materials covered thereby in any manner; or
    (B) challenging the ownership, validity or enforceability
    of any Borrower Intellectual Property. No owned Borrower
    Intellectual Property, and to Borrower’s Knowledge, no
    third-party Borrower Intellectual Property is subject to any
    outstanding order, judgment, decree, stipulation or agreement
    related to or restricting in any manner the licensing,
    assignment, transfer, use or conveyance thereof by the Borrower.
	 
	 	     
    (v) The Borrower has not received any written notice or
    otherwise has Knowledge of any pending or threatened claim,
    order or proceeding with respect to any Borrower Intellectual
    Property and, to Borrower’s Knowledge, no Borrower
    Intellectual Property is being used or enforced in a manner that
    would reasonably be expected to result in the abandonment,
    cancellation or unenforceability of such Intellectual Property.

18

 

		
	 	     
    (vi) Borrower has required all professional and technical
    employees who provided services to Borrower in connection with
    the Borrower Intellectual Property to execute agreements under
    which such employees are and were required to convey to Borrower
    ownership of all inventions and developments conceived or
    created by them in the course of their employment with Borrower.
    To Borrower’s Knowledge, none of the activities of
    Borrower’s professional and technical employees who are
    providing services to Borrower in connection with the Borrower
    Intellectual Property is violating any agreement between any
    such employees and their former employers.
	 
	 	     
    (vii) Other than as described in
    Schedule 9.1(t), the Borrower has not received any
    opinion of counsel regarding any third party Intellectual
    Property or any owned Borrower Intellectual Property.
	 
	 	     
    (viii) To Borrower’s Knowledge, Borrower has complied
    with its obligation under 37 CFR § 1.56(a) to
    disclose to the United States Patent and Trademark Office,
    during the pendency of any United States patent application
    comprising the owned Borrower Intellectual Property. None of
    Borrower’s Patents is involved in any interference or
    opposition proceeding, and, to Borrower’s Knowledge, no
    such proceeding is being threatened with respect to any of the
    Patents.
	 
	 	     
    (ix) To the extent that any Intellectual Property has been
    developed or created independently or jointly by an independent
    contractor or other third party for the Borrower, or is
    incorporated into any of the Borrower products, the Borrower has
    a written agreement with such independent contractor or third
    party and Borrower thereby has obtained exclusive or joint
    ownership of all such independent contractor’s or third
    party’s Intellectual Property in such work, material or
    invention by operation of law or valid assignment, or has
    acquired rights sufficient to use such Intellectual Property in
    the business of the Borrower as currently conducted and as
    contemplated to be conducted by virtue of a license.
	 
	 	     
    (x) Schedule 9.1(t) lists all agreements
    pertaining to Borrower Intellectual Property including without
    limitation, agreements pursuant to which Borrower either
    receives or grants rights in Intellectual Property. The Borrower
    is, and will be, in compliance with all terms and conditions of
    all, and is not and will not be in violation of any, licenses,
    sublicenses and other agreements, relating to Intellectual
    Property to which it is a party, whether acquiring or granting
    rights, or otherwise. Except as set forth in
    Schedule 9.1(t), the Borrower has no Knowledge of
    any assertion, claim or threatened claim, or facts that could
    serve as a basis of any assertion or claim, that the Borrower
    has breached or defaulted on any terms or conditions of such
    licenses, sublicenses and other agreements, and the Borrower has
    no basis to believe that any other party to such licenses,
    sublicenses and other agreements is in breach or in default of
    any terms or conditions thereof.
	 
	 	     
    (xi) Borrower has disclosed trade secrets of Borrower
    included in the Know-How only to Persons that have executed
    written confidentiality agreements governing the use or
    disclosure of such trade secrets, except to the extent Borrower
    disclosed such information in connection with making filings
    related to any Borrower Intellectual Property with governmental
    or regulatory authorities.
	 
	 	     
    (xii) The Borrower has taken all reasonably prudent or
    necessary steps to protect and preserve the confidentiality of
    its material Confidential Information, and with respect to all
    other Confidential Information Borrower has taken all
    commercially reasonable steps to protect and preserve the
    confidentiality of such Confidential Information. Without
    limiting the foregoing, the Borrower has and enforces a policy
    requiring each employee and consultant of the Borrower to
    execute a proprietary rights and confidentiality agreement, and
    all current and former employees and consultants of the Borrower
    have executed such an agreement.
	 
	 	     
    (xiii) Except as set forth on Schedule 9.1(t),
    Borrower has not received any adverse written notice from the
    FDA or any other Authority since January 1, 2003
    (i) regarding the approvability of product candidates of
    Borrower or (ii) alleging any violation of any law, policy,
    guideline, rule or regulation by Borrower.
    Schedule 9.1(t) sets forth (i) all of
    Borrower’s regulatory correspondence received from the FDA
    or any other similar Authority since January 1, 2003, which
    correspondence has been provided to the Lender and (ii) all
    of the permits issued to Borrower by the FDA or any other
    similar Authority. During the last five years no officer,
    employee or agent of Borrower, has made an untrue statement of a

19

 

		
	 	
    material fact or fraudulent statement to the FDA or any other
    authority, failed to disclose a material fact required to be
    disclosed to the FDA or any other authority, or committed an
    act, made a statement, or failed to make a statement that, at
    the time such disclosure was made which would violate any law,
    policy, guideline, rule or regulation.
	 
	 	     
    (u) The provisions of the Security Documents are effective
    to create in favor of the Lender a legal, valid and enforceable
    lien or security interest in all right, title and interest of
    the Borrower in the “Collateral” described therein.
    Upon the filing of proper financing statements in the offices in
    the jurisdictions listed on Schedule 9.1(u), the
    Lender shall have a perfected first priority security interest
    or lien on all right, title and interest of the Borrower in the
    “Collateral” described therein, which can be perfected
    by such filing, subject only to the existence of any Permitted
    Liens.
	 
	 	     
    (v) The businesses of the Borrower and its Subsidiaries
    have not been, and are not being, conducted in violation of any
    material state, local, federal, foreign or domestic laws, rules,
    regulations or court orders and none of the transactions
    contemplated in this Agreement or the other Loan Documents
    (including, without limitation, the borrowing hereunder and the
    use of the proceeds thereof), or the Proposed Transactions, will
    violate or result in a violation of Section 7 of the
    Exchange Act, as amended, or any regulations issued pursuant
    thereto, including, without limitation, Regulations G, T, U and
    X of the Board of Governors of the Federal Reserve System,
    12 C.F.R., Chapter II.
	 
	 	     
    (w) The written materials delivered or caused to be
    delivered, by or on behalf of the Borrower, to the Lender in
    connection with this Agreement and the other Loan Documents and
    the other transactions contemplated by this Agreement do not
    contain any untrue statement of a material fact or omit to state
    a material fact necessary in order to make the statements
    contained therein, in light of the circumstances under which
    they were made, not misleading.
	 
	 	     
    (x) The Borrower and its Subsidiaries have filed, or caused
    to be filed, in a timely manner, all federal, state and other
    tax returns and reports required to be filed, and have paid, in
    a timely manner, all federal, state and other taxes,
    assessments, fees and other governmental charges levied or
    imposed upon them or their properties, income or assets
    otherwise due and payable. All information in such tax returns,
    reports and declarations is true, complete and correct in all
    respects.
	 
	 	     
    (y) To the best Knowledge of the Borrower, since the date
    three years prior to the Closing Date, the Borrower has not
    undergone an “ownership change” as such term is
    defined for purposes of Section 382 of the IRC, and the
    Treasury Regulations (final, temporary and, as applicable,
    proposed) promulgated thereunder (an “Ownership
    Change”).
	 
	 	     
    (z) Set forth on Schedule 9.1(z) is a list, as
    of the date hereof, of all of the real property interests held
    by the Borrower and its Subsidiaries, indicating in each case
    whether the respective property is owned or leased, the identity
    of the owner or lessee and the location of the respective
    property.
	 
	 	     
    (aa) As of the Closing Date, the authorized capital stock
    of the Borrower consists of (i) 50,000,000 shares of
    Common Stock of which 23,555,266 shares were issued and
    outstanding, of which 243,600 are held as treasury shares; and
    (ii) 1,000,000 shares of preferred stock, par value
    $.01 per share, of which no shares were issued. Each of the
    outstanding shares of capital stock or other securities of each
    of the Subsidiaries is duly authorized, validly issued, fully
    paid and nonassessable and owned by the Borrower or by a direct
    or indirect wholly owned Subsidiary of the Borrower, free and
    clear of any Liens, other than Permitted Liens. Except as set
    forth in Schedule 9.1(aa), there are no preemptive
    or other outstanding rights, options, warrants, conversion
    rights, stock appreciation rights, redemption rights, repurchase
    rights, agreements, arrangements or commitments to issue or sell
    any shares of capital stock or other securities of the Borrower
    or any Subsidiary or any securities or obligations convertible
    or exchangeable into or exercisable for, or giving any Person a
    right to subscribe for or acquire, any securities of the
    Borrower or any Subsidiary, and no securities or obligations
    evidencing such rights are authorized, issued or outstanding.
	 
	 	     
    (bb) The Borrower and its Subsidiaries are insured by
    recognized, financially sound and reputable institutions with
    policies in such amounts and with such deductibles and covering
    such risks as are

20

 

		
	 	
    generally deemed adequate and customary for its businesses
    including, but not limited to, policies covering real and
    personal property owned or leased by the Borrower against theft,
    damage, destruction and acts of vandalism, and complying with
    the requirements set forth in Section 10.12. The Borrower
    has no reason to believe that it or any Subsidiary will not be
    able (i) to renew its existing insurance coverage as and
    when such policies expire or (ii) to obtain comparable
    coverage from similar institutions as may be necessary or
    appropriate to conduct its business as now conducted and at a
    cost that would not have a Material Adverse Effect.

		
	10.	
    COVENANTS

     
10.1.     Use of Proceeds.
Subject to Section 10.2, the Borrower shall use the
proceeds of the Loan solely to pay operating expenses at such
times, and in such amounts equal to or less than, the
corresponding time periods and amounts indicated on the
Borrower’s operating budget (the “Budget”), a
copy of the initial Budget covering the period from
September 1, 2005 through August 31, 2006 is attached
hereto as Exhibit D, and is subject to replacements
pursuant to Section 10.4(c).

     
10.2.     Disbursement Account.
The Borrower shall provide notice to the Lender of each
requested withdrawal from the Disbursement Account pursuant to
Section 10.4(g). Prior to the earlier of (a) the
occurrence and continuation of an Event of Default and
(b) the establishment of a reconstituted Disbursement
Account pursuant to Section 10.36(b), the Borrower may make
withdrawals from the Disbursement Account, and after the
establishment of a reconstituted Disbursement Account pursuant
to Section 10.36(b) (but not upon the occurrence and
continuation of an Event of Default) the Borrower may request
that the Lender make withdrawals from the Disbursement Account,
in any case no more frequently than bi-weekly; provided,
in each case that withdrawals made for any one-month period
shall not in the aggregate exceed 103% of the operating budget
for such period set forth in the Budget without the prior
written consent of the Lender; and provided, further, in
each case, that notwithstanding anything to the contrary in this
Agreement, in the event that the Borrower shall make or request
withdrawals in the aggregate exceeding 100% of the budgeted
amount for any such one-month period, the amount available for
withdrawal during the immediately succeeding one-month period
shall be automatically and without further action reduced by the
amount of such excess. Notwithstanding the foregoing, any
payment made or requested to be made by the Borrower to the
Lender in connection with the Obligations or any transfer or
withdrawal made or requested to be made by the Borrower of
interest, dividends or other income generated by the funds and
other assets deposited in the Disbursement Account (which
interest, dividends, and other income shall only be transferred
into a separate account of the Borrower), whether or not
reflected in the Budget, shall be a permitted withdrawal from
the Disbursement Account and shall not require the consent of
the Lender. If the Borrower requests that Lender make or permit
a withdrawal from the Disbursement Account, and such request
complies with the provisions herein relating to withdrawals from
the Disbursement Account, the Lender shall instruct Bank to
transfer such requested amount from the Disbursement Account to
a bank account of the Borrower designated in writing by the
Borrower that is subject to an account control agreement in
favor of the Lender.

     
10.3.     Governmental
Authorizations. The Borrower shall obtain, make and keep in
full force and effect all authorizations from and registrations
with governmental authorities that may be required for the
validity or enforceability against the Borrower of this
Agreement and the other Loan Documents.

     
10.4.     Financial Statements;
Reporting. (a) The Borrower shall furnish to the
Lender, within 45 days of the close of each of the first 3
quarters of each fiscal year, its consolidated and consolidating
balance sheets as at the close of such quarter and its income
statement and statement of changes in financial position for
such quarter, prepared in accordance with GAAP, applied on a
basis consistent with that used in preparing its audited
financial statements for prior years, certified by its chief
financial officer as fairly presenting the financial condition
of the Borrower and its Subsidiaries as at the close of that
quarter and the results of its operations for such quarter,
subject to changes resulting from audit and normal year-end
adjustments.

     
(b) The Borrower shall furnish to the Lender, within
90 days of the close of each fiscal year commencing with
the fiscal year ending December 31, 2005, its consolidated
and consolidating balance sheets as at the close of such fiscal
year and its income statement and statement of changes in
financial position for such fiscal

21

 

year, prepared in accordance with GAAP, applied on a basis
consistent with that used in preparing its audited financial
statements for prior years, certified by a firm of independent
accountants selected by it and acceptable to the Lender as
fairly presenting the financial condition of the Borrower and
its Subsidiaries as at the close of such fiscal year and the
results of its operations for such fiscal year. The
certification shall include or be accompanied by a statement
that, during the examination by that firm of those financial
statements, that firm observed or discovered no Default or Event
of Default (or a detailed description of any Default or Event of
Default so observed or discovered).

     
(c) The Borrower shall furnish to the Lender, not later
than November 30 of each year, (i) if an 18-Month
Budget has been delivered and constitutes the Budget, a revised
18-Month Budget, and (ii) otherwise, a revised annual
operating budget, which in any case, prior to the Final
Withdrawal Date and upon review and written approval of the
Lender (which approval shall not be unreasonably withheld),
shall thereafter constitute the Budget.

     
(d) The Borrower shall deliver to the Lender (i) prior
to the Final Withdrawal Date, on the first Business Day of each
month, and concurrently with each delivery of notice to the
Lender of a withdrawal from the Disbursement Account pursuant to
Section 10.2 and in accordance with Section 10.4(g), a
compliance certificate certifying that (A) no Default or
Event of Default has occurred and is continuing, and
(B) the representations and warranties of the Borrower set
forth in this Agreement and in each other Loan Document are true
and correct as if made on such date (except for representations
made as of a specified earlier date, which shall remain true as
of such earlier date), (ii) after the Final Withdrawal
Date, on the first Business Day of each month, a compliance
certificate certifying that (A) no Default or Event of
Default has occurred and is continuing, and (B) the
representations and warranties of the Borrower set forth in this
Agreement and in each other Loan Document are true and correct
as if made on such date (except for representations made as of a
specified earlier date, which shall remain true as of such
earlier date), and (iii) on the Exchange Date, a compliance
certificate certifying that (A) no Default or Event of
Default has occurred and is continuing, and (B) the
representations and warranties of the Borrower set forth in this
Agreement and in each other Loan Document are true and correct
as if made on such date (except for representations made as of a
specified earlier date, which shall remain true as of such
earlier date). A form of such compliance certificate is attached
hereto as Exhibit G.

     
(e) The Borrower shall furnish to the Lender not later than
the 15th day of each month a variance report detailing any
variances from the Budget during the previous month.

     
(f) The Borrower shall furnish to the Lender from time to
time such other statements and information as the Lender may
reasonably request.

     
(g) The Borrower shall notify the Lender of each requested
withdrawal from the Disbursement Account not later than 5
Business Days prior to the date of such withdrawal, by
delivering to the Lender a written notice (i) setting forth
the date and amount of such proposed withdrawal, which shall in
no event be later than five Business Days after the date of
receipt of such notice by the Lender, and (ii) certifying
that (A) the amount of such withdrawal, together with the
amount of all other withdrawals made during such calendar month,
does not exceed the operating cash requirement of the Borrower
for such month as set forth in the Budget, except as expressly
provided for under this Agreement, (B) upon the making of
such withdrawal no more than two withdrawals shall have been
made from the Disbursement Account during such month, and the
immediately preceding withdrawal was made not less than two
weeks prior to such proposed withdrawal, (C) no Default or
Event of Default has occurred and is continuing, (D) no
Default or Event of Default would occur as a result of such
withdrawal, and (E) the representations and warranties of
the Borrower hereunder are true and correct as of the date of
such certificate and the date of such proposed withdrawal (other
than representations and warranties made as of a specific
earlier date, which shall remain true and correct as of such
earlier date).

     
(h) The Borrower shall, immediately upon the receipt of
notice from Novartis that it intends to exercise the Option (as
defined in the Novartis Option and License Agreement), or upon
otherwise becoming aware that Novartis intends to exercise such
Option, provide a copy of such notice to the Lender or notify
the Lender in writing that Borrower has become aware of such
intention, as the case may be. Upon becoming aware that

22

 

Novartis intends to exercise such Option, whether by notice from
Novartis pursuant to the Novartis Option and License Agreement
or otherwise, the Borrower shall consult with Lender with
respect to all subsequent communication with Novartis, its
affiliates, agents or representatives, or any other Person,
regarding the Option, the Novartis Note or the Novartis Option
and License Agreement, or the transactions contemplated thereby,
and shall provide drafts of any intended correspondence with
such Persons in respect thereof prior to delivery of such
correspondence.

     
(i) Promptly upon the resignation of any person from the
Board of Directors, the Borrower shall provide the Lender with a
copy of the resignation letter of such person, together with any
waiver letters, indemnity agreements and other documents or
instruments executed or delivered in connection with such
resignation.

     
10.5.     ERISA. The Borrower
and its Subsidiaries shall not, and shall not cause or permit
any ERISA Affiliate to, cause or permit to occur an ERISA Event.
The Borrower and its Subsidiaries shall not, and shall not cause
or permit any ERISA Affiliate to, adopt, sponsor, maintain or
contribute to any Title IV Plan.

     
10.6.     Maintenance of
Property. The Borrower shall keep all property useful and
necessary in its business in good working order and condition,
ordinary wear and tear excepted.

     
10.7.     Maintenance of Existence;
Lines of Business. The Borrower shall preserve, renew and
keep in full force and effect its corporate existence and its
rights, privileges, franchises and licenses (including, but not
limited to, licenses required by the FDA and other applicable
agencies) necessary or desirable in the normal conduct of its
business. The Borrower shall not be engaged in any line of
business other than the Line of Business.

     
10.8.     Compliance with Laws.
The Borrower shall comply in all respects with all applicable
laws, ordinances, rules, regulations, and requirements of
governmental authorities (including, without limitation,
Environmental Laws, Tax laws, and ERISA and the rules and
regulations promulgated thereunder).

     
10.9.     Books and Records;
Inspection Rights. The Borrower shall keep proper books and
records in which full, true and correct entries are made of all
dealings and transactions in relation to its business and
activities. The Borrower shall permit the Lender and
representatives of the Lender to inspect its property and
records at any reasonable times, and to make copies of such
records as the Lender (or its representative) shall desire.

     
10.10.     Notices of Default.
The Borrower shall promptly notify the Lender of each Default or
Event of Default, and each other event that has or could have a
materially adverse effect on its ability to perform its
obligations under this Agreement, the Note or another Loan
Document, together with a detained description of such Default,
Event of Default or other event, and all actions taken or to be
taken in response thereto.

     
10.11.     Liens and
Encumbrances. The Borrower shall not create or permit to be
created or exist any Lien on any of its property now owned or
hereafter acquired, other than Permitted Liens.

     
10.12.     Insurance. The
Borrower shall maintain, with financially sound and reputable
insurance companies, insurance in such amounts and against such
risks as are customarily maintained by companies engaged in the
same or similar businesses operating in the same or similar
locations. The Borrower will in any event maintain:

		
	 	     
    (a) Casualty Insurance against loss or damage covering all
    of the tangible real and personal property and improvements of
    the Borrower by reason of any Peril in such amounts (subject to
    such deductibles as shall be satisfactory to the Lender) as
    shall be reasonable and customary and sufficient to avoid the
    insured named therein from becoming a co-insurer of any loss
    under such policy but in any event in an amount (i) in the
    case of fixed assets and equipment (including vehicles), at
    least equal to 100% of the actual replacement cost of such
    assets (including foundation, footings and excavation costs),
    subject to deductibles as aforesaid; and (ii) in the case
    of inventory, not less than the fair market value thereof,
    subject to deductibles as aforesaid.
	 
	 	     
    (b) Automobile liability insurance against liability for
    bodily injury and property damage in respect of all vehicles
    (whether owned, hired or rented by the Borrower) at any time
    located at, or used in

23

 

		
	 	
    connection with, its properties or operations in such amounts as
    are then customary for vehicles used in connection with similar
    properties and businesses, but in any event to the extent
    required by applicable law.
	 
	 	     
    (c) Comprehensive general liability insurance against
    claims for bodily injury, death or property damage occurring on,
    in or about the properties (and adjoining streets, sidewalks and
    waterways) of the Borrower, in such amounts as are then
    customary for property similar in use in the jurisdictions where
    such properties are located.
	 
	 	     
    (d) Workers’ compensation insurance (including
    Employers’ Liability Insurance) to the extent required by
    applicable law.
	 
	 	     
    (e) Product liability insurance against claims for bodily
    injury, pain and suffering, death or property damage resulting
    from the use of products developed, tested or sold by the
    Borrower in such amounts as are then customarily maintained by
    responsible persons engaged in businesses similar to that of the
    Borrower.
	 
	 	     
    (f) Other insurance as generally carried by owners of
    similar properties and businesses, in such amounts and against
    such risks as are then customary for property similar in use.

Such insurance shall name the Lender as loss payee (to the
extent covering risk of loss or damage to tangible property) and
as an additional named insured as its interests may appear (to
the extent covering any other risk). Each policy referred to in
this Section shall provide that it will not be canceled or
reduced, or allowed to lapse without renewal, except after not
less than 30 days’ notice to the Lender. The Borrower
will advise the Lender promptly of any policy cancellation,
reduction or amendment. Any proceeds received by the Lender on
account of any such insurance policy referred to in this
Section 10.12 shall be applied by the Lender promptly to
reduce the outstanding amount of the Obligations then due and
payable.

Without limiting the obligations of the Borrower under the
foregoing provisions of this Section, in the event the Borrower
shall fail to maintain in full force and effect insurance as
required by the foregoing provisions of this Section, then the
Lender may, but shall have no obligation so to do, procure
insurance covering the interests of the Lender in such amounts
and against such risks as the Lender shall deem appropriate, and
the Borrower shall reimburse the Lender in respect of any
premiums paid by the Lender in respect thereof.

     
10.13.     Proxy Statement.
Within 15 Business Days of the Closing Date, the Borrower, in
cooperation with the Lender, shall prepare and, unless the
Lender objects in writing, file with the Securities and Exchange
Commission preliminary proxy materials (“Proxy
Statement”), and take all other actions related
thereto, pursuant to and in accordance with the provisions of
Section 2(c) of the Investment Agreement.

     
10.14.     Consolidations,
Mergers. The Borrower shall not, directly or indirectly, by
operation of law or otherwise, merge with or consolidate with
another Person, liquidate, windup or dissolve itself, or sell,
transfer or lease or otherwise dispose of all or any substantial
part of its assets or acquire by purchase or otherwise the
business or assets of, or stock of, another Person; except
(A) that any Subsidiary may merge into or consolidate with
any other Subsidiary; and (B) any Subsidiary may merge with or
consolidate into the Borrower; provided that the Borrower
is the surviving organization.

     
10.15.     Asset Sales. The
Borrower shall not, and shall not permit any Subsidiary to,
directly or indirectly, consummate any Asset Sale, other than
the transfer of technology licenses to third parties in the
ordinary course of business consistent with past practices,
(a) with the prior written consent of the Lender (which
shall not be unreasonably withheld), (b) pursuant to the
Novartis Option and License Agreement or (c) pursuant to an
agreement, the terms and conditions of which expressly and
unconditionally provide for fixed cash payments to the Borrower
during the 18-month period commencing on the effective date of
such transfer, in aggregate amount, together with the aggregate
amount of cash and Cash Equivalents held by the Borrower
(including in the Disbursement Account), equal to or greater
than the aggregate projected cash expenditures of the Borrower
for such 18-month period as provided in the 18-Month Budget
delivered in connection with such transfer of technology
licenses. The Borrower shall, in connection with each proposed
Asset Sale permitted pursuant to Section 10.15(c), deliver
to the Lender an 18-Month Budget prior to the

24

 

consummation of such Asset Sale and such 18-Month Budget shall
(i) be subject to the review and approval of the Lender,
which approval shall not be unreasonably withheld, and
(ii) upon approval such 18-Month Budget shall constitute
the Budget for all purposes under this Agreement.

     
10.16.     Transactions With
Affiliates. The Borrower shall not, and shall not permit any
of its Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or assets
to, or purchase any property or assets from, or enter into, make
or amend any transaction, contract, agreement, understanding,
loan, advance or Guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an “Affiliate
Transaction”), unless (i) such Affiliate
Transaction is on terms that are no less favorable to the
Borrower or such Subsidiary than those that would have been
obtained in a comparable transaction by the Borrower or such
Subsidiary with an unrelated Person; and (ii) with respect
to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of
$500,000, the Borrower delivers to the Lender a resolution of
the Board of Directors certifying that such Affiliate
Transaction complies with clause (i) above and that such
Affiliate Transaction has been approved by a majority of the
disinterested members of the Board of Directors, and an opinion
as to the fairness to the Borrower or such Subsidiary of such
Affiliate Transaction from a financial point of view issued by
an accounting, appraisal or investment banking firm of national
standing. Notwithstanding the foregoing, the following items
shall not be deemed to be Affiliate Transactions: (A) the
payment of reasonable directors’ fees to Persons who are
not otherwise Affiliates of the Borrower or indemnification and
similar arrangements, consulting fees, employee salaries,
bonuses, employment agreements, compensation or employee benefit
arrangements or incentive arrangements with any officer,
director or employee of the Borrower or any Subsidiary
(including benefits under the foregoing); (B) Restricted
Payments made in compliance with Section 10.21;
(C) loans or advances to employees and reimbursement of
actual out-of-pocket expenses incurred by officers, directors
and employees, in each case in the ordinary course of business
in an amount not to exceed $100,000 individually and $200,000 in
the aggregate during any fiscal year; and (D) the Proposed
Transactions.

     
10.17.     Notice of Tax
Exemption. If an exemption is obtained at any time from any
present or future Taxes that would otherwise be due in respect
of any payment to be made by the Borrower under this Agreement
or any other Loan Document, the Borrower shall promptly deliver
to the Lender a certified copy of the documents evidencing that
exemption.

     
10.18.     Payment of Taxes. The
Borrower shall pay all Taxes, assessments and other governmental
charges of any kind imposed on or in respect of its income or
any of its businesses or assets, or in respect of Taxes and
other amounts it is required by law to withhold from amounts
paid by it to its employees, before any penalty or interest
accrues on the amount payable and before any Lien or other
encumbrance on any of its property exists as a result of
nonpayment; provided, however, that the Borrower shall
not be required by this Section to pay any amount if it is
diligently contesting its alleged obligation to pay that amount
in good faith through appropriate proceedings and maintains
appropriate reserves or other provisions in respect of the
contested amount as may be required under GAAP.

     
10.19.     Stockholder Approval.
As soon as practicable, but no later than 90 days after the
Closing Date, the Borrower shall hold a special meeting of its
stockholders for the purpose of obtaining stockholder approval
(“Stockholder Approval”) pursuant to and
in accordance with the provisions of Section 2(b) of the
Investment Agreement.

     
10.20.     Limitation on
Indebtedness. The Borrower and its Subsidiaries, on a
consolidated basis, shall not directly or indirectly incur,
create, assume, Guarantee, become liable, contingently or
otherwise, with respect to, or otherwise become responsible for
the payment of, including, without limitation, by way of
assumption or acquisition in a business combination any
Indebtedness other than (i) pursuant to this Agreement, the
other Loan Documents, the Investment Agreement or the other
Transaction Documents; (ii) any Indebtedness that is by its
terms expressly subordinated in all respects to the Obligations,
on terms and conditions satisfactory to the Lender, in its sole
discretion; (iii) Indebtedness evidenced by the Novartis
Note from time to time outstanding, which Indebtedness shall be
pari passu with the Obligations, and shall not be subordinated
in right of payment to the Obligations; and
(iv) Indebtedness secured by Permitted Liens.

25

 

     
10.21.     Restricted Payments.
The Borrower shall not, and shall not permit any Subsidiary,
directly or indirectly, to make a Restricted Payment other than,
so long as no Event of Default shall have occurred and be
continuing, or shall result therefrom, (i) any Restricted
Payment made out of the Net Cash Proceeds of the substantially
concurrent sale of, or made by exchange for, Equity Interests of
the Borrower (other than Disqualified Equity Interests and other
than Equity Interests issued or sold to a Subsidiary of the
Borrower or an employee stock ownership plan or to a trust
established by the Borrower or any of its Subsidiaries for the
benefit of their employees) or a substantially concurrent
capital contribution received by the Borrower from its
shareholders; or (ii) any purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value of
Indebtedness of the Borrower or any Guarantor that is
subordinated to the Obligations, made by exchange for, or out of
the proceeds of the substantially concurrent sale of,
Indebtedness of the Borrower, provided, that such newly
issued Indebtedness is subordinated to the Obligations on the
same terms as the Indebtedness so purchased, repurchased,
redeemed, defeased, acquired or retired.

     
10.22.     Notices. The Borrower
shall promptly give notice to the Lender of: (i) any change
in the Borrower or its operations that would adversely affect
the interests of the Lender in any material respect;
(ii) any default by the Borrower in its obligations under
the documentation governing any Indebtedness; (iii) any
breach by the Borrower of any other contract; (iv) any
litigation involving the Borrower or a Subsidiary; (v) any
material governmental notifications and proceedings, including
approval and denial notices by the FDA; (vi) any Person
which has become a 5-percent shareholder, as such term is
defined for purposes of Section 382 of the IRC and the
Treasury Regulations (final, temporary and, as applicable,
proposed) promulgated thereunder; and (vii) any other
development that causes or could reasonably be expected to cause
a Material Adverse Effect.

     
10.23.     Cancellation of
Indebtedness. The Borrower shall not cancel any claim or
debt owing to it, except for reasonable consideration negotiated
on an arm’s length basis and in the ordinary course of its
business consistent with past practices and settlement of
accounts in the ordinary course of business.

     
10.24.     Subsidiaries. Neither
the Borrower nor any Subsidiary shall acquire or create another
Subsidiary without the prior consent of the Lender, and such
newly acquired or created Subsidiary (a) shall be a
wholly-owned Subsidiary of the Borrower or another wholly-owned
Subsidiary of the Borrower, and (b) shall promptly execute
a Subsidiary Guaranty and a Subsidiary Security Agreement, and
such other documents and instruments as the Lender may
reasonably require, and the Borrower or such Subsidiary
acquiring or creating such new Subsidiary shall pledge the stock
of the newly acquired or created Subsidiary as Collateral.

     
10.25.     Limitation on Issuance of
Equity Interests of Subsidiaries. The Borrower shall not
sell, and shall not permit any Subsidiary, directly or
indirectly, to issue or sell, any shares of Equity Interests of
a Subsidiary (including options, warrants, or other rights to
purchase shares of such Equity Interests) except: (i) to
the Borrower or a wholly owned Subsidiary of the Borrower; or
(ii) issuances of director’s qualifying shares or
sales to foreign nationals of shares of Equity Interests of
foreign Subsidiaries, to the extent required by applicable law.

     
10.26.     Maintenance of NOLs.
Neither the Borrower, any Subsidiary nor any Affiliate of any
thereof, shall enter into any transaction which could reasonably
be expected to cause the Borrower, any Subsidiary or any
Affiliate of any thereof to undergo an Ownership Change, other
than an Excepted Transaction. For purposes of this
Section 10.26, “Excepted Transaction”
shall mean (a) any transaction contemplated under this
Agreement, the other Loan Documents, the Convertible Note, the
Investment Agreement, the Registration Rights Agreement and any
other certificate, instrument, agreement or other document
executed or to be executed in connection therewith, and
(b) any other financing transaction undertaken or to be
undertaken by the Borrower (i) with the prior written
consent of the Lender (such consent not to be unreasonably
withheld or delayed), or (ii) with respect to which the
Board of Directors has considered the effect of such proposed
financing transaction on the availability to the Borrower, any
Subsidiary or any Affiliate of any thereof of net operating
losses or associated tax benefits pursuant to Section 382
of the IRC arising from or related to such proposed financing
transaction, and obtained the advice of outside counsel or
accountants that such transaction has been structured to
minimize any negative effect on the availability of such net
operating losses or associated tax benefits. For the avoidance
of doubt, and notwithstanding anything to the contrary herein,

26

 

any change in the availability of net operating losses arising
from or related to any Excepted Transactions shall not
constitute a breach of or a Default or an Event of Default under
this Agreement.

     
10.27.     Intellectual
Property. (a) The Borrower shall conduct continuously
and operate actively its business according to good business
practices, including, without limitation, maintaining all of its
licenses, Patents, Copyrights, Know-How, design rights,
tradenames, trade secrets and Trademarks and taking all actions
necessary to enforce and protect the validity and enforceability
of all intellectual property rights or other right included in
the Borrower Intellectual Property.

     
(b) Borrower (either itself or through licensees) will not
do any act, or omit to do any act, whereby any of its Patents
may become forfeited, abandoned or dedicated to the public,
unless the Lender gives its prior written consent, which shall
not be unreasonably withheld or delayed.

     
(c) Borrower (either itself or through licensees) will
continue to use each of its Trademarks in order to maintain such
Trademark in full force free from any claim of abandonment for
non-use, unless the Lender gives its prior written consent,
which shall not be unreasonably withheld or delayed.

     
(d) Borrower will not (either itself or through licensees)
do any act whereby any of its Copyrights may fall into the
public domain, unless the Lender gives its prior written
consent, which shall not be unreasonably withheld or delayed.

     
(e) Borrower (either itself or through licensees) will not
infringe the Intellectual Property rights of any other Person.

     
(f) Borrower will notify the Lender immediately if it
knows, or has reason to know, that any application or
registration relating to any Borrower Intellectual Property may
become forfeited, abandoned or dedicated to the public, or of
any adverse determination or development (including the
institution of, or any such determination or development in, any
proceeding in the United States Patent and Trademark Office, the
United States Copyright Office or any agency, court or tribunal
in any country) regarding, the Borrower’s ownership of, or
the validity of, or the enforceability of, any Borrower
Intellectual Property or the Borrower’s right to register
the same or to own and maintain the same.

     
(g) Whenever the Borrower, either by itself or through any
agent, employee, licensee or designee, shall file an application
for the registration of any Intellectual Property with the
United States Patent and Trademark Office, the United States
Copyright Office or any similar office or agency in any other
country or any political subdivision thereof, the Borrower shall
promptly report such filing to the Lender. Upon the request of
the Lender, the Borrower shall execute and deliver to the Lender
any and all agreements, instruments, documents, and papers as
the Lender may reasonably request to evidence the Lender’s
security interest in any Copyright, Patent or Trademark and the
goodwill and general intangibles of the Borrower relating
thereto or represented thereby.

     
(h) Borrower will take all reasonable and necessary steps
to maintain and pursue each application (and to obtain the
relevant registration) and to maintain each registration of all
Borrower Intellectual Property owned by it.

     
(i) In the event that any Borrower Intellectual Property is
infringed upon or misappropriated or diluted by a third party,
the Borrower shall (i) take such actions as reasonably
necessary to protect such Borrower Intellectual Property; and
(ii) promptly notify the Lender after the Borrower learns
thereof and, to the extent, in its reasonable judgment, the
Borrower determines it appropriate under the circumstances, sue
for infringement, misappropriation or dilution, to seek
injunctive relief where appropriate and to recover any and all
damages for such infringement, misappropriation or dilution.

     
10.28.     Investments. The
Borrower shall not make or permit to remain outstanding any
Investments except:

		
	 	     
    (a) Investments outstanding on the date hereof and
    identified in Schedule 10.28.
	 
	 	     
    (b) Deposit accounts with banks.

27

 

		
	 	     
    (c) Investments in the Borrower or a Subsidiary.
	 
	 	     
    (d) Hedging Agreements entered into in the ordinary course
    of the Borrower’s financial planning and not for
    speculative purposes.
	 
	 	     
    (e) Advances to officers, directors and employers of such
    Person in the ordinary course of business (provided that
    such advances have been approved by a majority of the
    disinterested members of the Board of Directors).
	 
	 	     
    (f) Accounts receivable in the ordinary course of business
    on reasonable and customary trade terms.
	 
	 	     
    (g) Other investments in accordance with the Investment
    Guidelines.

     
10.29.     Subsidiary
Indebtedness. The Borrower shall not permit the aggregate
principal amount of Indebtedness (other than the Obligations) of
its Subsidiaries at any time to exceed $1,000,000.

     
10.30.     Restrictive
Agreements. (a) The Borrower shall not, directly or
indirectly, enter into, incur or permit to exist any agreement
or other arrangement that prohibits, restricts or imposes any
condition upon (i) the ability of the Borrower or any
Subsidiary to create, incur or permit to exist any Lien upon any
of its property or assets; or (ii) the ability of any
Subsidiary to pay dividends or other distributions with respect
to any shares of its capital stock or to make or repay loans or
advances to the Borrower or any other Subsidiary or to Guarantee
Indebtedness of the Borrower or any other Subsidiary.

     
(b) (i) The foregoing paragraph, however, shall not
apply to (A) restrictions and conditions imposed by law or
by this Agreement, the other Loan Documents, the Investment
Agreement and the other contracts, agreements and other
documents entered into in connection therewith;
(B) restrictions and conditions existing on the date hereof
identified on Schedule 10.30, (but shall apply to
any extension or renewal of, or any amendment or modification
expanding the scope of, any such restriction or condition); and
(C) restrictions and conditions imposed by the Novartis
Option and License Agreement and the Novartis Note as each
exists on the Closing Date (but shall apply to any extension or
renewal of, or any amendment or modification expanding the scope
of, any such restriction or condition); and
(ii) Clause (i) of paragraph (a) above shall
not apply to (A) restrictions or conditions imposed by any
agreement relating to secured Indebtedness permitted by this
Agreement if such restrictions or conditions apply only to the
property or assets securing such Indebtedness; and
(B) customary provisions in leases and other contracts
restricting the assignment thereof.

     
10.31.     Limitation on
Layering. Notwithstanding the provisions of
Section 10.20, the Borrower shall not incur any
Indebtedness that is subordinate or junior in right of payment
to the Obligations, and senior in any respect in right of
payment to any Indebtedness permitted under clause (iii) of
Section 10.20.

     
10.32.     Novartis Note. The
Borrower shall not at any time prior to the Repayment Date make
any payment in cash, or permit any payment to be made in cash,
under the Novartis Note, whether for principal, interest or
otherwise, except as expressly permitted under, and in
accordance with, the Investment Agreement.

     
10.33.     Clinical Trials.
Borrower will take all reasonable and necessary steps to pursue
clinical evaluations related to the approvability or approval of
product candidates including making all necessary filings with
the FDA or other authority. Borrower will not voluntarily cease
any such material clinical evaluations without the Lender’s
approval.

     
10.34.     Additional
Disclosure. Upon receipt of an Exchange Notice from the
Lender, at any time prior to the proposed Exchange Date, the
Borrower shall deliver or cause to be delivered to the Lender
supplemental information (including, without limitation, updated
Schedules pursuant to Section 9 of this Agreement and
similar provisions of the other Loan Documents) concerning
events subsequent to the date hereof, which would render any
statement, representation or warranty made in this Agreement or
any information contained in a Schedule or other document
required by this Agreement inaccurate or incomplete as of such
date, and such supplement or amendment shall be deemed
incorporated as part of this Agreement including such Schedules
unless the Lender determines in its reasonable discretion that
any changes, events, circumstances, occurrences or state of
facts disclosed in such supplement or amendment could,
individually or

28

 

in the aggregate, have a Material Adverse Effect on the Borrower
and its Subsidiaries (each, a “Material Adverse
Event”); provided, however, that if the
Borrower delivers such supplemental information to the Lender
later than 5 Business Days before the Exchange Date designated
by the Lender, the Lender shall be entitled to extend the
Exchange Date to a date up to 5 Business Days after its receipt
of such supplemental information. No supplement to, or amendment
of, any Schedule made pursuant to this Section shall be deemed
to cure any breach of any such representation or warranty made
in this Agreement unless the Lender specifically agrees thereto
in writing.

     
10.35.     SEC Filing
Compliance. The Borrower shall file all required reports,
schedules, registration statements and other documents with the
SEC. Each report, registration statement, definitive proxy
statement and information statement, including any
certifications pursuant to Section 302 or Section 906
of the Sarbanes-Oxley Act of 2002 or similar certifications,
filed by the Borrower or any Subsidiary under the Securities Act
or under Sections 13(a), 13(c), 14 and 15(d) of the
Exchange Act (collectively, the “Borrower Ongoing SEC
Documents”), with the SEC, (i) shall comply in
all material respects as to form with the applicable
requirements under the Securities Act or the Exchange Act, as
the case may be; and (ii) as of its filing date, shall not
contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances
under which they are made, not misleading; and each of the
balance sheets contained in or incorporated by reference into
any such Borrower Ongoing SEC Document (including the related
notes and schedules thereto) shall fairly present the financial
position of the entity or entities to which it relates as of its
date, and each of the statements of operations and changes in
stockholders’ equity and cash flows or equivalent
statements in such Borrower Ongoing SEC Documents (including any
related notes and schedules thereto) shall fairly present the
results of operations, changes in stockholders’ equity and
changes in cash flows, as the case may be, of the entity or
entities to which it relates for the periods to which it
relates, in each case in accordance with GAAP consistently
applied during the periods involved, except, in each case, as
may be noted therein, subject to normal year-end audit
adjustments in the case of unaudited statements.

     
10.36.     Post-Closing Actions.
As soon as practicable after the Closing Date the Borrower shall
(a) in no event later than the date twenty Business Days
after the Closing Date, take all actions necessary or advisable
to perfect to the maximum extent permitted or recognized under
applicable law (or attain the functional equivalent of
perfection of) the security interest granted to the Lender in
Non-Domestic Intellectual Property constituting Collateral,
other than specific items of Non-Domestic Intellectual Property
reasonably requested by the Borrower in writing, including a
description thereof in reasonable detail (including without
limitation identifying information for such item, a description
thereof, its location and an estimated Dollar value therefor),
which the Lender reasonably consents in writing is not subject
to perfection (or the functional equivalent of perfection
cannot be attained) of the security interest therein
(provided, however, that any failure to so perfect during
such twenty Business Day period, as may be extended pursuant to
this Section 10.36, other than a failure arising from the
Borrower or any agent of the Borrower failing to take any such
necessary or advisable action, shall not during such period
constitute an Event of Default hereunder or under any other Loan
Document), and (b) upon the written request of the Lender,
establish a deposit account, or reconstitute the Disbursement
Account, as a deposit or other account in which the Lender has
an ownership interest in addition to the security interest
granted pursuant to the Security Documents, or such other
account acceptable to the Lender and the Borrower, that is in
either case obtainable from a reputable financial institution of
recognized standing, which account shall in any case be subject
to the terms and conditions governing withdrawals set forth in
Section 10.2, into which the funds in the Disbursement
Account shall be transferred (if such new account is separate
from the Disbursement Account), and as to which all interest and
other income generated by the funds deposited therein shall be
owned exclusively by the Borrower and paid by the Bank into a
separate deposit account of the Borrower, and which account
shall thereafter be the Disbursement Account for all purposes
hereunder and under the other Loan Documents. Upon the
perfection (or the functional equivalent of perfection) of
the Lender’s security interest in an items of Non-Domestic
Intellectual Property constituting Collateral, the Borrower
shall as soon as practicable cause the delivery to the Lender of
a legal opinion of its outside counsel with respect to such
perfection (or functional equivalent) in form consistent,
to the extent applicable, with other legal opinions delivered by
the Borrower’s counsel under this Agreement and the other
Transaction Documents and reasonably acceptable to the Lender.

29

 

Upon written request by Borrower to the Lender for consent to
the non-perfection (or functional equivalent) of the
security interest in any item of Non-Domestic Intellectual
Property, complying with this Section 10.36, the Lender
shall endeavor to deliver a determination with respect to such
request within two Business Days after receipt thereof,
provided, that in the event the Lender shall not render such
determination within two Business Days, the twenty Business Day
period during which the Borrower is otherwise obligated pursuant
to this Section 10.36 to perfect the security interest in
such item shall automatically be extended by the number of
Business Days equal to the number of Business Days after such
two Business Day period through the date the Lender renders such
determination.

		
	11.	
    EXCHANGE FOR CONVERTIBLE NOTES

     
11.1.     Exchange of Notes. At
any time on or after the date on which the Stockholder Approval
of the Proposals (as defined in the Investment Agreement) is
obtained, the Lender shall have the right, but not the
obligation, to exchange the Note (the
“Exchange”), in whole but not in part
(including all principal and interest thereon), into the
Convertible Note (as defined in the Investment Agreement)
pursuant to and in accordance with the provisions of
Section 2(d) of the Investment Agreement by providing
written notice of the Exchange to the Borrower (the
“Exchange Notice”) indicating the date
on which the Exchange shall occur (the “Exchange
Date”), which date shall be no less than 10
Business Days after delivery of the Exchange Notice. The
Exchange shall be subject to the conditions set forth in the
Investment Agreement. The Borrower shall not be obligated to
issue the Convertible Note upon the Exchange unless either
(i) the Note, duly endorsed, is surrendered to the
Borrower; or (ii) the Lender notifies the Borrower that the
Note has been lost, stolen or destroyed and delivers to the
Borrower an affidavit in form and substance reasonably
acceptable to the Borrower attesting to the Note having been
lost, stolen or destroyed, as the case may be, and an agreement
in form and substance reasonably acceptable to the Borrower to
the effect that the Lender shall indemnify and hold the Borrower
harmless against any liability or damages resulting therefrom.
No later than 5 days following the date of the surrender of
the Note, the Borrower shall deliver to the Lender physical
certificates representing the Convertible Note.

     
11.2.     Additional Conditions to
Exchange. It shall be a condition precedent to the Lender
consummating the Exchange that (a) that no Material Adverse
Event shall have been disclosed in the supplements or amendments
described in Section 10.34 and (b) an opinion of Brown
Rudnick Berlack and Israels LLP, in the form attached as
Exhibit J to the Investment Agreement shall be
delivered to the Lender. Any Exchange Notice delivered by the
Lender pursuant to Section 11.1 shall become automatically
null and void without any further action by any party if a
Material Adverse Event shall be disclosed as described in
Section 10.34.

		
	12.	
    EVENTS OF DEFAULT

     
12.1.     Events of Default. If
one or more of the following events (each an “Event
of Default”) occurs and is continuing, the Lender
shall be entitled to exercise any or all of the remedies set
forth in Section 12.2.

		
	 	     
    (a) The Borrower fails to pay any Obligation as and when
    that amount becomes due and payable.
	 
	 	     
    (b) The Borrower (i) fails to perform or observe any
    covenant or agreement contained in Sections 10.1 -
    10.4 (other than Section 10.3 to the extent capable of cure
    within 10 days of such failure), Sections 10.7 -
    10.8, Section 10.9 (with respect to inspection rights),
    Sections 10.10 - 10.11, Sections 10.13 -
    10.16, Sections 10.18 -10.27 (other than clauses (b),
    (c) and (d) of Section 10.27 to the extent
    capable of cure within 10 days of such failure), and
    Sections 10.29 - 10.36 to be performed or observed by
    it; or (ii) fails to perform or observe any covenant or
    agreement other than those referred to in Section 12.1(a),
    12.1(d) or clause (i) of this Subsection and does not
    remedy the failure on or before the 10th day after it
    occurs.
	 
	 	     
    (c) Any representation or warranty of the Borrower in this
    Agreement or any other Loan Document proves to have been
    incorrect, incomplete or misleading in any material respect at
    the time it was made or deemed to have been made; provided,
    however, that from and after the Final Withdrawal Date,
    except for the purposes of any representations and warranties
    made or deemed made in connection with the Exchange, subject to
    the provisions of Sections 10.34 and 11.2 hereof, the
    Borrower’s inability to provide

30

 

		
	 	
    the certification described in Section 10.4(d)(ii)(B)
    hereof shall not constitute a Default or Event of Default under
    this Agreement or the other Loan Documents.
	 
	 	     
    (d) The Borrower fails to (i) file the Proxy Statement
    in accordance with Section 10.13 or (ii) to obtain
    Stockholder Approval in accordance with Section 10.19 (a
    “Stockholder Approval Default”);
    provided, however, that in the case of clause (ii)
    immediately above, the Lender and each other Permitted Holder
    holding Common Stock or other Equity Interests in the Borrower
    entitled to vote on the Proposed Transactions shall have voted
    in favor of the Proposed Transactions.
	 
	 	     
    (e) (i) Any of the Security Documents shall cease, for
    any reason, to be in full force and effect; or (ii) the
    Lien created by any of the Security Documents shall fail to
    constitute a Perfected Lien in the Collateral; provided,
    that (A) solely with respect to any individual item of
    Collateral having a fair market value of $25,000 (as reasonably
    determined by the Borrower in good faith and reasonably agreed
    to by the Lender) or less, such failure to maintain a Perfected
    Lien in such item of Collateral shall not constitute an Event of
    Default unless the Borrower does not remedy such failure on or
    before the 5th day after such failure occurs, (B) such
    failure to maintain a Perfected Lien in such item of Collateral
    shall not constitute an Event of Default if such failure results
    solely from any action or failure to act on the part of the
    Lender (following notice thereof from the Borrower) to maintain
    such Perfected Lien and which action or failure to act
    contravenes the provisions of this Agreement, the other Loan
    Documents or applicable law and (C) notwithstanding
    anything herein or in any Loan Document to the contrary, the
    failure to perfect (or attain the functional equivalent of
    perfection of) the security interest granted to the Lender in
    any Non-Domestic Intellectual Property constituting Collateral
    prior to the date required therefor pursuant to
    Section 10.36, shall not constitute an Event of Default.
	 
	 	     
    (f) The Borrower provides notice to the Lender, including
    by way of public announcement, at any time, of its intention not
    to issue, or otherwise refuses to issue, the Convertible Note to
    the Lender upon the Exchange in accordance with the terms herein
    and in the Investment Agreement.
	 
	 	     
    (g) The Borrower or any Subsidiary (i) fails to pay
    any of its other Indebtedness as and when that Indebtedness
    becomes due and payable; or (ii) fails to perform or
    observe any covenant or agreement to be performed or observed by
    it contained in any other agreement or in any instrument
    evidencing any of its Indebtedness (and any cure period under
    such other agreement or instrument shall have expired) and, as a
    result of the failure, any other party to that agreement or
    instrument is entitled to exercise the right to accelerate the
    maturity of any amount owing thereunder.
	 
	 	     
    (h) (i) A court enters a decree or order for relief
    with respect to the Borrower in an involuntary case under the
    Bankruptcy Code, which decree or order is not stayed or other
    similar relief is not granted under any applicable federal or
    state law; or (ii) the continuance of any of the following
    events for 45 days unless dismissed, bonded or discharged:
    (A) an involuntary case is commenced against the Borrower,
    under any applicable bankruptcy, insolvency or other similar law
    now or hereafter in effect; or (B) a decree or order of a
    court for the appointment of a receiver, liquidator,
    sequestrator, trustee, custodian or other officer having similar
    powers over the Borrower, or over all or a substantial part of
    its property, is entered; or (C) a receiver, trustee or
    other custodian is appointed without the consent of the
    Borrower, for all or a substantial part of the property of the
    Borrower.
	 
	 	     
    (i) (i) The Borrower commences a voluntary case under
    the Bankruptcy Code, or consents to the entry of an order for
    relief in an involuntary case or to the conversion of an
    involuntary case to a voluntary case under any such law or
    consents to the appointment of or taking possession by a
    receiver, trustee or other custodian for all or a substantial
    part of its property; or (ii) the Borrower makes any
    assignment for the benefit of creditors; or (iii) the Board
    of Directors adopts any resolution or otherwise authorizes
    action to approve any of the actions referred to in this
    Section 12.1(i).
	 
	 	     
    (j) Any governmental authorization necessary for the
    performance of any obligation of the Borrower under this
    Agreement or the Loan Documents, or the consummation of the
    Proposed Transactions, is not or fails to remain valid and
    subsisting in full force and effect.

31

 

		
	 	     
    (k) Any governmental authority or court takes any action
    that, in the determination of the Lender could have a Material
    Adverse Effect on the Borrower.
	 
	 	     
    (l) One or more judgments for the payment of money in an
    aggregate amount in excess of $100,000 shall be rendered against
    the Borrower and the same shall remain undischarged for a period
    of 30 consecutive days during which execution shall not be
    effectively stayed, or any action shall be legally taken by a
    judgment creditor to attach or levy upon any assets of the
    Borrower to enforce any such judgment.
	 
	 	     
    (m) The Borrower sells or otherwise disposes of all or a
    substantial part of its assets or ceases to conduct all or a
    substantial part of its business as now conducted, or merges or
    consolidates with any other Person without the prior written
    consent of the Lender.
	 
	 	     
    (n) The Common Stock is suspended from trading on any of,
    or is not listed (and authorized) for trading on at least one
    of, The Nasdaq Stock Market, The Nasdaq SmallCap Market, The New
    York Stock Exchange, The American Stock Exchange or is not
    eligible for trading on the OTC Bulletin Board for an
    aggregate of 10 Trading Days in any 9 month-period.
	 
	 	     
    (o) There shall have occurred and be continuing an
    “Event of Default” (as such term is defined in the
    Novartis Note) under the Novartis Note.
	 
	 	     
    (p) The Lender shall have given written notice of the
    Exchange to the Borrower in accordance with Section 11.1
    hereof and the Borrower shall be unable consummate the Exchange
    pursuant to the terms of the Investment Agreement, including,
    without limitation, Borrower’s inability to satisfy the
    condition set forth in Section 11.2 hereof.

     
12.2.     Default Remedies.
(a) If any Event of Default other than a Stockholder
Approval Default occurs and is continuing, the Lender may, by
notice to the Borrower, (i) declare the obligations of the
Lender hereunder to be terminated, whereupon those obligations
shall terminate; and (ii) declare all amounts payable
hereunder or under the Loan Documents by the Borrower that would
otherwise be due after the date of termination to be immediately
due and payable, whereupon all those amounts shall become
immediately due and payable, all without diligence, presentment,
demand of payment, protest or notice of any kind, which are
expressly waived by the Borrower; provided, however, that
if any event of a kind referred to in Section 12.1(h) or
Section 12.1(i) occurs, the obligations of the Lender
hereunder shall immediately terminate, and all amounts payable
hereunder by the Borrower that would otherwise be due after the
occurrence of that event shall become immediately due and
payable without any such notice or other formality waived by the
Borrower in this Section.

     
(b) Immediately upon the occurrence of a Stockholder
Approval Default, the obligations of the Lender hereunder shall
automatically terminate, and all amounts payable hereunder by
the Borrower shall become immediately due and payable without
any notice to the Borrower or any other Person.

		
	 	     
    (i) Immediately upon the occurrence of such Stockholder
    Approval Default, the Lender shall be entitled to receive
    payment in cash equal to the Stockholder Default Balance. The
    “Stockholder Default Balance” shall be
    calculated as of the time of any such repayment and shall be
    equal to the greater of the (a) sum of (1) the
    outstanding principal balance of the Loan, plus
    (2) all accrued and unpaid interest thereon, each amount
    being calculated as of the date of any such repayment (such sum
    being referred to herein as the “Loan Repayment
    Amount”) and (b) the sum of (1) the Peak
    Equity Amount (as defined below) plus (2) the Make
    Whole Amount (as defined below). If the Stockholder Default
    Balance is paid by the Borrower in more than one payment
    pursuant to the terms of this Section 12.2(b), the Loan
    Repayment Amount shall be reduced on a pro rata basis by any
    payments made by the Borrower in accordance with
    Section 12.2(b)(iii) below. If the Stockholder Default
    Balance shall not be paid in full, in cash, within 30 days
    of the Stockholder Approval Default, the Loan Repayment Amount
    shall thereafter bear interest at the Default Rate.
	 
	 	     
    (ii) Upon the occurrence of such Stockholder Approval
    Default, and thereafter if required pursuant to
    Section 12.2(b)(iv) below, the Borrower shall be obligated
    to offer for sale as soon as practicable

32

 

		
	 	
    pursuant to a registered offering (the “Registered
    Repayment Offering”) in accordance with
    Section 2.9 of the Registration Rights Agreement, the
    maximum number of shares of Common Stock that may be offered at
    the highest offering price per share possible (the
    “Share Price”); provided, that
    such Share Price is equal to or greater than one-half of the
    average closing price per share of the Common Stock for the five
    (5) Trading Days immediately after the later of the date of
    the Stockholder Approval Default and the most recent
    Recalculation Date. The determination regarding the Share Price
    to be obtained in connection with a Registered Repayment
    Offering and the number of shares of Common Stock that may be
    offered at such Share Price shall be made by an independent,
    nationally recognized investment bank selected by the Lender,
    whose determination shall be final and binding upon the
    Borrower, and as further provided in Section 2.9 of the
    Registration Rights Agreement.
	 
	 	     
    (iii) Upon receipt of any or all proceeds, net of
    underwriter’s discounts and commissions, of any Registered
    Repayment Offering (“Offering Proceeds”)
    pursuant to this Section 12.2(b), the Borrower shall pay to
    the Lender all of the Offering Proceeds (the
    “Proceeds Payment”) necessary to meet
    all of its Obligations hereunder. Upon the receipt of such
    payment by the Lender, the Loan Repayment Amount shall be
    reduced by the Dollar amount obtained by multiplying the Loan
    Repayment Amount outstanding immediately prior to such payment,
    by a fraction, the numerator of which is the Dollar amount of
    any such Proceeds Payment, and the denominator of which is the
    Stockholder Default Balance outstanding immediately prior to
    such payment. For example, if the Stockholder Default Balance is
    $32 million, the Loan Repayment Amount is $16 million,
    and the Borrower makes an $8 million Proceeds Payment, then
    the Loan Repayment Amount shall be reduced by 25%, or
    $4 million.
	 
	 	     
    (iv) If the outstanding Loan Repayment Amount is greater
    than zero after the application of any Proceeds Payment, the
    Borrower shall, on the date that is 150 days after the most
    recent Registered Repayment Offering was completed, unless
    otherwise instructed by the Lender with respect to timing of
    payments (each such date, a “Recalculation
    Date”), automatically and without further notice or
    other action, commence another Registered Repayment Offering in
    accordance with Section 12.2(b)(ii) above, and such
    offering shall become effective on or prior to 30 days
    after such Recalculation Date. Upon the completion of any such
    Registered Repayment Offering, the Borrower shall make a
    Proceeds Payment, and the Loan Repayment Amount shall be reduced
    in accordance with Section 12.2(b)(iii) above.
	 
	 	     
    (v) The “Peak Equity Amount” shall,
    at the time of any calculation, be calculated in the following
    manner:

		
	 	     
    (i) if the calculation is made immediately after the
    occurrence of a Stockholder Approval Default in accordance with
    Section 12.2(b)(i) above, the Peak Equity Amount shall be:

		
	 	     
    (A) the number of shares of Common Stock of the Borrower
    obtained by dividing the Loan Repayment Amount, at the time of
    such calculation, by the lower of (x) 112.50% of the
    average closing price per share of the Common Stock for the five
    (5) Trading Days prior to the Closing Date and
    (y) $3.78 (such quotient being referred to herein as the
    “Converted Shares”); multiplied by
	 
	 	     
    (B) the closing price per share of the Common Stock at the
    end of the third Trading Day preceding the date of the
    Stockholder Approval Default;

		
	 	     
    (ii) if such calculation is made as of any Recalculation
    Date in accordance with Section 12.2(b)(iv) above, the Peak
    Equity Amount shall be the greater of:

		
	 	     
    (A) the existing Peak Equity Amount immediately prior to
    such Recalculation Date, minus any reduction of the Loan
    Repayment Amount pursuant to
    Section 12.2(b)(iii); and
	 
	 	     
    (B) the Converted Shares multiplied by the average
    closing price per share of the Common Stock for the five
    (5) Trading Days immediately preceding such Recalculation
    Date.

		
	 	     
    (vi) Notwithstanding anything to the contrary contained
    herein, if the outstanding Loan Repayment Amount is greater than
    zero on the fifth anniversary of the Stockholder Approval
    Default, the Loan

33

 

		
	 	
    Repayment Amount shall become immediately due and payable in
    full without any rights of the Borrower to delay or partially
    apply such payment.
	 
	 	     
    (vii) The “Make Whole Amount”
    shall, at the time of any calculation, be an amount equal to the
    sum of (a) the excess of (A) the amount of Taxes due
    and payable by the Lender with respect to payments of the
    Stockholder Default Balance received during the period from the
    later of the date of the Stockholder Approval Default and the
    date the Stockholder Default Balance was last calculated
    (together with, if calculated for the period from the date of
    the Stockholder Approval Default, any additional Taxes payable
    with respect to the principal amount of the Loan for the period
    from the Closing Date to the date of the Stockholder Approval
    Default), over (B) the amount of Taxes that would have been
    payable by the Lender for such period, in its sole determination
    acting in good faith, had the Stockholder Approval Default not
    occurred and had the Exchange been made, plus
    (b) the amount of Taxes due and payable by the Lender by
    reason of the Lender’s receipt of the payments described in
    clauses (a) and (b) of this clause (vii).

     
12.3.     Right of Setoff. If
any amount payable hereunder is not paid as and when due, the
Borrower authorizes the Lender and each Affiliate of the Lender
to proceed, to the fullest extent permitted by applicable law,
without prior notice, by right of setoff, banker’s Lien,
counterclaim or otherwise, against any assets of the Borrower in
any currency that may at any time be in the possession of the
Lender or that Affiliate, at any branch or office, to the full
extent of all amounts due and payable to the Lender hereunder.

     
12.4.     Rights Not Exclusive.
The rights provided for herein are cumulative and are not
exclusive of any other rights, powers, privileges or remedies
provided by law.

		
	13.	
    INDEMNIFICATION

     
13.1.     Amendment and Enforcement
Expenses. The Borrower shall reimburse the Lender (including
without limitation in its capacity as Lender and “Secured
Party” under the Security Agreement) for all reasonable
fees, costs and expenses (including the reasonable fees,
disbursements and expenses of all of its counsel, advisors,
consultants, appraisers and auditors) incurred in connection
with (i) the negotiation, preparation and execution of this
Agreement, each other Loan Document and any agreement or
instrument contemplated hereby or thereby; the performance by
the parties hereto of their respective obligations hereunder or
the consummation of the transactions or any other transactions
contemplated hereby; (ii) administration of the Loan
hereunder and under the other Loan Documents; (iii) the
negotiation, preparation or execution of any amendment, waiver,
consent or similar instrument under this Agreement or any Loan
Document, (iv) any Default or Event of Default; and
(v) the preservation or enforcement of any right of the
Lender under this Agreement or any Loan Document.

     
13.2.     Other Expenses. If the
Borrower (i) fails to fulfill the conditions set forth in
Section 8.1 by the respective times specified for their
fulfillment, or (ii) fails to pay any amount payable
hereunder as and when due, the Borrower shall reimburse the
Lender (including without limitation in its capacity as Lender
and “Secured Party” under the Security Agreement) in
Dollars on demand for all losses and expenses incurred as a
consequence thereof, other than any loss suffered as a result of
reemploying deposits acquired by the Lender (or any Person to
whom the Lender has sold a participation in the Loan) for the
purpose of funding the Loan at a rate of return lower than the
cost of acquiring the deposits or any expense incurred by the
Lender (or such Person) in liquidating the deposits.

     
13.3.     Indemnification. The
Borrower shall indemnify, defend and hold harmless to the
fullest extent permitted by law the Lender (including without
limitation in its capacity as Lender and “Secured
Party” under the Security Agreement) and the Lender’s
Affiliates and each of their respective officers, directors,
managers, partners, shareholders, employees, lenders, advisors,
agents and other representatives and any Affiliate of the
foregoing, and each of their respective successors and permitted
assigns and each Person who controls any of the foregoing,
within the meaning of the Securities Act and the Exchange Act
(each, an “Indemnified Party”), from and
against, and shall promptly reimburse each Indemnified Party
for, all demands, claims, actions or causes of action (whether
or not the Indemnified Party is a party thereto), assessments,
losses, damages and liabilities asserted by third-parties and
adjudicated by a court of competent

34

 

jurisdiction to a final non-appealable judgment, and all costs
and expenses, including, without limitation, interest, court
costs and reasonable attorneys’ fees and expenses
(including, without limitation, reasonable expenses of
investigation and reasonable attorneys’ and
accountants’ fees and expenses in connection with any
action, suit or proceeding, including those incurred upon any
appeal), joint or several, arising or resulting from or in
connection with (w) any misrepresentation or any breach of
any warranty, covenant or agreement contained in this Agreement
or in any of the other Loan Documents, (x) any claim or
demand for commission or other compensation by any broker,
finder, agent or similar intermediary claiming to have been
employed by the Lender or any of its controlled Affiliates,
(y) the Lender’s holding a lien on the assets of the
Borrower or its Subsidiaries or with respect to the execution,
delivery, enforcement, performance and administration of, or in
any other way arising out of or relating to any of the
collateral documents with respect to such lien, or any actions
or failures by the Borrower to act with respect to any of the
foregoing, or (z) any performance by the Lender of its
obligations in accordance with the terms of the Loan Documents
(collectively, “Indemnified
Liabilities”), except that any such Indemnified
Liability shall be reduced in proportion to the amount (finally
determined by a court of competent jurisdiction) to be
attributable to such Indemnified Party’s gross negligence,
bad faith, or willful misconduct. The rights of the Indemnified
Parties under this Section 13.3 shall be in addition to
(a) any cause of action or similar right of any Indemnified
Party against the Borrower or other persons, or (b) any
liabilities the Borrower or any of its Subsidiaries may be
subject to pursuant to any applicable law.

     
13.4.     Increased Costs. The
Borrower shall reimburse the Lender in Dollars on demand for all
costs incurred and reductions in amounts received or receivable,
as reasonably determined by the Lender, that are attributable to
the Loan or the performance by the Lender of its obligations
under this Agreement and the other Loan Documents that occur by
reason of the promulgation of any law, regulation or treaty or
any change therein or in the application or interpretation
thereof or by reason of compliance by the Lender with any
direction, requirement or request (whether or not having the
force of law) of any governmental authority; including, without
limitation, each of the following: any such cost or reduction
resulting from (i) the imposition or amendment of any tax
other than Excluded Taxes; or (ii) the imposition or
amendment of any reserve, special deposit or similar requirement
against assets of, liabilities of, deposits with or for the
account of, or loans by, the Lender. If any requirement relating
to capital adequacy applicable to the Lender, or the entity
controlling the Lender, is imposed or amended with effect in
such a way that compliance therewith, in accordance with the
policies followed by the Lender (or that entity), will increase
the amount of capital that the Lender (or that entity) will be
required to maintain in respect of the Loan, the Borrower shall
pay the Lender on demand from time to time such additional
amounts as the Lender certifies are necessary to compensate it
(or that entity) for the resulting reduction in the rate of
return on the capital of the Lender (or that entity) caused by
compliance with that requirement. The Lender’s
certification shall describe in reasonable detail how it has
calculated the amount demanded. In calculating those amounts,
the Lender may use reasonable averaging and attribution methods
consistent with those being applied with respect to its other
customers that are similarly situated. If the Lender has sold
one or more participations in the Loan, any costs incurred by,
or reductions in return on capital of, the participants shall be
deemed to be attributable to the Loan for purposes of this
Section; provided, however, that the Borrower shall not
be required, as a result of the sale of any participation, to
reimburse the Lender for an amount greater than the amount that
would have been due if the Lender had not sold the participation.

     
13.5.     Waiver of Consequential
Damages, Etc. To the fullest extent permitted by applicable
law, the Borrower shall not assert, and hereby waives, any claim
against any Indemnified Party, on any theory of liability, for
special, indirect, consequential or punitive damages (as opposed
to direct or actual damages) arising out of, in connection with,
or as a result of, this Agreement, any other Loan Document or
any agreement or instrument contemplated hereby or the
transactions contemplated hereby or thereby. Subject to
Section 14.13, no Indemnified Party referred to in
Section 13.4 above shall be liable for any damages arising
from the use by unintended recipients or any information or
other materials distributed by it through telecommunications,
electronic or other information transmission systems in
connection with this Agreement or the other Loan Documents or
the transactions contemplated hereby or thereby; provided,
that such Indemnified Party has exercised reasonable care to
protect the confidentiality of such information or other
materials.

35

 

     
13.6.     Nature of Indemnity.
The indemnification obligations under this Agreement shall not
in any manner limit, prejudice or otherwise affect any rights or
obligations contained in any other Loan Document or Transaction
Document.

		
	14.	
    GENERAL

     
14.1.     Choice of Law. This
Agreement shall pursuant to Sections 5-1401 and 5-1402 of
the General Obligations Law of the State of New York be
construed and interpreted in accordance with the law of the
State of New York.

     
14.2.     Jurisdiction.
(a) The Borrower irrevocably submits to the jurisdiction of
the courts of the State of New York and of the United States
sitting in the Borough of Manhattan in respect of any action or
Proceeding relating in any way to this Agreement or any Note (a
“Proceeding”). The Borrower irrevocably
appoints CT Corporation System, which currently maintains a New
York City office situated at 111 Eighth Ave., 13th Floor,
New York, New York 10011, as its agent to receive service of
process or other legal summons for purposes of any Proceeding.
So long as the Borrower has any obligation under this Agreement,
it will maintain a duly appointed agent in New York City
acceptable to the Lender for the service of such process or
summons and, if it fails to maintain such an agent, any such
process or summons may be served on it by mailing a copy thereof
by registered mail, or a form of mail substantially equivalent
thereto, addressed to the Borrower at its address for notices
hereunder.

     
(b) The Borrower irrevocably waives, to the fullest extent
permitted by applicable law, any objection that it may now or
hereafter have to the laying of venue of any Proceeding in the
Supreme Court of the State of New York, County of New York, or
the United States District Court for the Southern District of
New York and any claim that any Proceeding brought in any such
court has been brought in an inconvenient forum.

     
(c) The Borrower further irrevocably waives, to the fullest
extent permitted by applicable law, any claim that any
Proceeding should be dismissed or stayed by reason, or pending
the resolution, of any action or proceeding commenced by the
Borrower relating in any way to this Agreement or any other Loan
Document, whether or not commenced earlier. To the fullest
extent permitted by applicable law, the Borrower shall take all
measures necessary for the Proceeding to proceed to judgment
prior to the entry of judgment in any such action or proceeding
commenced by the Borrower.

     
14.3.     Application and
Distribution of Payments. All payments received by the
Lender from the Borrower pursuant to this Agreement or the Loan
Documents shall, regardless of the application designated by the
Borrower, be applied, first, to any cost, expense, damage
or other indemnity due and owing under Article 14 hereof or
the other Loan Documents, second, to any premium due and
owing pursuant to Section 3.2, third to any interest
due and owing on the Loan, fourth, to the repayment of
the principal of the Loan, and fifth, to any other amount
due under this Agreement or the other Loan Documents.

     
14.4.     Replacement of Notes.
Upon the loss, theft, destruction or mutilation of any Note, and
upon execution and delivery by the Lender to the Borrower of an
affidavit in form and substance reasonably acceptable to the
Borrower attesting to such loss, theft, destruction or
mutilation, as the case may be, and an agreement, in form and
substance reasonably acceptable to the Borrower to the effect
that the Lender shall indemnify and hold the Borrower harmless
from and against any liability or damages arising therefrom, the
Borrower shall execute and deliver in lieu thereof a new Note,
dated the date of the Note being replaced, in the same principal
amount.

36

 

     
14.5.     Notices. All notices
and other communications given to any party hereto pursuant to
this Agreement shall be in writing and shall be delivered by
hand, fax or email (and in the case of fax or email, receipt
confirmed immediately via telephone), or mailed first class
postage prepaid, registered or certified mail, addressed as
follows:

			
	 	(a)	
    If to the Borrower, to:

		
	 	
    Emisphere Technologies, Inc.
	 	
    765 Old Saw Mill River Road
	 	
    Tarrytown, NY 10591
	 	
    Attention: Chief Executive Officer
	 	
    Phone: (914) 347-2220
	 	
    Fax: (914) 347-2498
	 	
    Email: mgoldberg@emisphere.com
	 
	 	
    with a copy to:
	 
	 	
    Brown Rudnick Berlack Israels LLP
	 	
    One Financial Center
	 	
    Boston, MA 02111
	 	
    Attn: Timothy C. Maguire, Esq.
	 	
    Fax: (617) 289-0413

			
	 	(b)	
    If to the Lender, to:

		
	 	
    MHR Fund Management LLC
	 	
    40 West 57th Street, 24th Floor
	 	
    New York, NY 10019
	 	
    Fax number: (212) 262-9356
	 	
    Attention: Hal Goldstein
	 	
    Phone: (212) 262-0005
	 	
    Fax: (212) 262-9356
	 	
    Email: hgoldstein@mhrfund.com
	 
	 	
    with a copy to:
	 
	 	
    Stroock & Stroock & Lavan LLP
	 	
    180 Maiden Lane
	 	
    New York, NY 10038
	 	
    Attn: Doron Lipshitz, Esq.
	 	
    Brett Lawrence, Esq.
	 	
    Phone: (212) 806-5400
	 	
    Fax: (212) 806-6006
	 	
    Email: dlipshitz@stroock.com
	 	
    blawrence@stroock.com

Each such notice or other communication shall for all purposes
be treated as being effective or having been given when
delivered, if delivered personally, by e-mail or facsimile with
confirmation of receipt or if by overnight courier or, if sent
by mail, upon actual receipt.

     
14.6.     Waivers. No failure or
delay on the part of the Lender in exercising any right
hereunder shall operate as a waiver of, or impair, any such
right. No single or partial exercise of any such right shall
preclude any other or further exercise thereof or the exercise
of any other right. No waiver of any such right or of any
obligation of the Borrower shall be effective unless given in
writing and executed by the Lender. No waiver of any such right
shall be deemed a waiver of any other right hereunder.

     
14.7.     Amendment. This
Agreement may be amended only by an instrument in writing
executed by the parties hereto.

37

 

     
14.8.     Assignments and
Participations. The Borrower may not transfer any of its
rights or obligations under this Agreement. The Lender may at
any time assign its rights and delegate its obligations
hereunder in whole or in part to any Person or Persons.
Transfers hereunder shall become effective only upon delivery of
notice thereof to the Borrower. Upon the effectiveness of a
permitted assignment hereunder, each reference in this Agreement
to the Lender shall be deemed to be a reference to the assignor
and the assignee to the extent of their respective interests.
The Borrower shall, from time to time at the request of the
Lender, execute and deliver any documents that are necessary to
give full force and effect to an assignment permitted hereunder,
including, without limitation, one or more new Notes in exchange
for the Note held by that Lender. The Lender shall be free at
any time to sell participations in its interests hereunder to
any Person or Persons.

     
14.9.     Determinations by the
Lender. Each determination by the Lender hereunder shall, in
the absence of manifest error, be conclusive and binding on the
parties.

     
14.10.     Survival. The
obligations of the Borrower under Section 6.1,
Section 6.2 and Article 13 shall survive the Repayment
Date and the cancellation of the Note and the termination of the
other obligations of the Borrower hereunder.

     
14.11.     Severability of
Provisions. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to
that jurisdiction, be ineffective to the extent of that
prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or
enforceability of that provision in any other jurisdiction.

     
14.12.     Counterparts. This
Agreement may be executed in any number of counterparts, and all
the counterparts taken together shall be deemed to constitute
one and the same instrument.

     
14.13.     Confidentiality. If
the Borrower reasonably believes that any information being
furnished by it to the Lender is confidential, the Borrower may
so indicate by notice in writing to the Lender, identifying that
information with reasonable specificity, in which event the
Lender will use reasonable efforts to maintain the
confidentiality thereof. However, the Lender shall be
free to disclose any such information to any professional
advisors retained by it and to any prospective transferee of any
of its rights or obligations hereunder or prospective
participant therein that itself agrees to be bound by this
confidentiality requirement. In addition, the Lender shall be
free to disclose such information to any court or other
governmental agency having jurisdiction over the Lender or as
required by any subpoena or similar process or as required by
law or to enable the Lender to enforce its rights hereunder.

     
14.14.     Binding Effect. This
Agreement shall be binding upon and inure to the benefit of the
Borrower and the Lender and their respective successors and
permitted assigns.

     
14.15.     Integration of Terms.
This Agreement contains the entire agreement between the parties
with respect to the subject matter hereof and supersedes all
oral statements and prior writings with respect thereto.

     
14.16.     WAIVER OF RIGHT TO TRIAL
BY JURY. EACH OF THE PARTIES IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT TO TRIAL
BY JURY OF ANY CLAIM, DEMAND OR CAUSE OF ACTION RELATING IN ANY
WAY TO THIS AGREEMENT OR ANY NOTE, WHETHER SOUNDING IN CONTRACT
OR TORT OR OTHERWISE, AND AGREES THAT EITHER PARTY MAY FILE A
COPY OF THIS SECTION WITH ANY COURT AS EVIDENCE OF THE
WAIVER OF ITS JURY TRIAL RIGHTS.

     
14.17.     Nature of
Obligations. For avoidance of doubt, the obligations under
the Convertible Note and the other “Loan Documents”
referred to therein will be executed and delivered in
substitution for, but not in satisfaction of, the Obligations
under this Agreement and the Loan Documents referred to herein
and the obligations under the Convertible Note shall not
constitute a refinancing, substitution or novation of the
Obligations.

[Remainder of Page Intentionally Left Blank]

38

 

     
IN WITNESS WHEREOF, the parties have caused this
Agreement to be duly executed and delivered as of the day and
year first written above.

BORROWER:

EMISPHERE TECHNOLOGIES, INC.

		
	By: 	
    /s/  Elliot M. Maza

 

Title: Chief Financial Officer

LENDER:

MHR INSTITUTIONAL PARTNERS IIA LP

		
	By: 	
    MHR Institutional Advisors II LLC,

its General Partner

		
	By: 	
    /s/ Hal Goldstein

 

Name: Hal Goldstein

		
	Title:	
    Authorized Signatory

39exv10w2

 

EXHBIT 10.2

11% SENIOR SECURED CONVERTIBLE NOTE

		
	$[                    ]	[                     ,200     ]

N-1

THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT, OR ANY APPLICABLE STATE SECURITIES LAW AND MAY
NOT BE TRANSFERRED UNLESS (I) THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR SUCH
APPLICABLE STATE SECURITIES LAWS (II) PURSUANT TO
RULE 144 OF THE SECURITIES ACT OR (III) IN THE OPINION
OF COUNSEL REASONABLY ACCEPTABLE TO THE COMPANY, REGISTRATION
UNDER THE SECURITIES ACT OR SUCH APPLICABLE STATE SECURITIES
LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH TRANSFER.

THIS SECURITY IS SUBJECT TO FURTHER RESTRICTIONS ON TRANSFER
AND OTHER CONDITIONS, AS SET FORTH IN THE REGISTRATION RIGHTS
AGREEMENT AND THE INVESTMENT AND EXCHANGE AGREEMENT BOTH ENTERED
INTO AS OF THE CLOSING DATE, COPIES OF WHICH ARE ON FILE AT THE
OFFICE OF THE COMPANY AND WILL BE FURNISHED WITHOUT CHARGE TO
THE HOLDER OF SUCH SECURITY UPON WRITTEN REQUEST.

     
FOR VALUE RECEIVED, EMISPHERE TECHNOLOGIES, INC., a Delaware
corporation (the “Company”), hereby promises to
pay to the order of [MHR Fund Management LLC], a Delaware
limited partnership (the “Holder”), the
principal amount of
[                    ]
MILLION DOLLARS
($[                    ]),
on the terms set forth herein. The obligations under this
11% Senior Secured Convertible Note (this
“Note”) are secured by a first priority
security interest in substantially all assets of the Company
pursuant to the Security Agreement and the other Security
Documents.

     
1.     Definitions;
Interpretation.

     
(a) Definitions. The following terms shall have the
meanings ascribed to them below:

		
	 	     
    “18-Month Budget” means, with respect to any
    Asset Sale proposed to be made pursuant to
    Section 7(n)(iii), the Company’s operating budget
    covering the period from the date of the consummation of such
    Asset Sale to the date 18 months thereafter.
	 
	 	     
    “Additional Documentation” has the meaning
    ascribed to such term in Section 3(b).
	 
	 	     
    “Additional Shares of Common Stock” has the
    meaning ascribed to such term in Section 3(d)(iv).
	 
	 	     
    “Affiliate” means, as to any Person, any other
    Person (i) that, directly or indirectly through one or more
    intermediaries, controls, is controlled by, or is under common
    control with, such Person; (ii) who is a director or
    officer (A) of such Person; (B) of any Subsidiary of
    such Person; or (C) of any Person described in
    clause (i) above with respect to such Person; or
    (iii) which, directly or indirectly through one or more
    intermediaries, is the beneficial or record owner (as defined in
    Rule 13d-3 of the Exchange Act, as is in effect on the date
    hereof) of 10% or more of any class of the outstanding voting
    stock, securities or other equity or ownership interests of such
    Person; provided that notwithstanding anything else
    herein to the contrary, any Permitted Holder shall be deemed not
    to be an Affiliate of the Company or any Subsidiary. For
    purposes of this definition, the term “control” (and
    the correlative terms, “controlled by” and “under
    common control with”) shall mean the possession, directly
    or indirectly, of the power to direct or cause the direction of
    the management or policies, whether through ownership of
    securities or other interests, by contract or otherwise.
	 
	 	     
    “Affiliate Transaction” has the meaning
    ascribed to such term in Section 7(o).

1

 

		
	 	     
    “Asset Sale” means (i) the sale, lease,
    conveyance or other disposition of any assets or rights
    (including, without limitation, a sale/leaseback transaction,
    and the sale or transfer of any FDA licenses or approvals) other
    than any sale, lease, conveyance or other disposition involving
    assets or rights (or a series of related sales, leases,
    conveyances or other dispositions) having a fair market value
    less than $50,000 individually and $100,000 in the aggregate
    during the period from the Closing Date until the Repayment Date
    (which fair market value shall in each case be determined as of
    the date of such disposition), and other than sales, conveyances
    or transfers of inventory in the ordinary course of business
    consistent with past practices with the prior written consent of
    the Holder (which shall not be unreasonably withheld); and
    (ii) the issuance or sale by the Company or any of its
    Subsidiaries of Equity Interests of any of the Company’s
    Subsidiaries. Notwithstanding the foregoing, the following items
    shall not be deemed to be Asset Sales: (i) a transfer of
    assets by the Company to a Subsidiary or by a Subsidiary to the
    Company or to another Subsidiary; (ii) an issuance or sale
    of Equity Interests by a Subsidiary to the Company or to another
    Subsidiary; (iii) a sale or other disposition of property
    or equipment that has become worn out, obsolete or otherwise
    unsuitable for its purpose; (iv) a disposition of Cash
    Equivalents; (v) transactions consummated in compliance
    with Section 7(n) or Restricted Payments in accordance with
    Section 7(s); and (vi) the exercise of rights
    (including foreclosure) in respect of any Lien permitted by
    Section 7(k).
	 
	 	     
    “Bank” means a financial institution at which
    the Company and the Holder shall mutually agree to maintain the
    Disbursement Account.
	 
	 	     
    “Bankruptcy Code” means the Bankruptcy Code of
    the United States, and all other liquidation, conservatorship,
    bankruptcy, assignment for the benefit of creditors, moratorium,
    rearrangement, receivership, insolvency, reorganization, or
    similar debtor relief Laws of the United States or other
    applicable jurisdictions from time to time in effect and
    affecting the rights of creditors generally.
	 
	 	     
    “Board of Directors” means the board of
    directors of the Company.
	 
	 	     
    “Budget” has the meaning ascribed to such term
    in Section 7(a), as updated and amended from time to time
    pursuant to Section 7(d)(iii) and Section 7(n).
	 
	 	     
    “Business Day” means any day that is not a
    Saturday, a Sunday or a day on which banks are required or
    permitted to be closed in the State of New York.
	 
	 	     
    “Capital Lease” means, for any Person, a lease
    of any interest in any kind of property (whether real, personal
    or mixed) or asset by such Person as lessee that is, should be
    or should have been recorded as a “capital lease” on
    the balance sheet of such Person in accordance with GAAP.
	 
	 	     
    “Cash Equivalents” means (i) Dollars,
    (ii) securities issued or directly and fully guaranteed or
    insured by the United States government or any agency or
    instrumentality thereof (provided that the full faith and
    credit of the United States is pledged in support thereof)
    having maturities of not more than 6 months from the date
    of acquisition, (iii) certificates of deposit and
    eurodollar time deposits with maturities of 6 months or
    less from the date of acquisition, bankers’ acceptances
    with maturities not exceeding 6 months and overnight bank
    deposits, in each case with any domestic commercial bank having
    capital and surplus in excess of $500,000,000 and a Thompson
    Bank Watch Rating of “B” or better,
    (iv) repurchase obligations with a term of not more than
    7 days for underlying securities of the types described in
    clauses (ii) and (iii) above entered into with any
    financial institution meeting the qualifications specified in
    clause (iii) above, (v) commercial paper having the
    highest rating obtainable from Moody’s Investors Service,
    Inc. or Standard & Poor’s Ratings Group and in
    each case maturing within 6 months after the date of
    acquisition and (vi) money market funds at least 95% of the
    assets of which constitute Cash Equivalents of the kinds
    described in clauses (i) - (v) of this definition.
	 
	 	     
    “Change of Control” shall be deemed to have
    occurred when (i) any person (as defined in
    Section 13(d)(3) or Section 14(d)(2) of the Exchange
    Act), other than one or more Permitted Holders, becomes the
    beneficial owner (as the term “beneficial owner” is
    defined under Rule 13d-3 under the Exchange Act) of a
    majority of the combined voting power of the Common Stock;
    (ii) the Company merges or consolidates with or into
    another Person as a result of which the shareholders of the
    Company

2

 

		
	 	
    immediately prior to the consummation of such transaction do not
    own at least 50% of the outstanding voting securities of the
    remaining, consolidated or successor entity, as the case may be,
    or the Company sells or disposes of all or substantially all of
    its assets to any Person; (iii) the liquidation,
    dissolution, or the winding up of the affairs of the Company; or
    (iv) during any 12 month-period following the date
    hereof, individuals who at the beginning of such period
    constituted the Board of Directors (and any new members of the
    Board of Directors whose election by the Board of Directors or
    whose nomination for election by the Company’s shareholders
    was approved by (A) a vote of a majority of the members of
    the Board of Directors then still in office who either were
    directors at the beginning of such period or whose election or
    nomination for election was previously so approved or
    (B) the Permitted Holders), cease for any reason to
    constitute a majority of the Board of Directors.
	 
	 	     
    “Closing Date” means September 26, 2005.
    The date of the initial closings under the Loan Agreement and
    the Investment Agreement.
	 
	 	     
    “Code” or “UCC” means the
    Uniform Commercial Code in effect in the State of New York;
    provided, that in the event that, by reason of mandatory
    provisions of law, any or all of the attachment, perfection or
    priority of, or remedies with respect to the Holder’s Lien
    on any Collateral is governed by the Uniform Commercial Code as
    enacted and in effect in a jurisdiction other than the State of
    New York, the term “Code” shall mean the Uniform
    Commercial Code as enacted and in effect in such other
    jurisdiction solely for purposes of the provisions thereof
    relating to such attachment, perfection, priority or remedies
    and for purposes of definitions related to such provisions.
	 
	 	     
    “Collateral” has the meaning ascribed to such
    term in Section 2.1 of the Security Agreement.
	 
	 	     
    “Common Stock” means the Company’s common
    stock, par value $0.01 per share.
	 
	 	     
    “Company 2004 10-K” means the
    Company’s Annual Report on Form 10-K for the fiscal
    year ended December 31, 2004, as amended and filed with the
    SEC prior to the Closing Date.
	 
	 	     
    “Company Intellectual Property” constitutes all
    present and future Intellectual Property owned, controlled,
    licensed or used by the Company or necessary to the conduct of
    the business of the Company.
	 
	 	     
    “Company Ongoing SEC Documents” has the meaning
    ascribed to such term in Section 7(ff).
	 
	 	     
    “Company SEC Documents” has the meaning
    ascribed to such term in Section 6(k).
	 
	 	     
    “Confidential Information” means all
    proprietary and confidential information or materials possessed
    or developed, whether developed before or after the date hereof;
    including without limitation, information or materials on
    substances, formulations, technology, equipment, data, reports,
    Know-How, sources for supply, patent position and business
    plans, inventions, discoveries, improvements and methods,
    marketing techniques or plans, manufacturing and other plant
    designs, location of operations, and any other information
    regarding business operations.
	 
	 	     
    “Conversion Amount” means the portion of the
    principal amount of this Note being converted plus any accrued
    and unpaid interest thereon through the Conversion Date each as
    specified in the Notice of Conversion.
	 
	 	     
    “Conversion Date” means, for any conversion,
    the date specified in the Notice of Conversion so long as the
    copy of the Notice of Conversion is faxed (or delivered by other
    means resulting in notice) to the Company at or before
    11:59 p.m., New York City time, on the Conversion Date
    indicated in the Notice of Conversion; provided,
    however, that if the Notice of Conversion is not so faxed
    or otherwise delivered before such time, then the Conversion
    Date shall be the date the Holder faxes or otherwise delivers
    the Notice of Conversion to the Company.

3

 

		
	 	     
    “Conversion Price” means $3.78 per share of
    Common Stock, subject to adjustments as set forth herein.
	 
	 	     
    “Conversion Shares” has the meaning ascribed to
    such term in Section 3(a).
	 
	 	     
    “Convertible Securities” has the meaning
    ascribed to such term in Section 3(d)(iv)(A).
	 
	 	     
    “Copyright Licenses” means all written
    agreements granting any right under any Copyright, including the
    grant of rights to manufacture, distribute, exploit and sell
    materials derived from any Copyright.
	 
	 	     
    “Copyrights” means all copyrights arising under
    the laws of the United States, any other country or any
    political subdivision thereof, whether registered or
    unregistered and whether published or unpublished, all
    registrations and recordings thereof, and all applications in
    connection therewith, including all registrations, recordings
    and applications in the United States Copyright Office, and the
    right to obtain all renewals of any of the foregoing.
	 
	 	     
    “Daily Market Price” means, as of any date of
    determination, the closing sale price for the Common Stock, for
    the Trading Day of such date of determination (subject to
    equitable adjustment for any stock splits, stock dividends,
    reclassifications or similar events during such Trading Day or
    that are not otherwise reflected in such closing price and
    further subject to adjustment as provided herein) on the
    principal United States securities exchange or trading market
    where the Common Stock is listed or traded as reported by
    Bloomberg, or if the foregoing does not apply, the closing sale
    price for the Common Stock on the OTC Bulletin Board for
    such security as reported by Bloomberg, or, if no sale price is
    reported for such security by Bloomberg, the closing sale price
    as reported in the “pink sheets” by the Pink Sheets
    LLC, in each case for such date or, if such date was not a
    Trading Day for such security, on the next preceding date which
    was a Trading Day. If the Daily Market Price cannot be
    calculated for such security as of either of such dates on any
    of the foregoing bases, the Daily Market Price of such security
    on such date shall be the fair market value as reasonably
    determined by an investment banking firm selected by the Holder
    and reasonably acceptable to the Company, with the costs of such
    appraisal to be borne by the Company.
	 
	 	     
    “Delivery Period” has the meaning ascribed to
    such term in Section 3(c).
	 
	 	     
    “Default” means any event that, with the giving
    of notice or the lapse of time or both, would constitute an
    Event of Default.
	 
	 	     
    “Default Rate” has the meaning ascribed to such
    term in Section 2(b).
	 
	 	     
    “Disbursement Account” means (a) an
    investment account (i) maintained at Bank in the name of
    the Company, and (ii) as to which the right to transfer,
    withdraw or otherwise disburse funds therefrom shall reside,
    pursuant to the terms hereof and the terms of any account
    control agreement if one was entered into, solely with the
    Holder to the exclusion of the Company, as such investment
    account may have been reconstituted or replaced pursuant to
    Section 7(hh)(ii) hereof, or (b) such other deposit
    account as the Holder and Borrower shall reasonably agree, and
    in each case subject to an account control agreement in form and
    substance acceptable to the Holder and the Company.
	 
	 	     
    “Disqualified Equity Interests” means any
    Equity Interests that, by their terms (or by the terms of any
    security into which they are convertible, or for which they are
    exchangeable, at the option of the holder thereof), or upon the
    happening of any event, mature or are mandatorily redeemable,
    pursuant to a sinking fund obligation or otherwise, or are
    redeemable at the option of the holder thereof, in whole or in
    part, on or prior to the date that is 91 days after the
    Maturity Date.
	 
	 	     
    “Disregarded Securities” has the meaning
    ascribed to such term in Section 3(d)(iv)(E).

4

 

		
	 	     
    “Dollars” or “$” means lawful
    money of the United States.
	 
	 	     
    “DTC” has the meaning ascribed to such term in
    Section 3(c).
	 
	 	     
    “DTC Transfer” has the meaning ascribed to such
    term in Section 3(c).
	 
	 	     
    “Environmental Law” means any present and
    future federal, state, local or foreign laws, statutes,
    ordinances, rules, regulations and the like, as well as common
    law, relating to protection of human health or the environment,
    including but not limited to those relating to Hazardous
    Substances.
	 
	 	     
    “Equity Interest” means, (i) with respect
    to any Person that is a corporation, any and all shares,
    interests, participations or other equivalents (however
    designated and whether or not voting) of corporate stock,
    including each class of common stock and preferred stock of such
    Person and all options, warrants or other rights to purchase or
    acquire any of the foregoing; and (ii) with respect to any
    Person that is not a corporation, any and all partnership,
    membership or other equity interests of such Person, and all
    options, warrants or other rights to purchase or acquire any of
    the foregoing.
	 
	 	     
    “ERISA” means the Employee Retirement Income
    Security Act of 1974.
	 
	 	     
    “ERISA Affiliate” means, with respect to the
    Company or any Subsidiary, any trade or business (whether or not
    incorporated) that, together with the Company or Subsidiary, is
    treated as a single employer within the meaning of
    Sections 414(b), (c), (m) or (o) of the IRC.
	 
	 	     
    “ERISA Event” means, with respect to the
    Company or any Subsidiary or ERISA Affiliate, (i) the
    complete or partial withdrawal (as such terms are defined in
    Sections 4203 and 4205 of ERISA, respectively) of the
    Company or any Subsidiary or ERISA Affiliate from any
    Multiemployer Plan; (ii) the institution of proceedings to
    terminate a Multiemployer Plan by the PBGC; (iii) the
    failure by the Company or any Subsidiary or ERISA Affiliate to
    make when due required contributions to a Multiemployer Plan
    unless such failure is cured within 30 days; (iv) any
    other event or condition that might reasonably be expected to
    constitute grounds under Section 4042 of ERISA for the
    termination of, or the appointment of a trustee to administer,
    any Multiemployer Plan or for the imposition of liability under
    Section 4069 or 4212(c) of ERISA; (v) the termination
    of a Multiemployer Plan under Section 4041A of ERISA or the
    reorganization or insolvency of a Multiemployer Plan under
    Section 4241 or 4245 of ERISA; (vi) the loss of a
    Qualified Plan’s qualification or tax exempt status; or
    (vii) any other event or condition that could constitute
    grounds for the imposition of material liability with respect to
    any Plan and which, if curable, is not cured within 30 days.
	 
	 	     
    “Event of Default” has the meaning ascribed to
    such term in Section 8(a).
	 
	 	     
    “Excepted Transaction” has the meaning ascribed
    to such term in Section 7(x).
	 
	 	     
    “Exchange Act” means the Securities Exchange
    Act of 1934, as amended.
	 
	 	     
    “Excluded Issuances” has the meaning ascribed
    to such term in Section 3(d)(v).
	 
	 	     
    “Extraordinary Event” has the meaning ascribed
    to such term in Section 3(d)(iii).
	 
	 	     
    “FDA” means the Food and Drug Administration,
    as from time to time constituted, created under the Food and
    Drug Act of 1906.
	 
	 	     
    “Final Withdrawal Date” means the date
    immediately following the date on which all proceeds have been
    disbursed from the Disbursement Account in accordance with the
    applicable provisions hereof.
	 
	 	     
    “GAAP” means generally accepted accounting
    principles in the United States of America in effect from time
    to time as applied by nationally recognized accounting firms.
	 
	 	     
    “Guarantee” by any Person means 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, without
    limitation, any obligation of such Person: (i) 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

5

 

		
	 	
    the payment of such Indebtedness, (ii) to purchase
    property, securities or services for the purpose of assuring the
    holder of such Indebtedness of the payment of such Indebtedness,
    or (iii) 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 (and “Guaranteed,”
    “Guaranteeing” and “Guarantor”
    shall have meanings correlative to the foregoing);
    provided, however, that the Guarantee by any
    Person shall not include endorsements by such Person for
    collection or deposit, in either case, in the ordinary course of
    business.
	 
	 	     
    “Guarantors” means any Subsidiary of the
    Company that executes a guaranty in accordance with
    Section 7(v).
	 
	 	     
    “Hazardous Substances” includes, but is not
    limited to, any and all substances defined, listed or otherwise
    classified as pollutants, hazardous wastes, medical wastes,
    hazardous substances, radiological substances, hazardous
    materials, extremely hazardous wastes or words of similar
    meaning or regulatory effect under any present or future
    Environmental Laws, or that may have a negative impact on human
    health or the environment.
	 
	 	     
    “Hedge Agreement” means any and all
    transactions, agreements or documents now existing or hereafter
    entered into by the Company which provide for an interest rate,
    credit, commodity or equity swap, cap, floor, collar, forward
    foreign exchange transaction, currency swap, cross currency rate
    swap, currency option, or any combination of, or option with
    respect to, these or similar transactions, for the purpose of
    hedging exposure to fluctuations in interest or exchange rates,
    loan, credit exchange, security or currency valuations or
    commodity prices.
	 
	 	     
    “Indebtedness” of any Person means, without
    duplication, (i) all obligations of such Person for
    borrowed money; (ii) all obligations of such Person
    evidenced by bonds, debentures, notes or other similar
    instruments and all reimbursement or other obligations in
    respect of letters of credit, bankers acceptances, interest rate
    swaps, hedges, derivatives or other financial products;
    (iii) all obligations of such Person as a lessee under
    Capital Leases; (iv) all obligations or liabilities of
    others secured by a Lien on any asset of such Person,
    irrespective of whether such obligation or liability is assumed;
    (v) all obligations of such Person to pay the deferred
    purchase price of assets; (vi) all obligations of such
    Person owing under Hedge Agreements; and (vii) any
    obligations of such Person guaranteeing or intended to guarantee
    (whether directly or indirectly guaranteed, endorsed, co-made,
    discounted, or sold with recourse) any obligation of any other
    Person that constitutes Indebtedness of such other Person under
    any of clauses (i) through (vi) above.
	 
	 	     
    “Intellectual Property” means the collective
    reference to all rights, priorities and privileges relating to
    intellectual property, whether arising under United States,
    multinational or foreign laws or otherwise, including the
    Know-How, Copyrights, the Copyright Licenses, the Patents, the
    Patent Licenses, the Trademarks and the Trademark Licenses, and
    all rights to sue at law or in equity for any infringement or
    other impairment thereof, including the right to receive all
    proceeds and damages therefrom.
	 
	 	     
    “Interest Rate” has the meaning ascribed to
    such term in Section 2(b).
	 
	 	     
    “Investment Agreement” means Investment and
    Exchange Agreement, dated the Closing Date, among the Borrower,
    the Lender, MHR Capital Partners (500) LP, MHR Capital
    Partners (100) LP, and MHR Institutional Partners II
    LP.
	 
	 	     
    “Investment Guidelines” means the
    Company’s Corporate Investment Policy, a copy of which is
    attached hereto as Exhibit D.
	 
	 	     
    “Investments” means, (i) any direct or
    indirect purchase or other acquisition by the Company or any
    Subsidiary of any Equity Interest, or other ownership interest
    in, any other Person, and (ii) any direct or indirect loan,
    advance or capital contribution by the Company or any Subsidiary
    to any other Person, including all indebtedness and accounts
    receivable from that other Person that are not current assets or
    did not arise from sales to that other Person in the ordinary
    course of business.

6

 

		
	 	     
    “IRC” means the Internal Revenue Code of 1986,
    and the Treasury Regulations (final, temporary and, as
    applicable, proposed) promulgated thereunder.
	 
	 	     
    “Know-How” means any and all proprietary
    unpatented technical information, data, ideas, test results,
    inventions, instructions, processes, knowledge, techniques,
    discoveries, formulae, specifications, designs, regulatory
    filings, and biological or other materials (including, without
    limitation, biological, chemical, toxicological, physical and
    analytical, safety, manufacturing and quality control data and
    information).
	 
	 	     
    “Knowledge” means, with respect to the
    knowledge of the Company, the knowledge of the chief executive
    officer or the chief financial officer of the Company after due
    and diligent inquiry.
	 
	 	     
    “Lender” means the Lender under the Loan
    Agreement on the Closing Date.
	 
	 	     
    “Lien” means any mortgage or deed of trust,
    pledge, hypothecation, assignment, security deposit arrangement,
    lien, charge, claim, security interest, easement or encumbrance,
    or preference, priority or other security agreement or
    preferential arrangement of any kind or nature whatsoever
    (including any lease or title retention agreement, any financing
    lease having substantially the same economic effect as any of
    the foregoing, and the filing of, or agreement to give, any
    financing statement perfecting a security interest under the
    Code or comparable law of any jurisdiction).
	 
	 	     
    “Line of Business” means (a) the
    Company’s development of improved dosage forms of drugs,
    either alone or with corporate partners, by applying its
    proprietary eligen® technology to those drugs or licensing
    its eligen® technology to partners who typically apply it
    directly to their marketed drugs (which has included oral
    delivery of proteins, peptides, macromolecules and charged
    organics), (b) the Company’s and its partners’
    clinical trials of oral formulations or prototypes of salmon
    calcitonin, heparin, insulin, parathyroid hormone, human growth
    hormone and cromolyn sodium, and (c) the continued
    development of any studies being actively undertaken by the
    Company as of the Closing Date that are related to the
    activities of the Company under clauses (a) and
    (b) (including improved oral dosage forms of already orally
    bioavailable drugs, trans and intra dermal delivery, and buccal
    delivery).
	 
	 	     
    “Loan Agreement” means the Senior Secured Term
    Loan Agreement, dated as of the Closing Date, between the
    Company and the Lender.
	 
	 	     
    “Loan Documents” means this Note, the
    Investment Agreement, the Security Documents and any
    certificates, instruments, agreements or other documents
    executed in connection herewith or therewith.
	 
	 	     
    “Material Adverse Effect” means, individually
    or together with other adverse effects, any material adverse
    effect on the liabilities, operations, financial condition,
    tangible or intangible properties, business or results of
    operations of the Company and its Subsidiaries taken as a whole
    or the ability of the Company to consummate the transactions
    contemplated hereby or by the other Loan Documents, or the
    Proposed Transactions; provided, however, that any such
    effects resulting from (i) any change affecting the
    pharmaceutical industry generally, (ii) any change in
    general United States economic conditions, (iii) any change
    in law, rule or regulation or GAAP; except, in the case of each
    of (i), (ii) and (iii), to the extent that such changes
    affect the Company disproportionately to the pharmaceutical
    industry taken as a whole; (iv) any change, event,
    occurrence or state of facts directly arising out of or
    resulting from any action taken, or the failure to take an
    action, by the Company with the Holder’s express written
    consent or in accordance with the express written instructions
    of the Holder or as otherwise expressly required or explicitly
    and specifically permitted to be taken by the Company pursuant
    to the terms of the Loan Agreement, this Note, the other Loan
    Documents or the Investment Agreement; or (v) any change in
    the Company’s stock price or any failure by the Company to
    meet revenue or earnings projections published by industry
    analysts (provided that this clause (v) shall not be
    construed as providing, or be used or relied upon for any
    determination, that the change, event, occurrence or state of
    facts giving rise to such change or failure does not constitute,
    cause, contribute to or result in a Material Adverse Effect)
    shall in each case not be considered when determining if a
    Material Adverse Effect has occurred.
	 
	 	     
    “Maturity Date” has the meaning ascribed to
    such term in Section 2(a).

7

 

		
	 	     
    “MHR” means MHR Fund Management LLC and any
    successor thereto.
	 
	 	     
    “Multiemployer Plan” means a
    “multiemployer plan” as defined in
    Section 4001(a)(3) of ERISA, and to which the Company or
    any Subsidiary or ERISA Affiliate is making, is obligated to
    make or has made or been obligated to make, contributions on
    behalf of participants who are or were employed by any of them.
	 
	 	     
    “Net Cash Proceeds,” with respect to any
    issuance or sale of Equity Interests or Indebtedness, means the
    cash proceeds of such issuance or sale net of all reasonable and
    customary attorneys’ fees, accountants’ fees,
    underwriters’ or placement agents’ fees, discounts or
    commissions and brokerage, consultant and other fees actually
    incurred in connection with such issuance or sale and net of
    taxes actually paid as a result thereof.
	 
	 	     
    “Non-Domestic Intellectual Property” means any
    and all Intellectual Property other than Intellectual Property
    arising under the laws of the United States.
	 
	 	     
    “Notice of Conversion” has the meaning ascribed
    to such term in Section 3(b).
	 
	 	     
    “Novartis” means Novartis Pharma AG, a company
    registered in Switzerland.
	 
	 	     
    “Novartis Note” means the Convertible
    Promissory Note Due December 1, 2009, issued by the
    Company for the benefit of Novartis, as delivered to the Lender
    on the Closing Date.
	 
	 	     
    “Novartis Option and License Agreement” means
    the Research Collaboration Option and License Agreement by and
    between the Company and Novartis, dated as of December 1,
    2004, as delivered to the Lender on the Closing Date.
	 
	 	     
    “Obligation” means all principal of and
    interest (including all interest that accrues after the
    commencement of any case or proceeding by or against Holder in
    bankruptcy, whether or not allowed in such case or proceeding)
    on this Note, and any penalties, fees, charges, expenses,
    indemnification payments, reimbursements and any other sum
    chargeable to the Company under this Note or any of the other
    Loan Documents (other than the Investment Agreement).
	 
	 	     
    “Officers’ Certificate” means a
    certificate signed by the chief executive officer and the chief
    financial officer of the Company and delivered to the Holder.
	 
	 	     
    “Options” has the meaning ascribed to such term
    in Section 3(d)(iv)(A).
	 
	 	     
    “Ownership Change” has the meaning ascribed to
    such term in Section 6(y).
	 
	 	     
    “Patent Licenses” means all agreements, whether
    written or oral, providing for the grant of any right to
    manufacture, use or sell any invention covered in whole or in
    part by a Patent.
	 
	 	     
    “Patents” means (i) all letters patent of
    the United States, any other country or any political
    subdivision thereof, all reissues and extensions thereof and all
    goodwill associated therewith; (ii) all applications for
    letters patent of the United States or any other country and all
    divisions, continuations and continuations-in-part thereof; and
    (iii) all rights to obtain any reissues or extensions of
    the foregoing.
	 
	 	     
    “PBGC” means the Pension Benefit Guaranty
    Corporation.
	 
	 	     
    “Pension Plan” means a Plan described in
    Section 3(2) of ERISA.
	 
	 	     
    “Perfected Lien” means a legal, valid and
    enforceable perfected, first priority lien and security interest
    under the internal laws of the relevant state in the United
    States (without reference to conflicts of law) for the benefit
    of the Holder, pursuant to the Security Documents.
	 
	 	     
    “Peril” means, collectively, fire, lightning,
    flood, windstorm, hail, earthquake, explosion, riot and civil
    commotion, vandalism and malicious mischief, damage from
    aircraft, vehicles and smoke and all other perils covered by the
    “all-risk” endorsement then in use in the
    jurisdictions where the properties of the Company and its
    Subsidiaries are located.
	 
	 	     
    “Permitted Holders” means MHR and any Related
    Party or Affiliate of MHR.

8

 

		
	 	     
    “Permitted Liens” means the following:
    (i) Liens granted to secure payment of the Obligations;
    (ii) Liens imposed by law for taxes (other than payroll
    taxes), assessments or charges of any governmental authority for
    claims not yet due or which are being contested in good faith by
    appropriate proceedings and with respect to which adequate
    reserves or other appropriate provisions are being maintained in
    accordance with GAAP to the satisfaction of the Holder, in its
    sole discretion; (iii) (A) statutory Liens of
    landlords (provided that any such landlord has executed a
    landlord waiver and consent in form and substance satisfactory
    to the Holder, in its sole discretion); and (B) other Liens
    imposed by law or that arise by operation of law in the ordinary
    course of business from the date of creation thereof, in each
    case only for amounts not yet due or which are being contested
    in good faith by appropriate proceedings and with respect to
    which adequate reserves or other appropriate provisions are
    being maintained in accordance with GAAP to the satisfaction of
    the Holder, in its sole discretion; (iv) Liens
    (A) incurred or deposits made in the ordinary course of
    business (including, without limitation, surety bonds and appeal
    bonds) in connection with workers’ compensation,
    unemployment insurance and other types of social security
    benefits or to secure the performance of tenders, bids, leases,
    contracts (other than for the repayment of Indebtedness),
    statutory obligations and other similar obligations; or
    (B) arising as a result of progress payments under
    government contracts; (v) purchase money Liens in
    connection with the purchase by the grantor of such Lien of
    equipment in the normal course of business, including without
    limitation the Lien securing Indebtedness under the Master Lease
    Agreement between the Company and General Electric Capital
    Corporation dated as of March 14, 2004 (including related
    schedules); (vi) Liens subordinated in all respects to the
    Lien securing payment of the Obligations on terms and conditions
    and pursuant to an agreement in form and substance satisfactory
    to the Holder in its sole discretion; (vii) Liens to secure
    the financing of insurance premiums for insurance policies
    obtained pursuant to and in compliance with Section 7(l),
    provided, that such Liens are limited to the proceeds
    (including loss payments) of the insurance policies so financed,
    un-earned premiums on and dividends under such insurance
    policies, and the Company’s interest under any state
    insurance guarantee funds that may arise relating to such
    insurance policies; and (viii) to the extent constituting a
    Lien, the transfer of technology licenses in the ordinary course
    of business of the Company and otherwise permitted or disclosed
    hereunder.
	 
	 	     
    “Person” means any corporation, limited
    liability company, natural person, firm, joint venture,
    partnership, trust, unincorporated organization or government,
    or any political subdivision, department or agency of any
    government.
	 
	 	     
    “Plan” means, at any time, an “employee
    benefit plan,” as defined in Section 3(3) of ERISA,
    that the Company or any Subsidiary or ERISA Affiliate maintains,
    contributes to or has an obligation to contribute to on behalf
    of participants who are or were employed by the Company or any
    Subsidiary.
	 
	 	     
    “Precedent Obligations” has the meaning
    ascribed to such term in Section 19.
	 
	 	     
    “Proceeding” has the meaning ascribed to such
    term in Section 10.
	 
	 	     
    “Proposed Transactions” means the transactions
    contemplated by the Investment Agreement.
	 
	 	     
    “Redemption Date” has the meaning ascribed
    to such term in Section 4(b).
	 
	 	     
    “Redemption Premium” has the meaning
    ascribed to such term in Section 4(b).
	 
	 	     
    “Registration Rights Agreement” means the
    Registration Rights Agreement, dated as of the Closing Date, by
    and among the Borrower, the Lender, MHR Capital Partners
    (500) LP, MHR Capital Partners (100) LP, and MHR
    Institutional Partners II LP.
	 
	 	     
    “Related Party” means (1) any controlling
    stockholder, controlling member, general partner, majority owned
    Subsidiary, or spouse or immediate family member (in the case of
    an individual) of any Permitted Holder, (2) any estate,
    trust, corporation, partnership or other entity, the
    beneficiaries, stockholders, partners, owners or Persons holding
    a controlling interest of which consist solely of one or more
    Permitted Holders and/or such other Persons referred to in the
    immediately preceding clause (1), (3) any executor,
    administrator, trustee, manager, director or other similar
    fiduciary of any Person

9

 

		
	 	
    referred to in the immediately preceding clause (2) acting
    solely in such capacity, (4) any investment fund or other
    entity controlled by, or under common control with, the Holder
    or the principals that control the Holder, or (5) upon the
    liquidation of any entity of the type described in the
    immediately preceding clause (4), the former partners or
    beneficial owners thereof to the extent any Voting Stock may
    still be held by such entity.
	 
	 	     
    “Repayment Date” means the date on which all
    Obligations are irrevocably repaid in full, in Dollars, to the
    Holder or converted into Common Stock pursuant to the terms
    hereof.
	 
	 	     
    “Restricted Payment” means, with respect to the
    Company or any Subsidiary, (i) the declaration or payment
    of any dividend or the incurrence of any liability to make any
    other payment or distribution of cash or other property or
    assets in respect of any Equity Interest of such Person, other
    than a payment or distribution of Equity Interests in connection
    with the exercise of any warrant, option or other right to
    acquire Equity Interests permitted under or issued pursuant to
    any Transaction Document; (ii) any payment on account of
    the purchase, redemption, defeasance, sinking fund or other
    retirement of any Equity Interest of such Person or any other
    payment or distribution made in respect thereof, either directly
    or indirectly, other than a payment made in Equity Interests in
    connection with the exercise of any warrant, option or other
    right to acquire Equity Interests permitted under or issued
    pursuant to any Transaction Document; (iii) any payment
    made to redeem, purchase, repurchase or retire, or to obtain the
    surrender of, any outstanding warrants, options or other rights
    to acquire any Equity Interest of such Person now or hereafter
    outstanding, other than a payment made in Equity Interests in
    connection with the exercise of any warrant, option or other
    right to acquire Equity Interests permitted under or issued
    pursuant to any Transaction Document; (iv) any payment of a
    claim for the rescission of the purchase or sale of, or for
    material damages arising from the purchase or sale of, any
    Equity Interests of such Person or of a claim for reimbursement,
    indemnification or contribution arising out of or related to any
    such claim for damages or rescission; (v) any payment,
    loan, contribution, or other transfer of funds or other property
    to any stockholder of such Person, except as otherwise permitted
    hereunder, in the other Loan Documents, the Investment Agreement
    or the other Transaction Documents, and other than payment of
    compensation in the ordinary course of business to stockholders
    who are employees of such Person; and (vi) any payment of
    management fees (or other fees of a similar nature) or
    out-of-pocket expenses in connection therewith by such Person to
    any Stockholder.
	 
	 	     
    “Retiree Welfare Plan” means, at any time, a
    welfare plan that provides for continuing coverage or benefits
    for any participant or any beneficiary of a participant after
    such participant’s termination of employment (other than
    (i) coverage mandated by applicable laws, including without
    limitation, COBRA continuation coverage; (ii) death
    benefits or retirement benefits under any “employee pension
    plan”, as that term is defined in Section 3(2) of
    ERISA; (iii) deferred compensation benefits accrued as
    liabilities on the books of the Company or any Subsidiary or
    ERISA Affiliate; or (iv) benefits, the full direct cost of
    which is borne by current or former employees (or beneficiary
    thereof)).
	 
	 	     
    “SEC” means the United States Securities and
    Exchange Commission.
	 
	 	     
    “Securities Act” means the Securities Act of
    1933.
	 
	 	     
    “Security Agreement” means the Pledge and
    Security Agreement, dated as of the Closing Date, by and between
    the Company and MHR Institutional Partners II LP, a copy of
    which is attached hereto as Exhibit B.
	 
	 	     
    “Security Documents” means the collective
    reference to the Security Agreement (including the Security
    Agreement (Copyrights); Security Agreement (Patents); Security
    Agreement (Trademarks) and Security Agreement (Domain Name
    Registrations) attached thereto), any account control agreements
    delivered pursuant to the Loan Documents, any Subsidiary
    Guaranty, any Subsidiary Security Agreement, the UCC financing
    statements required to be filed and all other security documents
    hereafter delivered to the Holder in connection with granting a
    Lien on any of the assets of the Company or a Subsidiary to
    secure the Obligations.

10

 

		
	 	     
    “Stockholder” means, with respect to any
    Person, each holder of any Equity Interests of such Person.
	 
	 	     
    “Subsidiary” means (i) as to the Company,
    any Person in which more than 25% of all equity, membership,
    partnership or other ownership interests is owned directly or
    indirectly by the Company or one or more of its Subsidiaries;
    and (ii) as to any other Person, any Person in which more
    than 25% of all equity, membership, partnership or other
    ownership interests is owned directly or indirectly by such
    Person or by one or more of such Person’s Subsidiaries.
    Unless otherwise specified in this Note or any Loan Document,
    references to a Subsidiary refer to a Subsidiary of the Company.
	 
	 	     
    “Subsidiary Guaranty” means a guaranty
    agreement executed by a Subsidiary pursuant to
    Section 7(v), in form and substance satisfactory to the
    Holder, the Company and such Subsidiary, guaranteeing payment of
    the Obligations and providing, without limitation, that such
    Subsidiary shall be bound by the covenants set forth in this
    Note, and shall make such representations and warranties as the
    Holder may require.
	 
	 	     
    “Subsidiary Security Agreement” means a pledge
    and security agreement executed by a Subsidiary pursuant to
    Section 7(v), substantially in the form of the Security
    Agreement, and otherwise in form and substance satisfactory to
    the Holder, the Company and such Subsidiary, securing payment of
    the Obligations.
	 
	 	     
    “Taxes” means any present or future tax, levy,
    impost, duty, charge, assessment or fee of any nature that is
    imposed by any government or taxing authority.
	 
	 	     
    “Trademark Licenses” means, collectively, each
    agreement, whether written or oral, providing for the grant of
    any right to use any Trademark.
	 
	 	     
    “Trademarks” means (i) all trademarks,
    trade names, corporate names, company names, business names,
    fictitious business names, trade styles, service marks, logos
    and other source or business identifiers, and all goodwill
    associated therewith, now existing or hereafter adopted or
    acquired, all registrations and recordings thereof, and all
    applications in connection therewith, whether in the United
    States Patent and Trademark Office or in any similar office or
    agency of the United States, any State thereof or any other
    country or any political subdivision thereof, or otherwise, and
    all common-law rights related thereto; and (ii) the right
    to obtain all renewals thereof.
	 
	 	     
    “Trading Day” shall mean any day on which the
    principal United States securities exchange or trading market
    where the Common Stock is then listed or traded, is open for
    trading.
	 
	 	     
    “Transaction Documents” shall have the meaning
    ascribed thereto in the Investment Agreement.
	 
	 	     
    “Trigger Issuance” has the meaning ascribed to
    such term in Section 3(d)(iv).
	 
	 	     
    “United States” means the United States of
    America.
	 
	 	     
    “Voting Stock” of a Person means all classes of
    Equity Interests or other interests of such Person then
    outstanding and normally entitled (without regard to the
    occurrence of any contingency) to vote in the election of
    directors, managers or trustees thereof.

     
(b) Interpretation. The headings of the articles and
sections of this Note are included for convenience of reference.
They shall not affect the construction of any provision of this
Note. References herein to articles, sections, subsections or
exhibits without further identification of the document to which
reference is made are references to provisions or parts of this
Note. The words “herein,” “hereof” and
“hereunder” are used in this Note to refer to this
Note as a whole including all Exhibits and Schedules, as the
same may from time to time be amended, restated, modified, or
supplemented and not to any particular section, subsection, or
clause contained in this Note or any such Exhibit or Schedule.
The meaning given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms. The words
“include,” “includes,” and
“including” shall be deemed to be followed by the
phrase “without limitation.” The word “will”
shall be construed to have the same meaning and effect as the
word “shall”. Unless the context requires

11

 

otherwise (a) any definition of or reference to any
agreement, instrument or other document herein shall be
construed as referring to such agreement, instrument or document
as from time to time amended, supplemented or otherwise modified
(subject to any restrictions on such amendments, supplements or
modifications set forth herein); (b) any reference to
statute shall be construed to refer to such statute as amended
from time to time, and any rules and regulations promulgated
thereunder; and (c) any reference herein to any Person
shall be construed to include such Person’s successors and
permitted assigns.

     
2.     Payments of Interest and
Principal. Subject to the provisions of this Note, payments
of principal plus interest on the unpaid principal balance of
this Note outstanding from time to time, and any applicable
additional payments shall be payable in accordance with the
following:

		
	 	     
    (a) Maturity. On September 26, 2012 (the
    “Maturity Date”), the Company shall repay the
    outstanding principal of this Note, all interest accrued on this
    Note, all fees and all other obligations due or accrued to the
    Holder unless this Note is earlier converted or redeemed in full
    pursuant to Sections 3 or 4 hereof. If the Maturity Date is
    a day other than a Business Day, the maturity thereof shall be
    extended to the next succeeding Business Day and, with respect
    to payments of principal, interest thereon shall be payable at
    the applicable rate during such extension. Contemporaneously
    with the repayment of this Note, the Holder shall surrender this
    Note, duly endorsed, at the office of the Company.
	 
	 	     
    (b) Interest. Interest shall accrue on the
    outstanding principal of this Note during the period commencing
    on the date hereof and terminating on the Maturity Date at an
    annual interest rate (the “Interest Rate”)
    equal to 11.00% per annum, compounded monthly, and will be
    payable monthly in arrears in kind through issuance to the
    Holder of additional Notes (in a form substantially similar to
    the form of this Note with appropriate notations for the date of
    issuance and initial principal amount), up to and including the
    Maturity Date. So long as an Event of Default has occurred and
    is continuing, at the election of the Holder, interest shall
    accrue on all outstanding Obligations at a rate equal to
    2% per annum above the Interest Rate (“Default
    Rate”). Interest at the Default Rate shall accrue from
    the initial date of such Event of Default until that Event of
    Default is cured or waived and shall be payable upon demand and,
    if not paid when due, shall itself bear interest as provided in
    this Section.
	 
	 	     
    (c) Payments. Except as provided in
    Section 2(b), all payments of principal, interest, fees and
    other amounts due hereunder shall be made by the Company in
    Dollars by wire transfer or by any other method approved in
    advance by the Holder to the account of the Holder at the
    address of the Holder set forth in Section 11 hereof or at
    such other place designated by the Holder in writing to the
    Company.
	 
	 	     
    (d) Acceleration of the Maturity Date.
    Notwithstanding anything to the contrary contained herein, this
    Note shall become due and payable together with all accrued
    interest due on the outstanding principal amount hereunder upon
    the occurrence of an Event of Default in accordance with
    Section 8(b) hereof.

     
3.     Conversion.

     
(a) Conversion at the Option of the Holder. The
Holder may, at any time and from time to time on or after the
date hereof, convert all or any part of the outstanding
principal amount of this Note, plus all accrued interest thereon
through the Conversion Date, into a number of fully paid and
nonassessable shares of Common Stock (“Conversion
Shares”) upon surrender of this Note. The number of
shares of Common Stock issuable upon surrender of this Note
shall be determined in accordance with the following formula:

Conversion Amount

Conversion Price

     
(b) Mechanics of Conversion. In order to effect a
conversion pursuant to this Section 3, the Holder shall:
(a) fax (or otherwise deliver) a copy of the fully executed
Notice of Conversion, attached hereto as Exhibit A
(the “Notice of Conversion”), to the Company
and (b) surrender or cause to be surrendered this Note,
duly endorsed, along with a copy of the Notice of Conversion as
soon as practicable thereafter to the Company. Upon receipt by
the Company of a facsimile copy of a Notice of Conversion from a
Holder, the Company shall within two (2) Business Days
send, via facsimile, a confirmation to such Holder stating that

12

 

the Notice of Conversion has been received, advising the Holder
of any additional documentation reasonably required by the
transfer agent for the Common Stock to issue the Conversion
Shares in the manner provided in the Notice of Conversion (the
”Additional Documentation”) and the name and
telephone number of a contact person at the Company regarding
the conversion. The Company shall not be obligated to issue
Conversion Shares upon a conversion unless either this Note is
delivered to the Company as provided above, or the Holder
notifies the Company that such certificates have been lost,
stolen or destroyed and delivers the documentation to the
Company required by Section 14.

     
(c) Delivery of Conversion Shares Upon Conversion.
Upon the surrender of this Note accompanied by a Notice of
Conversion and any Additional Documentation, the Company shall,
no later than the later of (a) the second Business Day
following the Conversion Date and (b) the third Business
Day following the date of such surrender (or, in the case of
lost, stolen or destroyed certificates, after provision of
indemnity pursuant to Section 14) (the “Delivery
Period”), issue and deliver to the Holder or its
nominee (x) that number of Conversion Shares issuable upon
conversion of the portion of this Note being converted and
(y) a new Note in the form hereof representing the balance
of the principal amount hereof not being converted, if any. If
the Company’s transfer agent is participating in the
Depositary Trust Company (“DTC”) Fast Automated
Securities Transfer program, and so long as the certificates
therefor do not bear a legend and the Holder thereof is not then
required to return such certificate for the placement of a
legend thereon, the Company shall cause its transfer agent to
electronically transmit the Conversion Shares to the Holder by
crediting the account of the Holder or its nominee with DTC, as
specified in the Notice of Conversion, through its DTC Deposit
Withdrawal Agent Commission System (“DTC
Transfer”). If the aforementioned conditions to a DTC
Transfer are not satisfied, the Company shall deliver to the
Holder physical certificates representing the Conversion Shares.
Further, the Holder may instruct the Company to deliver to the
Holder physical certificates representing the Conversion Shares
in lieu of delivering such shares by way of DTC Transfer.

     
(d) Adjustment to Conversion Price. The Conversion
Price in effect at any time shall be subject to adjustment from
time to time upon the happening of certain events, as follows:

		
	 	     
    (i) Common Stock Dividends; Common Stock Splits; Reverse
    Common Stock Splits. If the Company, at any time while this
    Note is outstanding, (A) shall pay a stock dividend on its
    Common Stock, (B) subdivide outstanding shares of Common
    Stock into a larger number of shares, or (C) combine
    outstanding shares of Common Stock into a smaller number of
    shares, the Conversion Price shall be multiplied by a fraction
    the numerator of which shall be the number of shares of Common
    Stock (excluding treasury shares, if any) outstanding before
    such event and the denominator of which shall be the number of
    shares of Common Stock outstanding after such event. Any
    adjustment made pursuant to this Section 3(d)(i) shall
    become effective immediately after the record date for the
    determination of stockholders entitled to receive such dividend
    or distribution and shall become effective immediately after the
    effective date in the case of a subdivision, combination or
    re-classification.
	 
	 	     
    (ii) Subscription Rights. If the Company, at any
    time while this Note is outstanding, shall fix a record date for
    the distribution to all of the holders of Common Stock evidence
    of its indebtedness or assets or rights, options, warrants or
    other securities entitling them to subscribe for, purchase,
    convert to, exchange for or to otherwise acquire any security
    (excluding those referred to in Section 3(d)(i) above),
    then in each such case the Conversion Price at which this Note
    shall thereafter be exercisable shall be determined by
    multiplying the Conversion Price in effect immediately prior to
    the record date fixed for determination of stockholders entitled
    to receive such distribution by a fraction, the denominator of
    which shall be the average Daily Market Price of the Common
    Stock for the ten (10) Trading Days prior to the record
    date mentioned above, and the numerator of which shall be such
    average Daily Market Price of the Common Stock for the ten
    (10) Trading Days prior to such record date less the then
    fair market value at such record date of the portion of such
    evidence of indebtedness or assets or rights, options, warrants
    or other securities so distributed applicable to one outstanding
    share of Common Stock as determined by the Board of Directors in
    good faith; provided, however, that in the event
    of a distribution exceeding twenty percent (20%) of the net
    assets of the Company, such fair market value shall be
    determined by an appraiser selected by the Holder and reasonably
    acceptable to the Company. The

13

 

		
	 	
    Company shall pay for all such appraisals. Such adjustment shall
    be made whenever any such distribution is made and shall become
    effective immediately after the record date mentioned above.
	 
	 	     
    (iii) Other Events. In case of (A) any
    reclassification of the Common Stock into other securities of
    the Company, (B) any compulsory share exchange pursuant to
    which the Common Stock is converted into other securities, cash
    or property or (C) any merger or consolidation with or into
    any persons, or any sale or other disposition of all or
    substantially all of the assets of the Company to any person
    (each of (A), (B) or (C), an “Extraordinary
    Event”), the Holder shall have the right thereafter to
    convert this Note into shares of stock and other securities,
    cash and property receivable upon or deemed to be held by
    holders of Common Stock following such Extraordinary Event, that
    the Holder would have been entitled to receive had it converted
    this Note immediately prior to such Extraordinary Event (without
    taking into account any limitations or restrictions on the
    convertibility of this Note). In the case of an Extraordinary
    Event, the terms of any such Extraordinary Event shall include
    such terms so as to continue to give to the Holder the right to
    receive the securities, cash or property set forth in this
    Section 3(d)(iii) upon any conversion following such
    Extraordinary Event. This provision shall similarly apply to
    successive Extraordinary Events. For the avoidance of doubt,
    nothing contained in this clause (iii) shall be construed
    to impair the Company’s or the Holder’s rights under
    Section 5.
	 
	 	     
    (iv) Issuance of Additional Shares of Common Stock.
    Except as provided in subsection (v) hereof, if and
    whenever the Company shall issue or sell, or is, in accordance
    with any of subsections (iv)(A) through (iv)(H) hereof,
    deemed to have issued or sold, any Additional Shares of Common
    Stock (defined below) for a consideration per share less than
    the Conversion Price in effect immediately prior to the time of
    such issue or sale, then and in each such case (a
    “Trigger Issuance”) the then-existing
    Conversion Price shall be reduced, as of the close of business
    on the effective date of the Trigger Issuance, to the lowest
    price per share at which any share of Common Stock was issued or
    sold or deemed to be issued or sold in the Trigger Issuance. For
    purposes of this subsection (iv), “Additional
    Shares of Common Stock” means all shares of Common
    Stock issued by the Company or deemed to be issued pursuant to
    this subsection (iv), other than Excluded Issuances (as
    defined in subsection (v) hereof).
	 
	 	     
    For purposes of this subsection (iv), the following
    subsections (iv)(A) to (iv)(H) shall also be applicable
    (subject, in each such case, to the provisions of
    subsection (v) hereof) and to each other subsection
    contained in this subsection (iv):

		
	 	     
    (A) Issuance of Rights or Options. In case at any
    time the Company shall in any manner grant (directly and not by
    assumption in a merger or otherwise) any warrants or other
    rights to subscribe for or to purchase, or any options for the
    purchase of, Common Stock or any stock or security convertible
    into or exchangeable for Common Stock (such warrants, rights or
    options being called “Options” and such
    convertible or exchangeable stock or securities being called
    “Convertible Securities”) whether or not such
    Options or the right to convert or exchange any such Convertible
    Securities are immediately exercisable, and the price per share
    for which Common Stock is issuable upon the exercise of such
    Options or upon the conversion or exchange of such Convertible
    Securities (determined by dividing (i) the sum (which sum
    shall constitute the applicable consideration) of (x) the
    total amount, if any, received or receivable by the Company as
    consideration for the granting of such Options, plus
    (y) the aggregate amount of additional consideration
    payable to the Company upon the exercise of all such Options,
    plus (z), in the case of such Options which relate to
    Convertible Securities, the aggregate amount of additional
    consideration, if any, payable upon the issue or sale of such
    Convertible Securities and upon the conversion or exchange
    thereof, by (ii) the total maximum number of shares of
    Common Stock issuable upon the exercise of such Options or upon
    the conversion or exchange of all such Convertible Securities
    issuable upon the exercise of such Options) shall be less than
    the Conversion Price in effect immediately prior to the time of
    the granting of such Options, then the total number of shares of
    Common Stock issuable upon the exercise of such Options or upon
    conversion or exchange of the total amount of such Convertible
    Securities issuable upon the exercise of such Options shall be
    deemed to have been issued for such price per share as of the
    date of granting of such Options and thereafter shall be deemed
    to be

14

 

		
	 	
    outstanding for purposes of adjusting the Conversion Price.
    Except as otherwise provided in subsection (iv)(D), no
    adjustment of the Conversion Price shall be made upon the actual
    issue of such Common Stock or of such Convertible Securities
    upon exercise of such Options or upon the actual issue of such
    Common Stock upon conversion or exchange of such Convertible
    Securities.
	 
	 	     
    (B) Issuance of Convertible Securities. In case the
    Company shall in any manner issue (directly and not by
    assumption in a merger or otherwise) or sell any Convertible
    Securities, whether or not the rights to exchange or convert any
    such Convertible Securities are immediately exercisable, and the
    price per share for which Common Stock is issuable upon such
    conversion or exchange (determined by dividing (i) the sum
    (which sum shall constitute the applicable consideration) of
    (x) the total amount received or receivable by the Company
    as consideration for the issue or sale of such Convertible
    Securities, plus (y) the aggregate amount of additional
    consideration, if any, payable to the Company upon the
    conversion or exchange thereof, by (ii) the total number of
    shares of Common Stock issuable upon the conversion or exchange
    of all such Convertible Securities) shall be less than the
    Conversion Price in effect immediately prior to the time of such
    issue or sale, then the total maximum number of shares of Common
    Stock issuable upon conversion or exchange of all such
    Convertible Securities shall be deemed to have been issued for
    such price per share as of the date of the issue or sale of such
    Convertible Securities and thereafter shall be deemed to be
    outstanding for purposes of adjusting the Conversion Price,
    provided that (a) except as otherwise provided in
    subsection (iv)(D), no adjustment of the Conversion Price
    shall be made upon the actual issuance of such Common Stock upon
    conversion or exchange of such Convertible Securities and
    (b) no further adjustment of the Conversion Price shall be
    made by reason of the issue or sale of Convertible Securities
    upon exercise of any Options to purchase any such Convertible
    Securities for which adjustments of the Conversion Price have
    been made pursuant to the other provisions of
    subsection (iv).
	 
	 	     
    (C) Change in Warrant Price or Amount.
    Notwithstanding the provisions of subsection (iii), if the
    exercise price provided for in any warrants of the Company on
    the date hereof is below the Conversion Price and (i) such
    exercise price is reduced, the then-existing Conversion Price
    shall be reduced, as of the close of business on the effective
    date of such reduction in exercise price by an amount equal to
    the product of (x) the original exercise price minus
    (y) the reduced exercise price and (2) a fraction, the
    numerator of which is the number of shares of Common Stock that
    may be acquired upon exercise, if any, of the warrants whose
    exercise price is reduced and the denominator of which is the
    aggregate number of shares of Common Stock that may be acquired
    upon exercise of all of the outstanding warrants or
    (ii) the Company amends the terms of such warrants to
    increase the number of shares of Common Stock that may be
    acquired upon exercise of the warrants, the then-existing
    Conversion Price shall be reduced, as of the close of business
    on the effective date of amendment by an amount equal to the
    product of (1) (x) the original exercise price minus
    (y) the product of the original exercise price and a
    fraction, the numerator of which is the old number of shares for
    which the warrants were exercisable immediately prior to such
    amendment and the denominator of which is the new number of
    shares for which the warrants are exercisable immediately
    following such amendment and (2) a fraction, the numerator
    of which is the number of shares of Common Stock that may be
    acquired upon exercise, if any, of the warrants whose exercise
    price is reduced and the denominator of which is the aggregate
    number of shares of Common Stock that may be acquired upon
    exercise of all of the outstanding warrants.
	 
	 	     
    (D) Change in Option Price or Conversion Rate. Upon
    the happening of any of the following events, namely, if the
    purchase price provided for in any Option referred to in
    subsection (iv)(A) hereof, the additional consideration, if
    any, payable upon the conversion or exchange of any Convertible
    Securities referred to in subsections (iv)(A) or (iv)(B),
    or the rate at which Convertible Securities referred to in
    subsections (iv)(A) or (iv)(B) are convertible into or
    exchangeable for Common Stock shall change at any time
    (including, but not limited to, changes under or by reason of
    provisions designed to protect against dilution), the Conversion
    Price in effect at the time of such event shall forthwith be
    readjusted to the Conversion Price which would have

15

 

		
	 	
    been in effect at such time had such Options or Convertible
    Securities still outstanding provided for such changed purchase
    price, additional consideration or conversion rate, as the case
    may be, at the time initially granted, issued or sold.
	 
	 	     
    (E) Calculation of Consideration Received. If any
    Common Stock, Options or Convertible Securities are issued,
    granted or sold for cash, the consideration received therefor
    will be the amount received by the Company therefor, after
    deduction of all underwriting discounts or allowances in
    connection with such issuance, grant or sale. In case any Common
    Stock, Options or Convertible Securities are issued or sold for
    a consideration part or all of which shall be other than cash,
    including in the case of a strategic or similar arrangement in
    which the other entity will provide services to the Company,
    purchase services from the Company or otherwise provide
    intangible consideration to the Company, the amount of the
    consideration other than cash received by the Company (including
    the net present value of the consideration expected by the
    Company for the provided or purchased services) will be the fair
    market value of such consideration, except where such
    consideration consists of securities, in which case the amount
    of consideration received by the Company will be the average
    Daily Market Price for the ten (10) Trading Days with
    respect to such securities thereof prior to the date of receipt.
    In case any Common Stock, Options or Convertible Securities are
    issued in connection with any merger or consolidation in which
    the Company is the surviving Company, the amount of
    consideration therefor will be deemed to be the fair market
    value of such portion of the net assets and business of the
    non-surviving Company as is attributable to such Common Stock,
    Options or Convertible Securities, as the case may be.
    Notwithstanding anything to the contrary contained herein, if
    Common Stock, Options or Convertible Securities are issued,
    granted or sold in conjunction with each other as part of a
    single transaction or in a series of related transactions, and
    one or more of such securities are issued, granted or sold for a
    price below fair market value (when the aggregate value of such
    securities is compared with the aggregate amount of
    consideration received by the Company therefor), the Holder may
    elect to determine the amount of consideration deemed to be
    received by the Company therefor by deducting the difference
    between the fair value of and the amount paid for any type of
    securities issued, granted or sold in such transaction or series
    of transactions (the “Disregarded Securities”).
    If the Holder makes an election pursuant to the immediately
    preceding sentence, no adjustment to the Conversion Price shall
    be made pursuant to this subsection (iv)(E) for the
    issuance of the Disregarded Securities or upon any conversion or
    exercise thereof. For example, if the Company were to issue
    convertible notes having a face value of $1,000,000 and warrants
    to purchase shares of Common Stock at an exercise price equal to
    the market price of the Common Stock on the date of issuance of
    such warrants in exchange for $1,000,000 of consideration, the
    fair value of the warrants would be subtracted from the
    $1,000,000 of consideration received by the Company for the
    purposes of determining the price per share of Common Stock
    issuable upon conversion of the convertible notes and for
    purposes of determining any adjustment to the Conversion Price
    hereunder as a result of the issuance of the Convertible
    Securities. The Holder shall calculate, using standard
    commercial valuation methods appropriate for valuing such
    assets, the fair market value of any consideration other than
    cash or securities; provided, however, that if the
    Company does not agree to such fair market value calculation
    within three (3) Business Days after receipt of such
    calculation along with reasonably detailed supporting
    documentation from the Holder, then such fair market value will
    be determined in good faith by an investment banker or other
    appropriate expert of national reputation selected by the Holder
    (which investment banker or other expert shall not have been
    engaged or otherwise employed by the Holder within one
    (1) year of the date of such engagement hereunder) and
    reasonably acceptable to the Company, with the costs of such
    appraisal to be borne by the Company.
	 
	 	     
    (F) Other Action Affecting Conversion Price. If the
    Company takes any action affecting the Common Stock after the
    date hereof that would be covered by this Section 3, but
    for the manner in which such action is taken or structured,
    which would in any way diminish the value of this Note then the
    Conversion Price shall be adjusted in such manner as the Board
    of Directors of the Company shall in good faith determine to be
    equitable under the circumstances.

16

 

		
	 	     
    (G) Record Date. In case the Company shall take a
    record of the holders of its Common Stock for the purpose of
    entitling them (i) to receive a dividend or other
    distribution payable in Common Stock, Options or Convertible
    Securities or (ii) to subscribe for or purchase Common
    Stock, Options or Convertible Securities, then such record date
    shall be deemed to be the date of the issue or sale of the
    shares of Common Stock deemed to have been issued or sold upon
    the declaration of such dividend or the making of such other
    distribution or the date of the granting of such right of
    subscription or purchase, as the case may be, provided,
    however, that any such adjustment in the Conversion Price
    shall be reversed or shall not become effective, as applicable,
    if the Company abandons the action to which the record date
    pertains.
	 
	 	     
    (H) Treasury Shares. The number of shares of Common
    Stock outstanding at any given time shall not include shares
    owned or held by or for the account of the Company or any of its
    wholly-owned Subsidiaries, and the disposition of any such
    shares (other than the cancellation or retirement thereof) shall
    be considered an issue or sale of Common Stock for the purpose
    of this subsection (iv).

		
	 	     
    (v) Excluded Issuances. Notwithstanding anything to
    the contrary contained herein, the Company shall not be required
    to make any adjustment of the Conversion Price in the case of
    the issuance of (A) Common Stock, Options and Convertible
    Securities for a total consideration of less than $10,000,000
    during any 24-month period; (B) Common Stock, Options or
    Convertible Securities issued to employees or consultants of the
    Company in connection with their employment or engagement by the
    Company pursuant to an equity compensation plan in effect as of
    September 26, 2005, which are granted in the ordinary
    course of business and consistent with past practice;
    (C) Common Stock or Convertible Securities to employees or
    consultants of the Company in connection with their employment
    or engagement by the Company pursuant to an equity purchase plan
    in effect as of September 26, 2005, which are granted in
    the ordinary course of business and consistent with past
    practice; (D) Common Stock upon the conversion or exercise
    of any warrants outstanding on the date hereof as disclosed in
    Schedule 3(d)(v), except as set forth in
    subsection (iv)(C) above; or (E) Common Stock, Options
    or Convertible Securities that are issued at or above the market
    price at the time of issuance; and (F) Common Stock,
    Options or Convertible Securities approved by the Holder
    (collectively, “Excluded Issuances”).
	 
	 	     
    (vi) Weighted Average Adjustment for Issuances. In
    the event that at any time or from time to time the Company
    shall issue or sell Common Stock, Options or Convertible
    Securities subject to Section 3(d)(iv) for no consideration
    or for a per share consideration that is greater than the
    applicable Conversion Price at the time of such issuance or sale
    but less at the time of such issuance or sale than the Daily
    Market Price, then the Conversion Price in effect immediately
    prior to each such issuance or sale will immediately be reduced
    to the price determined by multiplying the Conversion Price, in
    effect immediately prior to such issuance or sale, by a
    fraction, (A) the numerator of which shall be (x) the
    number of shares of Common Stock outstanding immediately prior
    to such issuance or sale plus (y) the number of shares of
    Common Stock which the aggregate consideration received by the
    Company for the total number of such additional shares of Common
    Stock so issued or sold would purchase at the Daily Market Price
    on the last Trading Day immediately preceding such issuance or
    sale and (B) the denominator of which shall be the number
    of shares of Common Stock outstanding immediately after such
    issue or sale.

     
(e) Fractional Shares. Upon a conversion hereunder,
the Company shall not be required to issue stock certificates
representing fractions of shares of the Common Stock, but may if
otherwise permitted, make a cash payment in respect of any final
fraction of a share based on the closing bid price at such time.
If the Company elects not, or is unable, to make such a cash
payment, the Holder shall be entitled to receive, in lieu of the
final fraction of a share, one whole share of Common Stock.

     
(f) Notice of Adjustments. Upon the occurrence of
each adjustment or readjustment of the Conversion Price pursuant
to this Section 3, the Company, at its own expense, shall
promptly compute such adjustment or readjustment and prepare and
furnish to each Holder a certificate setting forth such
adjustment

17

 

or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Company shall, upon the
written request at any time of the Holder, furnish to such
Holder a like certificate setting forth (i) such adjustment
or readjustment, (ii) the Conversion Price at the time in
effect and (iii) the number of shares of Common Stock and
the amount, if any, of other securities or property which at the
time would be received upon conversion of this Note.

     
4.     Redemption. (a) The
Company may redeem this Note, in whole or in part, at any time
after September 26, 2010, at a redemption price equal to
the principal amount of this Note, plus accrued and unpaid
interest thereon, if (i) the closing price of the Common
Stock on any day on or after September 26, 2010 has been
greater than $30.00 for at least forty (40) consecutive
Trading Days, which calculation may include the forty
(40) Trading Days prior to September 26, 2010 and
(ii) at the time of any such redemption all of the Common
Stock into which this Note (or a portion thereof subject to such
redemption) is convertible is freely transferable by the Holder
without any restriction pursuant to registration or exemption
under all applicable United States federal and state securities
laws.

     
(b) Upon the occurrence of a Change of Control of the
Company on or prior to September 26, 2009, the Holder shall
have the right to require the Company to purchase this Note by
paying the Holder a redemption premium (the
”Redemption Premium”), calculated as a
percentage of the principal amount of this Note plus any accrued
and unpaid interest thereon through the date of such redemption
(the “Redemption Date”), equal to the
following: (i) if the Redemption Date occurs on or
before September 26, 2006, the Redemption Premium
shall equal 104% of the principal amount of this Note plus any
accrued and unpaid interest thereon through the
Redemption Date; (ii) if the Redemption Date
occurs between September 27, 2006 and September 26,
2007, the Redemption Premium shall equal 103% of the
principal amount of this Note plus any accrued and unpaid
interest thereon through the Redemption Date; (iii) if
the Redemption Date occurs between September 27, 2007
and September 26, 2008, the Redemption Premium shall
equal 102% of the principal amount of this Note plus any accrued
and unpaid interest thereon through the Redemption Date and
(iv) if the Redemption Date occurs between
September 27, 2008 and September 26, 2009, the
Redemption Premium shall equal 101% of the principal amount
of this Note plus any accrued and unpaid interest thereon
through the Redemption Date.

     
5.     Ranking. This Note shall
be senior Indebtedness of the Company, ranking senior to all
other Indebtedness and future Indebtedness of the Company in all
respects, including in right of payment in full in cash;
provided, however, that notwithstanding such
ranking and first priority security interest, the indebtedness
of the Company under the Novartis Note shall not be required to
be subordinated to, and shall rank pari passu in right of
payment with, this Note.

     
6.     Representations and
Warranties of the Company. The Company hereby represents and
warrants to the Holder, as of the date hereof and each other
date required to be made hereunder or under the other
Transaction Documents (except to the extent such representations
and warranties expressly relate only to an earlier date, in
which case such representations and warranties shall be correct
and accurate in all material respects on and as of such earlier
date), the following:

		
	 	     
    (a) The Company is (i) duly organized, validly
    existing and in good standing under the laws of the State of
    Delaware and has all requisite corporate or similar power and
    authority to own and operate its properties and assets and to
    carry on its business as presently conducted, and
    (ii) qualified to do business and is in good standing as a
    foreign corporation in each jurisdiction where the ownership or
    operation of its properties or conduct of its business requires
    such qualification, except where the failure to be so qualified
    would not have a Material Adverse Effect.
	 
	 	     
    (b) The execution, delivery and performance by the Company
    of this Note and the other Transaction Documents, and its
    obligations hereunder and thereunder and the other Proposed
    Transactions, have been duly authorized and do not and will not
    constitute a breach or violation, or constitute a default under,
    the organizational documents of the Company; and this Note and
    each other Transaction Document to be executed by the Company
    will constitute the valid and legally binding obligation of the
    Company, enforceable against it in accordance with its terms,
    subject to bankruptcy, insolvency,

18

 

		
	 	
    fraudulent transfer, reorganization, moratorium and similar laws
    of general applicability, relating to or affecting
    creditors’ rights generally.
	 
	 	     
    (c) The execution, delivery and performance by the Company
    of the Loan Documents do not, and the performance by it of its
    obligations contemplated thereunder will not, (i) violate
    or contravene any provision of the Company’s articles or
    incorporation, bylaws or similar organizational documents;
    (ii) except as set forth on Schedule 6(c)(ii),
    constitute or result in a breach or violation of, or a default
    under, the acceleration of any obligations of, or the creation
    of any Lien on the assets of, the Company or any of its
    Subsidiaries (with or without notice, lapse of time or both)
    pursuant to any contract that is binding upon the Company or any
    of its Subsidiaries, or any change in the rights or obligations
    of any party under any of such contracts; (iii) except
    pursuant to the Loan Documents, and except as set forth on
    Schedule 6(c)(iii), require the Company or any of
    its Subsidiaries to obtain the consent, waiver, authorization or
    approval of any person which has not already been obtained; or
    (iv) violate, contravene or conflict with any award,
    judgment, decree or other order of any governmental entity, any
    statute, law, rule, regulation or other requirement of any
    governmental entity in the United States or elsewhere, or any
    permit, license, registration or other approval or authorization
    of any governmental entity.
	 
	 	     
    (d) Other than filings pursuant to federal and state
    securities laws or filings required to be made with the NASD or
    Nasdaq directly related to the execution and delivery of the
    Transaction Documents, no notices, reports or other filings are
    required to be made by the Company or any of its Subsidiaries
    with, nor are any consents, registrations, approvals, permits or
    authorizations required to be obtained by the Company or any of
    its Subsidiaries from, any court or governmental authority or
    regulatory or self-regulatory entity in connection with the
    execution and delivery of this Note, the other Loan Documents or
    the Proposed Transactions.
	 
	 	     
    (e) No event has occurred that could constitute a Default
    or Event of Default, or could cause a default or event of
    default to occur, under any agreement or instrument evidencing
    any Indebtedness of the Company as a result of the issuance of
    this Note or the Proposed Transactions.
	 
	 	     
    (f) No consent or approval of, or notice to, any creditor
    of the Company or any Subsidiary (other than the Holder and the
    “Investor” under the Investment Agreement) is required
    by the terms of any agreement or instrument evidencing any
    Indebtedness of the Company or any Subsidiary for the
    Company’s execution or delivery of, or the performance of
    the obligations of the Company under, this Note or the Loan
    Documents or the consummation of the transactions contemplated
    hereby or thereby or the consummation of the other Proposed
    Transactions.
	 
	 	     
    (g) There are no (i) except as otherwise disclosed on
    Schedule 6(g), material civil, criminal or administrative
    actions, suits, claims, hearings, investigations or proceedings
    pending or threatened against the Company or any of its
    Subsidiaries; or (ii) except as otherwise specifically
    disclosed in accordance herewith or as otherwise permitted
    herein, material obligations or liabilities, whether or not
    accrued, contingent or otherwise and whether or not required to
    be disclosed, including those relating to environmental and
    occupational safety and health matters, or any other facts or
    circumstances that could result in any claims against, or
    obligations or liabilities of, the Company or any of its
    Subsidiaries.
	 
	 	     
    (h) Each of the Company and its Subsidiaries has good and
    marketable title to, or leasehold interest in, all real property
    and other property and assets owned by it, free and clear of all
    Liens or other encumbrances securing Indebtedness (other than
    Permitted Liens), and, subject to Section 7(r), its
    obligations under both this Note and the other Loan Documents
    rank senior to all other existing Indebtedness and future
    Indebtedness of the Company in all respects, including in right
    of payment in full in cash.
	 
	 	     
    (i) The Company’s (i) audited financial
    statements dated December 31, 2004 and for the fiscal year
    ended on that date; and (ii) consolidated balance sheet
    dated June 30, 2005 and the related consolidated statements
    of income and cash flows for the portion of the Company’s
    fiscal year ended on that date, each as heretofore delivered to
    the Holder are complete and correct, have been prepared in
    accordance with GAAP. The audited financial statements of the
    Company dated December 31, 2004 and

19

 

		
	 	
    for the fiscal year ended on that date have been certified by a
    firm of independent accountants as fairly presenting the
    financial condition of the Company as at that date and the
    results of its operations for that fiscal year or portion
    thereof.
	 
	 	     
    (j) Since December 31, 2004, there has not been
    (i) any material damage, destruction or other casualty loss
    with respect to any material asset or property owned, leased or
    otherwise used by the Company or any of its Subsidiaries,
    whether or not covered by insurance; (ii) any declaration,
    setting aside or payment of any dividend or other distribution
    in respect of the capital stock of the Company; or
    (iii) any change by the Company or any of its Subsidiaries
    in accounting principles, practices or methods.
	 
	 	     
    (k) The Company has filed all required reports, schedules,
    registration statements and other documents with the SEC since
    April 30, 2002. The Company 2004 10-K and all other
    reports, registration statements, definitive proxy statements or
    information statements, including any certifications pursuant to
    Section 302 or Section 906 of the Sarbanes-Oxley Act
    of 2002 or similar certifications, filed by the Company or any
    Subsidiary subsequent to April 30, 2002, under the
    Securities Act or under Sections 13(a), 13(c), 14 and 15(d)
    of the Exchange Act in the form filed (collectively, the
    “Company SEC Documents”), with the SEC,
    (i) complied in all material respects as to form with the
    applicable requirements under the Securities Act or the Exchange
    Act, as the case may be; and (ii) as of its filing date,
    did not or will not contain any untrue statement of a material
    fact or omit to state a material fact required to be stated
    therein or necessary to make the statements made therein, in
    light of the circumstances under which they were made, not
    misleading; and each of the balance sheets contained in or
    incorporated by reference into any such Company SEC Document
    (including the related notes and schedules thereto) fairly
    presents or will fairly present the financial position of the
    entity or entities to which it relates as of its date, and each
    of the statements of operations and changes in
    stockholders’ equity and cash flows or equivalent
    statements in such Company SEC Documents (including any related
    notes and schedules thereto) fairly presents or will fairly
    present the results of operations, changes in stockholders’
    equity and changes in cash flows, as the case may be, of the
    entity or entities to which it relates for the periods to which
    it relates, in each case in accordance with GAAP consistently
    applied during the periods involved, except, in each case, as
    may be noted therein, subject to normal year-end audit
    adjustments in the case of unaudited statements.
	 
	 	     
    (l) The Company has designed and maintains a system of
    internal controls over financial reporting (as defined in
    Rules 13a-15(f) and 15d-15(f) of the Exchange Act)
    sufficient to provide reasonable assurances regarding the
    reliability of financial reporting and the preparation of
    financial statements for external purposes in accordance with
    GAAP. The Company (i) has designed and maintains disclosure
    controls and procedures (as defined in Rules 13a-15(e) and
    15d-15(e) of the Exchange Act) to ensure that material
    information required to be disclosed by the Company in the
    reports that it files or submits under the Exchange Act is
    recorded, processed, summarized and reported within the time
    periods specified in the SEC’s rules and forms and is
    accumulated and communicated to the Company’s management as
    appropriate to allow timely decisions regarding required
    disclosure; and (ii) has disclosed, based on its most
    recent evaluation of such disclosure controls and procedures
    prior to the date of this Note, to the Company’s auditors
    and the audit committee of the Board of Directors (A) any
    significant deficiencies and material weaknesses in the design
    or operation of internal controls over financial reporting that
    are reasonably likely to adversely affect in any material
    respect the Company’s ability to record, process, summarize
    and report financial information; and (B) any fraud,
    whether or not material, that involves management or other
    employees who have a significant role in the Company’s
    internal controls over financial reporting.
	 
	 	     
    (m) Since January 1, 2004, the Company has not
    received written notice from the SEC or any other governmental
    entity that any of its accounting policies or practices, or any
    of the documents filed by the Company or filed or furnished by
    its officers, are or may be the subject of any review, inquiry,
    investigation or challenge by the SEC or other governmental
    entity, other than comments received by the Company from the SEC
    in connection with registration statements filed by the Company
    under the Securities Act prior to the date hereof. Since
    January 1, 2004, neither the Company’s independent
    public accounting firm, nor any employee, director, advisor or
    other agent or Affiliate of the Company has

20

 

		
	 	
    informed the Company that such Person has any material
    questions, challenges or disagreements regarding or pertaining
    to the Company’s accounting policies or practices or the
    Company’s internal controls over financial reporting.
	 
	 	     
    (n) Schedule 6(n) contains a true and complete
    list of, and the Company has delivered to the Holder copies of
    all documents creating or governing, all securitization
    transactions and “off-balance sheet arrangements” (as
    defined in Item 303(a)(4)(ii) of Regulation S-K of the
    SEC) effected by or to which the Company is a party since
    January 1, 2004.
	 
	 	     
    (o) Except as set forth on Schedule 6(o), the
    Company has not, since July 30, 2002, extended or
    maintained credit, arranged for the extension of credit, or
    renewed an extension of credit, in the form of a personal loan
    to or for any director or executive officer (or equivalent
    thereof) of the Company or any Affiliate.
	 
	 	     
    (p) To the Knowledge of the Company, PricewaterhouseCoopers
    LLP, which has expressed its opinion with respect to the
    financial statements of the Company audited by it and included
    in the Company SEC Reports (including the related notes), is and
    has been throughout the period covered by such financial
    statements, (i) a registered public accounting firm (as
    defined in Section 2(a)(12) of the Sarbanes-Oxley Act);
    (ii) “independent” with respect to the Company
    within the meaning of Rule 2-01 of Regulation S-X of
    the SEC; (iii) in compliance with subsections
    (g) through (l) of Section 10A of the Exchange
    Act and the related Rules of the SEC; and (iv) in
    compliance with the rules of the Public Company Accounting
    Oversight Board. Schedule 6(p) contains a true and
    complete list of all non-audit services performed by
    PricewaterhouseCoopers LLP for the Company since January 1,
    2004.
	 
	 	     
    (q) The execution and delivery of this Note and the other
    Loan Documents is not subject to any tax, duty, fee or other
    charge, including, without limitation, any registration or
    transfer tax, stamp duty or similar levy.
	 
	 	     
    (r) (i) Schedule 6(r) lists all Plans and
    separately identifies all Pension Plans, Multiemployer Plans and
    Welfare Plans, including all Retiree Welfare Plans as of the
    date hereof. Copies of all such listed Plans, together with a
    copy of the most recently filed Form IRS/ DOL 5500 for each
    such Plan have been made available to the Holder prior to the
    date hereof. Except with respect to Multiemployer Plans, each
    Qualified Plan has been determined by the IRS to qualify under
    Section 401 of the IRC, the trusts created thereunder have
    been determined to be exempt from tax under the provisions of
    Section 501 of the IRC, and, to the Knowledge of the
    Company, nothing has occurred that would cause the loss of such
    qualification or tax-exempt status. Each Plan is in material
    compliance with the applicable provisions of ERISA and the IRC,
    including the timely filing of all reports required under the
    IRC or ERISA, including the statement required by 29 CFR
    Section 2520.104-23. Neither the Company, nor any
    Subsidiary, nor any ERISA Affiliate has failed to make any
    material contribution or pay any amount due as required by
    either Section 412 of the IRC or Section 302 of ERISA
    or the terms of any Plan. Neither the Company, nor any
    Subsidiary, nor any ERISA Affiliate has engaged in a
    “prohibited transaction,” as defined in
    Section 406 of ERISA and Section 4975 of the IRC, in
    connection with any Plan, that would subject the Company or any
    Subsidiary to a material tax on prohibited transactions imposed
    by Section 502(i) of ERISA or Section 4975 of the IRC.
	 
	 	     
    (ii) (A) Except as disclosed on
    Schedule 6(r), neither the Company, nor any
    Subsidiary, nor any ERISA Affiliate has ever maintained,
    established, sponsored, participated in or contributed to any
    Title IV Plan; (B) there are no pending, or to the
    Knowledge of the Company or any Subsidiary, threatened claims
    (other than claims for benefits in the normal course),
    sanctions, actions or lawsuits, asserted or instituted against
    any Plan or any Person as fiduciary or sponsor of any Plan; and
    (C) neither the Company, nor any Subsidiary, nor any ERISA
    Affiliate has incurred or reasonably expects to incur any
    liability as a result of a complete or partial withdrawal from a
    Multiemployer Plan.
	 
	 	     
    (s) The Company’s use, storage, treatment and disposal
    of Hazardous Substances is and has been in full compliance with
    Environmental Law; (i) there has been no unpermitted
    release, discharge, emission or escape into the environment of
    Hazardous Substances; (ii) the Company has all permits
    necessary and

21

 

		
	 	
    required for its use, storage, treatment and disposal of
    Hazardous Substances; and (iii) the Company does not know
    of, and has not received, any written notice or other
    communication from any person or entity (including but not
    limited to a governmental entity) of a possible claim or
    liability pursuant to any Environmental Law, or any actual or
    potential administrative or judicial proceedings in connection
    with any of the foregoing.
	 
	 	     
    (t) (i) The Company owns, either exclusively or
    jointly, all right, title and interest in and to (free and clear
    of all Liens other than Permitted Liens) or is licensed to use
    all the Company Intellectual Property, including, without
    limitation, the Patents, Trademarks and Copyrights listed on
    Schedule 6(t), and, except as set forth on
    Schedule 6(t), has exclusive rights to use, sell,
    license, assign, transfer, convey, dispose of, or otherwise
    commercially exploit the Company Intellectual Property.
	 
	 	     
    (ii) Schedule 6(t) lists all of the
    Company’s Patents, Trademarks, registered Copyrights and
    material Know-How, and, to the extent applicable, the
    jurisdiction(s) in which each item of Company Intellectual
    Property was or is filed or registered, including the respective
    application or registration numbers and dates, and an indication
    as to whether each such item of Company Intellectual Property is
    owned exclusively or jointly. Each item of Company Intellectual
    Property is in compliance with all formal legal requirements
    (including payment of filing, examination, annuity and
    maintenance fees and proofs of use) and is valid and subsisting.
    In connection with all Company Intellectual Property owned,
    either exclusively or jointly by the Company, the Company
    represents and warrants, and in connection with all third-party
    Company Intellectual Property, the Company represents and
    warrants to Company’s Knowledge, that all necessary
    registration, maintenance and renewal fees have been paid and
    all necessary documents and certificates in connection with such
    Company Intellectual Property have been filed with the relevant
    patent, copyright, trademark or other authorities in the United
    States or foreign jurisdictions, as the case may be, for the
    purposes of perfecting, prosecuting and maintaining such Company
    Intellectual Property.
	 
	 	     
    (iii) The operation of the business of the Company as
    currently conducted or currently contemplated to be conducted
    does not and will not infringe or misappropriate the
    Intellectual Property of any third party, violate any right of
    any third party or constitute unfair competition or trade
    practices under the laws of any jurisdiction.
	 
	 	     
    (iv) Other than as described in Schedule 6(t),
    no Person has asserted or threatened to assert any claims
    (A) contesting the right of the Company to use, exercise,
    sell, license, transfer or dispose of any Company Intellectual
    Property or any products, processes or materials covered thereby
    in any manner; or (B) challenging the ownership, validity
    or enforceability of any Company Intellectual Property. No owned
    Company Intellectual Property and, to the Company’s
    Knowledge, no third-party Company Intellectual Property is
    subject to any outstanding order, judgment, decree, stipulation
    or agreement related to or restricting in any manner the
    licensing, assignment, transfer, use or conveyance thereof by
    the Company.
	 
	 	     
    (v) The Company has not received any written notice or
    otherwise has Knowledge of any pending or threatened claim,
    order or proceeding with respect to any Company Intellectual
    Property and, to the Company’s Knowledge, no Company
    Intellectual Property is being used or enforced in a manner that
    would reasonably be expected to result in the abandonment,
    cancellation or unenforceability of such Intellectual Property.
	 
	 	     
    (vi) The Company has required all professional and
    technical employees who provided services to the Company in
    connection with the Company Intellectual Property to execute
    agreements under which such employees are and were required to
    convey to the Company ownership of all inventions and
    developments conceived or created by them in the course of their
    employment with the Company. To the Company’s Knowledge,
    none of the activities of the Company’s professional and
    technical employees who are providing services to the Company in
    connection with the Company Intellectual Property is violating
    any agreement between any such employees and their former
    employers.

22

 

		
	 	     
    (vii) Other than as described in Schedule 6(t),
    Company has not received any opinion of counsel regarding any
    third party Intellectual Property or any owned Company
    Intellectual Property.
	 
	 	     
    (viii) To the Company’s Knowledge, the Company has
    complied with its obligation under
    37 CFR § 1.56(a) to disclose to the United
    States Patent and Trademark Office, during the pendency of any
    United States patent application comprising the owned Company
    Intellectual Property. None of the Company’s Patents is
    involved in any interference or opposition proceeding, and, to
    the Company’s Knowledge, no such proceeding is being
    threatened with respect to any of the Patents.
	 
	 	     
    (ix) To the extent that any Intellectual Property has been
    developed or created independently or jointly by an independent
    contractor or other third party for the Company, or is
    incorporated into any of the Company products, the Company has a
    written agreement with such independent contractor or third
    party and Company thereby has obtained exclusive or joint
    ownership of all such independent contractor’s or third
    party’s Intellectual Property in such work, material or
    invention by operation of law or valid assignment, or has
    acquired rights sufficient to use such Intellectual Property in
    the business of the Company as currently conducted and as
    contemplated to be conducted by virtue of a license.
	 
	 	     
    (x) Schedule 6(t) lists all agreements
    pertaining to Company Intellectual Property including without
    limitation, agreements pursuant to which the Company either
    receives or grants rights in Intellectual Property. The Company
    is, and will be, in compliance with all terms and conditions of
    all, and is not and will not be in violation of any, licenses,
    sublicenses and other agreements, relating to Intellectual
    Property to which it is a party, whether acquiring or granting
    rights, or otherwise. Except as set forth in
    Schedule 6(t), the Company has no Knowledge of any
    assertion, claim or threatened claim, or facts that could serve
    as a basis of any assertion or claim, that the Company has
    breached or defaulted on any terms or conditions of such
    licenses, sublicenses and other agreements, and the Company has
    no basis to believe that any other party to such licenses,
    sublicenses and other agreements is in breach or in default of
    any terms or conditions thereof.
	 
	 	     
    (xi) The Company has disclosed trade secrets of the Company
    included in the Know-How only to Persons that have executed
    written confidentiality agreements governing the use or
    disclosure of such trade secrets, except to the extent the
    Company disclosed such information in connection with making
    filings related to any Company Intellectual Property with
    governmental or regulatory authorities.
	 
	 	     
    (xii) The Company has taken all reasonably prudent or
    necessary steps to protect and preserve the confidentiality of
    its material Confidential Information, and with respect to all
    other Confidential Information the Company has taken all
    commercially reasonable steps to protect and preserve the
    confidentiality of such Confidential Information. Without
    limiting the foregoing, the Company has and enforces a policy
    requiring each employee and consultant of the Company to execute
    a proprietary rights and confidentiality agreement, and all
    current and former employees and consultants of the Company have
    executed such an agreement.
	 
	 	     
    (xiii) Except as set forth on Schedule 9.1(t),
    the Company has not received any adverse written notice from the
    FDA or any other Authority since January 1, 2003
    (i) regarding the approvability of product candidates of
    the Company or (ii) alleging any violation of any law,
    policy, guideline, rule or regulation by the Company.
    Schedule 9.1(t) sets forth (i) all of the
    Company’s regulatory correspondence received from the FDA
    or any other similar Authority since January 1, 2003, which
    correspondence has been provided to the Holder and (ii) all
    of the permits issued to the Company by the FDA or any other
    similar Authority. During the last five years no officer,
    employee or agent of the Company, has made an untrue statement
    of a material fact or fraudulent statement to the FDA or any
    other authority, failed to disclose a material fact required to
    be disclosed to the FDA or any other authority, or committed an
    act, made a statement, or failed to make a statement that, at
    the time such disclosure was made which would violate any law,
    policy, guideline, rule or regulation.
	 
	 	     
    (u) The provisions of the Security Documents are effective
    to create in favor of the Holder a legal, valid and enforceable
    lien and security interest in all right, title and interest of
    the Company in the “Collateral” described therein.
    Upon the filing of proper financing statements in the offices in
    the

23

 

		
	 	
    jurisdictions listed on Schedule 6(u), the Holder
    shall have a perfected first priority security interest or lien
    on all right, title and interest of the Company in the
    “Collateral” described therein, which can be perfected
    by such filing, subject only to the existence of any Permitted
    Liens.
	 
	 	     
    (v) The businesses of the Company and its Subsidiaries have
    not been, and are not being, conducted in violation of any
    material state, local, federal, foreign or domestic laws, rules,
    regulations or court orders and none of the transactions
    contemplated in this Note or the other Loan Documents
    (including, without limitation, the borrowing hereunder and the
    use of the proceeds thereof), or the Proposed Transactions, will
    violate or result in a violation of Section 7 of the
    Exchange Act, as amended, or any regulations issued pursuant
    thereto, including, without limitation, Regulations G, T, U and
    X of the Board of Governors of the Federal Reserve System,
    12 C.F.R., Chapter II.
	 
	 	     
    (w) The written materials delivered or caused to be
    delivered, by or on behalf of the Company, to the Holder in
    connection with this Note and the other Loan Documents and the
    other transactions contemplated by this Note do not contain any
    untrue statement of a material fact or omit to state a material
    fact necessary in order to make the statements contained
    therein, in light of the circumstances under which they were
    made, not misleading.
	 
	 	     
    (x) The Company and its Subsidiaries have filed, or caused
    to be filed, in a timely manner, all federal, state and other
    tax returns and reports required to be filed, and have paid, in
    a timely manner, all federal, state and other taxes,
    assessments, fees and other governmental charges levied or
    imposed upon them or their properties, income or assets
    otherwise due and payable. All information in such tax returns,
    reports and declarations is true, complete and correct in all
    respects.
	 
	 	     
    (y) To the best Knowledge of the Company, since the date
    three years prior to the Closing Date, the Company has not
    undergone an “ownership change” as such term is
    defined for purposes of Section 382 of the IRC, and the
    Treasury Regulations (final, temporary and, as applicable,
    proposed) promulgated thereunder (an “Ownership
    Change”).
	 
	 	     
    (z) Set forth on Schedule 6(z) is a list, as of
    the date hereof, of all of the real property interests held by
    the Company and its Subsidiaries, indicating in each case
    whether the respective property is owned or leased, the identity
    of the owner or lessee and the location of the respective
    property.
	 
	 	     
    (aa) As of the date hereof, the authorized capital stock of
    the Company consists of (i) 50,000,000 shares of
    Common Stock of which 23,555,266 shares were issued and
    outstanding, of which 243,600 are held as treasury shares; and
    (ii) 1,000,000 shares of preferred stock, par value
    $.01 per share, of which no shares were issued. Each of the
    outstanding shares of capital stock or other securities of each
    of the Subsidiaries is duly authorized, validly issued, fully
    paid and nonassessable and owned by the Company or by a direct
    or indirect wholly owned Subsidiary of the Company, free and
    clear of any Liens, other than Permitted Liens. Except as set
    forth in Schedule 6(aa), there are no preemptive or
    other outstanding rights, options, warrants, conversion rights,
    stock appreciation rights, redemption rights, repurchase rights,
    agreements, arrangements or commitments to issue or sell any
    shares of capital stock or other securities of the Company or
    any Subsidiary or any securities or obligations convertible or
    exchangeable into or exercisable for, or giving any Person a
    right to subscribe for or acquire, any securities of the Company
    or any Subsidiary, and no securities or obligations evidencing
    such rights are authorized, issued or outstanding.
	 
	 	     
    (bb) The Company and its Subsidiaries are insured by
    recognized, financially sound and reputable institutions with
    policies in such amounts and with such deductibles and covering
    such risks as are generally deemed adequate and customary for
    its businesses including, but not limited to, policies covering
    real and personal property owned or leased by the Company
    against theft, damage, destruction and acts of vandalism, and
    complying with the requirements set forth in Section 7(l)
    hereof. The Company has no reason to believe that it or any
    Subsidiary will not be able (i) to renew its existing
    insurance coverage as and when such policies expire or
    (ii) to obtain comparable coverage from similar
    institutions as may be necessary or appropriate to conduct its
    business as now conducted and at a cost that would not have a
    Material Adverse Effect.

24

 

     
7.     Covenants.

     
(a) Use of Proceeds. Subject to Section 7(b),
the Company shall use the proceeds of the Loan solely to pay
operating expenses at such times, and in such amounts equal to
or less than, the corresponding time periods and amounts
indicated on the Company’s operating budget (the
“Budget”), a copy of the initial Budget
covering the period from September 1, 2005 through
August 31, 2006 has been provided to Holder, and is subject
to replacements pursuant to Section 7(d)(iii) hereof.

     
(b) Disbursement Account. The Company shall provide
notice to the Holder of each requested withdrawal from the
Disbursement Account pursuant to Section 7(d)(vii). Prior
to the earlier of (a) the occurrence and continuation of an
Event of Default and (b) the establishment of a
reconstituted Disbursement Account pursuant to
Section 7(hh)(ii), the Company may make withdrawals from
the Disbursement Account, and after the establishment of a
reconstituted Disbursement Account pursuant to
Section 7(hh)(ii) (but not upon the occurrence and
continuation of an Event of Default) the Company may request
that the Holder make withdrawals from the Disbursement Account,
in any case no more frequently than bi-weekly; provided,
in each case that withdrawals made for any one-month period
shall not in the aggregate exceed 103% of the operating budget
for such period set forth in the Budget without the prior
written consent of the Holder; and provided, further, in
each case, that notwithstanding anything to the contrary in this
Agreement, in the event that the Company shall make or request
withdrawals in the aggregate exceeding 100% of the budgeted
amount for any such one-month period, the amount available for
withdrawal during the immediately succeeding one-month period
shall be automatically and without further action reduced by the
amount of such excess. Notwithstanding the foregoing, any
payment made or requested to be made by the Company to the
Holder in connection with the Obligations or any transfer or
withdrawal made or requested to be made by the Company of
interest, dividends or other income generated by the funds and
other assets deposited in the Disbursement Account (which
interest, dividends, and other income shall only be transferred
into a separate account of the Company), whether or not
reflected in the Budget, shall be a permitted withdrawal from
the Disbursement Account and shall not require the consent of
the Holder. If the Company requests that Holder make or permit a
withdrawal from the Disbursement Account, and such request
complies with the provisions herein relating to withdrawals from
the Disbursement Account, the Holder shall instruct Bank to
transfer such requested amount from the Disbursement Account to
a bank account of the Company designated in writing by the
Company that is subject to an account control agreement in favor
of the Holder.

     
(c) Governmental Authorizations. The Company shall
obtain, make and keep in full force and effect all
authorizations from and registrations with governmental
authorities that may be required for the validity or
enforceability against the Company of this Note and the other
Loan Documents.

     
(d) Financial Statements; Reporting. (i) The
Company shall furnish to the Holder, within 45 days of the
close of each of the first 3 quarters of each fiscal year, its
consolidated and consolidating balance sheets as at the close of
such quarter and its income statement and statement of changes
in financial position for such quarter, prepared in accordance
with GAAP, applied on a basis consistent with that used in
preparing its audited financial statements for prior years,
certified by its chief financial officer as fairly presenting
the financial condition of the Company and its Subsidiaries as
at the close of that quarter and the results of its operations
for such quarter, subject to changes resulting from audit and
normal year-end adjustments.

     
(ii) The Company shall furnish to the Holder, within
90 days of the close of each fiscal year commencing with
the fiscal year ending December 31, 2005, its consolidated
and consolidating balance sheets as at the close of such fiscal
year and its income statement and statement of changes in
financial position for such fiscal year, prepared in accordance
with GAAP, applied on a basis consistent with that used in
preparing its audited financial statements for prior years,
certified by a firm of independent accountants selected by it
and acceptable to the Holder as fairly presenting the financial
condition of the Company and its Subsidiaries as at the close of
such fiscal year and the results of its operations for such
fiscal year. The certification shall include or be accompanied
by a statement that, during the examination by that firm of
those financial statements, that firm observed or discovered no
Default or Event of Default (or a detailed description of any
Default or Event of Default so observed or discovered).

25

 

     
(iii) The Company shall furnish to the Holder, not later
than November 30 of each year, (i) if an 18-Month
Budget has been delivered and constitutes the Budget, a revised
18-Month Budget, and (ii) otherwise, a revised annual
operating budget, which in any case, prior to the Final
Withdrawal Date and upon review and written approval of the
Holder (which approval shall not be unreasonably withheld),
shall thereafter constitute the Budget.

     
(iv) The Company shall deliver to the Holder (A) prior
to the Final Withdrawal Date, on the first Business Day of each
month, and concurrently with each delivery of notice to the
Holder of a withdrawal from the Disbursement Account pursuant to
Section 7(b) and in accordance with Section 7(d)(vii),
a compliance certificate certifying that (1) no Default or
Event of Default has occurred and is continuing, and
(2) the representations and warranties of the Company set
forth in this Note and in each other Loan Document are true and
correct as if made on such date (except for representations made
as of a specified earlier date, which shall remain true as of
such earlier date), and (B) after the Final Withdrawal
Date, on the first Business Day of each month, a compliance
certificate certifying that (1) no Default or Event of
Default has occurred and is continuing, and (2) the
representations and warranties of the Company set forth in this
Note and in each other Loan Document are true and correct as if
made on such date (except for representations made as of a
specified earlier date, which shall remain true as of such
earlier date). A form of such compliance certificate is attached
hereto as Exhibit C.

     
(v) The Company shall furnish to the Holder not later than
the 15th day of each month a variance report detailing any
variances had from the Budget during the previous month.

     
(vi) The Company shall furnish to the Holder from time to
time such other statements and information as the Holder may
reasonably request.

     
(vii) The Company shall notify the Holder of each requested
withdrawal from the Disbursement Account not later than 5
Business Days prior to the date of such withdrawal, by
delivering to the Holder a written notice (i) setting forth
the date and amount of such proposed withdrawal, which shall in
no event be later than five Business Days after the date of
receipt of such notice by the Holder, and (ii) certifying
that (A) the amount of such withdrawal, together with the
amount of all other withdrawals made during such calendar month,
does not exceed the operating cash requirement of the Company
for such month as set forth in the Budget, except as expressly
provided for under this Note, (B) upon the making of such
withdrawal no more than two withdrawals shall have been made
from the Disbursement Account during such month, and the
immediately preceding withdrawal was made not less than two
weeks prior to such proposed withdrawal, (C) no Default or
Event of Default has occurred and is continuing, (D) no
Default or Event of Default would occur as a result of such
withdrawal, and (E) the representations and warranties of
the Company hereunder are true and correct as of the date of
such certificate and the date of such proposed withdrawal (other
than representations and warranties made as of a specific
earlier date, which shall remain true and correct as of such
earlier date).

     
(viii) The Company shall, immediately upon the receipt of
notice from Novartis that it intends to exercise the Option (as
defined in the Novartis Option and License Agreement), or upon
otherwise becoming aware that Novartis intends to exercise such
Option, provide a copy of such notice to the Holder or notify
the Holder in writing that Company has become aware of such
intention, as the case may be. Upon becoming aware that Novartis
intends to exercise such Option, whether by notice from Novartis
pursuant to the Novartis Option and License Agreement or
otherwise, the Company shall consult with Holder with respect to
all subsequent communication with Novartis, its affiliates,
agents or representatives, or any other Person, regarding the
Option, the Novartis Note or the Novartis Option and License
Agreement, or the transactions contemplated thereby, and shall
provide drafts of any intended correspondence with such Persons
in respect thereof prior to delivery of such correspondence.

     
(ix) Promptly upon the resignation of any person from the
Board of Directors, the Company shall provide the Holder with a
copy of the resignation letter of such person, together with any
waiver letters, indemnity agreements and other documents or
instruments executed or delivered in connection with such
resignation.

26

 

     
(e) ERISA. The Company and its Subsidiaries shall
not, and shall not cause or permit any ERISA Affiliate to, cause
or permit to occur an ERISA Event. The Company and its
Subsidiaries shall not, and shall not cause or permit any ERISA
Affiliate to, adopt, sponsor, maintain or contribute to any
Title IV Plan.

     
(f) Maintenance of Property. The Company shall keep
all property useful and necessary in its business in good
working order and condition, ordinary wear and tear excepted.

     
(g) Maintenance of Existence; Lines of Business. The
Company shall preserve, renew and keep in full force and effect
its corporate existence and its rights, privileges, franchises
and licenses (including, but not limited to, licenses required
by the FDA and other applicable agencies) necessary or desirable
in the normal conduct of its business. The Company shall not be
engaged in any line of business other than the Line of Business.

     
(h) Compliance with Laws. The Company shall comply
in all respects with all applicable laws, ordinances, rules,
regulations, and requirements of governmental authorities
(including, without limitation, Environmental Laws, Tax laws,
and ERISA and the rules and regulations promulgated thereunder).

     
(i) Books and Records; Inspection Rights. The
Company shall keep proper books and records in which full, true
and correct entries are made of all dealings and transactions in
relation to its business and activities. The Company shall
permit the Holder and representatives of the Holder to inspect
its property and records at any reasonable times, and to make
copies of such records as the Holder (or its representative)
shall desire.

     
(j) Notices of Default. The Company shall promptly
notify the Holder of each Default or Event of Default, and each
other event that has or could have a materially adverse effect
on its ability to perform its obligations under this Note or
another Loan Document, together with a detained description of
such Default, Event of Default or other event, and all actions
taken or to be taken in response thereto.

     
(k) Liens and Encumbrances. The Company shall not
create or permit to be created or exist any Lien on any of its
property now owned or hereafter acquired, other than Permitted
Liens.

     
(l) Insurance. The Company shall maintain, with
financially sound and reputable insurance companies, insurance
in such amounts and against such risks as are customarily
maintained by companies engaged in the same or similar
businesses operating in the same or similar locations. The
Company will in any event maintain:

     
(i) Casualty Insurance against loss or damage covering all
of the tangible real and personal property and improvements of
the Company by reason of any Peril in such amounts (subject to
such deductibles as shall be satisfactory to the Holder) as
shall be reasonable and customary and sufficient to avoid the
insured named therein from becoming a co-insurer of any loss
under such policy but in any event in an amount (i) in the
case of fixed assets and equipment (including vehicles), at
least equal to 100% of the actual replacement cost of such
assets (including foundation, footings and excavation costs),
subject to deductibles as aforesaid; and (ii) in the case
of inventory, not less than the fair market value thereof,
subject to deductibles as aforesaid.

     
(ii) Automobile liability insurance against liability for
bodily injury and property damage in respect of all vehicles
(whether owned, hired or rented by the Company) at any time
located at, or used in connection with, its properties or
operations in such amounts as are then customary for vehicles
used in connection with similar properties and businesses, but
in any event to the extent required by applicable law.

     
(iii) Comprehensive general liability insurance against
claims for bodily injury, death or property damage occurring on,
in or about the properties (and adjoining streets, sidewalks and
waterways) of the Company, in such amounts as are then customary
for property similar in use in the jurisdictions where such
properties are located.

     
(iv) Workers’ compensation insurance (including
Employers’ Liability Insurance) to the extent required by
applicable law.

     
(v) Product liability insurance against claims for bodily
injury, pain and suffering, death or property damage resulting
from the use of products developed, tested or sold by the
Company in such amounts as are then customarily maintained by
responsible persons engaged in businesses similar to that of the
Company.

27

 

     
(vi) Other insurance as generally carried by owners of
similar properties and businesses, in such amounts and against
such risks as are then customary for property similar in use.

     
Such insurance shall name the Holder as loss payee (to the
extent covering risk of loss or damage to tangible property) and
as an additional named insured as its interests may appear (to
the extent covering any other risk). Each policy referred to in
this Section shall provide that it will not be canceled or
reduced, or allowed to lapse without renewal, except after not
less than 30 days’ notice to the Holder. The Company
will advise the Holder promptly of any policy cancellation,
reduction or amendment. Any proceeds received by the Holder on
account of any such insurance policy referred to in this
Section 7(l) shall be applied by the Holder promptly to
reduce the outstanding amount of the Obligations then due and
payable.

     
Without limiting the obligations of the Company under the
foregoing provisions of this Section, in the event the Company
shall fail to maintain in full force and effect insurance as
required by the foregoing provisions of this Section, then the
Holder may, but shall have no obligation so to do, procure
insurance covering the interests of the Holder in such amounts
and against such risks as the Holder shall deem appropriate, and
the Company shall reimburse the Holder in respect of any
premiums paid by the Holder in respect thereof.

     
(m) Consolidations, Mergers. The Company shall not,
directly or indirectly, by operation of law or otherwise, merge
with or consolidate with another Person, liquidate, windup or
dissolve itself, or sell, transfer or lease or otherwise dispose
of all or any substantial part of its assets or acquire by
purchase or otherwise the business or assets of, or stock of,
another Person; except (i) that any Subsidiary may merge
into or consolidate with any other Subsidiary; and (ii) any
Subsidiary may merge with or consolidate into the Company;
provided that the Company is the surviving organization.

     
(n) Asset Sales. The Company shall not, and shall
not permit any Subsidiary to, directly or indirectly, consummate
any Asset Sale, other than the transfer of technology licenses
to third parties in the ordinary course of business consistent
with past practices, (i) with the prior written consent of
the Holder (which shall not be unreasonably withheld),
(ii) pursuant to the Novartis Option and License Agreement
or (iii) pursuant to an agreement, the terms and conditions
of which expressly and unconditionally provide for fixed cash
payments to the Company during the 18-month period commencing on
the effective date of such transfer, in aggregate amount,
together with the aggregate amount of cash and Cash Equivalents
held by the Company (including in the Disbursement Account),
equal to or greater than the aggregate projected cash
expenditures of the Company for such 18-month period as provided
in the 18-Month Budget delivered in connection with such
transfer of technology licenses. The Company shall, in
connection with each proposed Asset Sale permitted pursuant to
Section 7(n)(iii), deliver to the Holder an 18-Month Budget
prior to the consummation of such Asset Sale and such 18-Month
Budget shall (i) be subject to the review and approval of
the Holder, which approval shall not be unreasonably withheld,
and (ii) upon approval such 18-Month Budget shall
constitute the Budget for all purposes under this Note.

     
(o) Transactions With Affiliates. The Company shall
not, and shall not permit any of its Subsidiaries to, make any
payment to, or sell, lease, transfer or otherwise dispose of any
of its properties or assets to, or purchase any property or
assets from, or enter into, make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the
foregoing, an ”Affiliate Transaction”), unless
(i) such Affiliate Transaction is on terms that are no less
favorable to the Company or such Subsidiary than those that
would have been obtained in a comparable transaction by the
Company or such Subsidiary with an unrelated Person; and
(ii) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration
in excess of $500,000, the Company delivers to the Holder a
resolution of the Board of Directors certifying that such
Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved by a majority
of the disinterested members of the Board of Directors, and an
opinion as to the fairness to the Company or such Subsidiary of
such Affiliate Transaction from a financial point of view issued
by an accounting, appraisal or investment banking firm of
national standing. Notwithstanding the foregoing, the following
items shall not be deemed to be Affiliate Transactions:
(A) the payment of reasonable directors’ fees to
Persons who are not otherwise Affiliates of the Company or
indemnification and similar arrangements, consulting fees,
employee salaries,

28

 

bonuses, employment agreements, compensation or employee benefit
arrangements or incentive arrangements with any officer,
director or employee of the Company or any Subsidiary (including
benefits under the foregoing); (B) Restricted Payments made
in compliance with Section 7(s); (C) loans or advances
to employees and reimbursement of actual out-of-pocket expenses
incurred by officers, directors and employees, in each case in
the ordinary course of business in an amount not to exceed
$100,000 individually and $200,000 in the aggregate during any
fiscal year; and (D) the Proposed Transactions.

     
(p) Notice of Tax Exemption. If an exemption is
obtained at any time from any present or future Taxes that would
otherwise be due in respect of any payment to be made by the
Company under this Note or any other Loan Document, the Company
shall promptly deliver to the Holder a certified copy of the
documents evidencing that exemption.

     
(q) Payment of Taxes. The Company shall pay all
Taxes, assessments and other governmental charges of any kind
imposed on or in respect of its income or any of its businesses
or assets, or in respect of Taxes and other amounts it is
required by law to withhold from amounts paid by it to its
employees, before any penalty or interest accrues on the amount
payable and before any Lien or other encumbrance on any of its
property exists as a result of nonpayment; provided,
however, that the Company shall not be required by this
Section to pay any amount if it is diligently contesting its
alleged obligation to pay that amount in good faith through
appropriate proceedings and maintains appropriate reserves or
other provisions in respect of the contested amount as may be
required under GAAP.

     
(r) Limitation on Indebtedness. The Company and its
Subsidiaries, on a consolidated basis, shall not directly or
indirectly incur, create, assume, guarantee, become liable,
contingently or otherwise, with respect to, or otherwise become
responsible for the payment of, including, without limitation,
by way of assumption or acquisition in a business combination
any Indebtedness other than (i) pursuant to this Note, the
other Loan Documents, the Investment Agreement or the other
Transaction Documents; (ii) any Indebtedness that is by its
terms expressly subordinated in all respects to the Obligations,
on terms and conditions satisfactory to the Holder, in its sole
discretion; (iii) Indebtedness evidenced by the Novartis
Note from time to time outstanding, which Indebtedness shall be
pari passu with the Obligations, and shall not be subordinated
in right of payment to the Obligations; and
(iv) Indebtedness secured by Permitted Liens.

     
(s) Restricted Payments. The Company shall not, and
shall not permit any Subsidiary, directly or indirectly, to make
a Restricted Payment other than, so long as no Event of Default
shall have occurred and be continuing, or shall result
therefrom, (i) any Restricted Payment made out of the Net
Cash Proceeds of the substantially concurrent sale of, or made
by exchange for, Equity Interests of the Company (other than
Disqualified Equity Interests and other than Equity Interests
issued or sold to a Subsidiary of the Company or an employee
stock ownership plan or to a trust established by the Company or
any of its Subsidiaries for the benefit of their employees) or a
substantially concurrent capital contribution received by the
Company from its stockholders; or (ii) any purchase,
repurchase, redemption, defeasance or other acquisition or
retirement for value of Indebtedness of the Company or any
Guarantor that is subordinated to the Obligations, made by
exchange for, or out of the proceeds of the substantially
concurrent sale of, Indebtedness of the Company;
provided, that such newly issued Indebtedness is
subordinated to the Obligations on the same terms as the
Indebtedness so purchased, repurchased, redeemed, defeased,
acquired or retired.

     
(t) Notices. The Company shall promptly give notice
to the Holder of: (i) any change in the Company or its
operations that would adversely affect the interests of the
Holder in any material respect; (ii) any default by the
Company in its obligations under the documentation governing any
Indebtedness; (iii) any breach by the Company of any other
contract; (iv) any litigation involving the Company or a
Subsidiary; (v) any material governmental notifications and
proceedings, including approval and denial notices by the FDA;
(vi) any Person which has become a 5-percent stockholder,
as such term is defined for purposes of Section 382 of the
IRC and the Treasury Regulations (final, temporary and, as
applicable, proposed) promulgated thereunder; and (vii) any
other development that causes or could reasonably be expected to
cause a Material Adverse Effect.

29

 

     
(u) Cancellation of Indebtedness. The Company shall
not cancel any claim or debt owing to it, except for reasonable
consideration negotiated on an arm’s length basis and in
the ordinary course of its business consistent with past
practices and settlement of accounts in the ordinary course of
business.

     
(v) Subsidiaries. Neither the Company nor any
Subsidiary shall acquire or create another Subsidiary without
the prior consent of the Holder, and such newly acquired or
created Subsidiary shall promptly execute a Subsidiary Guaranty
and a Subsidiary Security Agreement, and such other documents
and such other documents and instruments as the Holder may
reasonably require, and the Company or such Subsidiary acquiring
or creating such new Subsidiary shall pledge the stock of the
newly acquired or created Subsidiary as Collateral.

     
(w) Limitation on Issuance of Equity Interests of
Subsidiaries. The Company shall not sell, and shall not
permit any Subsidiary, directly or indirectly, to issue or sell,
any shares of Equity Interests of a Subsidiary (including
options, warrants, or other rights to purchase shares of such
Equity Interests) except: (i) to the Company or a wholly
owned Subsidiary of the Company; or (ii) issuances of
director’s qualifying shares or sales to foreign nationals
of shares of Equity Interests of foreign Subsidiaries, to the
extent required by applicable law.

     
(x) Maintenance of NOLs. Neither the Company, any
Subsidiary nor any Affiliate of any thereof, shall enter into
any transaction which could reasonably be expected to cause the
Company, any Subsidiary or any Affiliate of any thereof to
undergo an Ownership Change, other than an Excepted Transaction.
For purposes of this Section 7(x), “Excepted
Transaction” shall mean (a) any transaction
contemplated under the Loan Agreement, this Note, the other Loan
Documents, the Investment Agreement, the Registration Rights
Agreement and any other certificate, instrument, agreement or
other document executed or to be executed in connection
therewith, and (b) any other financing transaction
undertaken or to be undertaken by the Company (i) with the
prior written consent of the Holder (such consent not to be
unreasonably withheld or delayed), or (ii) with respect to
which the Board of Directors has considered the effect of such
proposed financing transaction on the availability to the
Company, any Subsidiary or any Affiliate of any thereof of net
operating losses or associated tax benefits pursuant to
Section 382 of the IRC arising from or related to such
proposed financing transaction, and obtained the advice of
outside counsel or accountants that such transaction has been
structured to minimize any negative effect on the availability
of such net operating losses or associated tax benefits. For the
avoidance of doubt, and notwithstanding anything to the contrary
herein, any change in the availability of net operating losses
arising from or related to any Excepted Transactions shall not
constitute a breach of or a Default or an Event of Default under
this Note.

     
(y) Intellectual Property. (i) The Company
shall conduct continuously and operate actively its business
according to good business practices, including, without
limitation, maintaining all of its licenses, Patents,
Copyrights, Know-How, design rights, trade names, trade secrets
and trademarks and taking all actions necessary to enforce and
protect the validity and enforceability of all intellectual
property rights or other right included in the Company
Intellectual Property.

     
(ii) The Company (either itself or through licensees) will
not do any act, or omit to do any act, whereby any of its
Patents may become forfeited, abandoned or dedicated to the
public, unless the Holder gives its prior written consent, which
shall not be unreasonably withheld or delayed.

     
(iii) The Company (either itself or through licensees) will
continue to use each of its Trademarks in order to maintain such
Trademark in full force free from any claim of abandonment for
non-use, unless the Holder gives its prior written consent,
which shall not be unreasonably withheld or delayed.

     
(iv) The Company will not (either itself or through
licensees) do any act whereby any of its Copyrights may fall
into the public domain, unless the Holder gives its prior
written consent, which shall not be unreasonably withheld or
delayed.

     
(v) The Company (either itself or through licensees) will
not infringe the Intellectual Property rights of any other
Person.

30

 

     
(vi) The Company will notify the Holder immediately if it
knows, or has reason to know, that any application or
registration relating to any Company Intellectual Property may
become forfeited, abandoned or dedicated to the public, or of
any adverse determination or development (including the
institution of, or any such determination or development in, any
proceeding in the United States Patent and Trademark Office, the
United States Copyright Office or any agency, court or tribunal
in any country) regarding, the Company’s ownership of, or
the validity of, or the enforceability of, any Company
Intellectual Property or the Company’s right to register
the same or to own and maintain the same.

     
(vii) Whenever the Company, either by itself or through any
agent, employee, licensee or designee, shall file an application
for the registration of any Intellectual Property with the
United States Patent and Trademark Office, the United States
Copyright Office or any similar office or agency in any other
country or any political subdivision thereof, the Company shall
promptly report such filing to the Holder. Upon the request of
the Holder, the Company shall execute and deliver to the Holder,
any and all agreements, instruments, documents, and papers as
the Holder may reasonably request to evidence the Holder’s
security interest in any Copyright, Patent or Trademark and the
goodwill and general intangibles of the Company relating thereto
or represented thereby.

     
(viii) The Company will take all reasonable and necessary
steps to maintain and pursue each application (and to obtain the
relevant registration) and to maintain each registration of all
Company Intellectual Property owned by it.

     
(ix) In the event that any Company Intellectual Property is
infringed upon or misappropriated or diluted by a third party,
the Company shall (i) take such actions as reasonably
necessary to protect such Company Intellectual Property; and
(ii) promptly notify the Holder after the Company learns
thereof and, to the extent, in its reasonable judgment, the
Company determines it appropriate under the circumstances, sue
for infringement, misappropriation or dilution, to seek
injunctive relief where appropriate and to recover any and all
damages for such infringement, misappropriation or dilution.

     
(z) Investments. The Company shall not make or
permit to remain outstanding any Investments except:

		
	 	     
    (i) Investments outstanding on the date hereof and
    identified in Schedule 7(z)(i).
	 
	 	     
    (ii) Deposit accounts with banks.
	 
	 	     
    (iii) Investments in the Company or a Subsidiary.
	 
	 	     
    (iv) Hedging Agreements entered into in the ordinary course
    of the Company’s financial planning and not for speculative
    purposes.
	 
	 	     
    (v) Advances to officers, directors and employers of such
    Person in the ordinary course of business (provided that
    such advances have been approved by a majority of the
    disinterested members of the Board of Directors).
	 
	 	     
    (vi) Accounts receivable in the ordinary course of business
    on reasonable and customary trade terms.
	 
	 	     
    (vii) Other investments in accordance with the Investment
    Guidelines.

     
(aa) Subsidiary Indebtedness. The Company shall not
permit the aggregate principal amount of Indebtedness (other
than the Obligations) of its Subsidiaries at any time to exceed
$1,000,000.

     
(bb) Restrictive Agreements. (i) The Company
shall not, directly or indirectly, enter into, incur or permit
to exist any agreement or other arrangement that prohibits,
restricts or imposes any condition upon (A) the ability of
the Company or any Subsidiary to create, incur or permit to
exist any Lien upon any of its property or assets; or
(B) the ability of any Subsidiary to pay dividends or other
distributions with respect to any shares of its capital stock or
to make or repay loans or advances to the Company or any other
Subsidiary or to guarantee Indebtedness of the Company or any
other Subsidiary.

31

 

     
(ii) (A) The foregoing paragraph, however, shall not
apply to (x) restrictions and conditions imposed by law or
by this Note, the other Loan Documents, the Investment Agreement
and the other contracts, agreements and other documents entered
into in connection therewith; (y) restrictions and
conditions existing on the date hereof identified on
Schedule 7(bb)(ii), (but shall apply to any
extension or renewal of, or any amendment or modification
expanding the scope of, any such restriction or condition); and
(z) restrictions and conditions imposed by the Novartis
Option and License Agreement and the Novartis Note as each
exists on the Closing Date (but shall apply to any extension or
renewal of, or any amendment or modification expanding the scope
of, any such restriction or condition); and
(B) Clause (A) of paragraph (i) above
shall not apply to (x) restrictions or conditions imposed
by any agreement relating to secured Indebtedness permitted by
this Note if such restrictions or conditions apply only to the
property or assets securing such Indebtedness; and
(y) customary provisions in leases and other contracts
restricting the assignment thereof.

     
(cc) Limitation on Layering. Notwithstanding the
provisions of Section 7(r), the Company shall not incur any
Indebtedness that is subordinate or junior in right of payment
to the Obligations, and senior in any respect in right of
payment to any Indebtedness permitted under clause (iii) of
Section 7(r).

     
(dd) Novartis Note. The Company shall not at any
time prior to the Repayment Date make any payment in cash, or
permit any payment to be made in cash, under the Novartis Note,
whether for principal, interest or otherwise, except as
expressly permitted under, and in accordance with, the
Investment Agreement.

     
(ee) Clinical Trials. The Company will take all
reasonable and necessary steps to pursue clinical evaluations
related to the approvability or approval of product candidates
including making all necessary filings with the FDA or other
authority. The Company will not voluntarily cease any such
material clinical evaluations without the Holder’s approval.

     
(gg) SEC Filing Compliance. The Company shall file
all required reports, schedules, registration statements and
other documents with the SEC. Each report, registration
statement, definitive proxy statement and information statement,
including any certifications pursuant to Section 302 or
Section 906 of the Sarbanes-Oxley Act of 2002 or similar
certifications, filed by the Company or any Subsidiary under the
Securities Act or under Sections 13(a), 13(c), 14 and 15(d)
of the Exchange Act (collectively, the “Company Ongoing
SEC Documents”), with the SEC, (i) shall comply in
all material respects as to form with the applicable
requirements under the Securities Act or the Exchange Act, as
the case may be; and (ii) as of its filing date, shall not
contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances
under which they are made, not misleading; and each of the
balance sheets contained in or incorporated by reference into
any such Company Ongoing SEC Document (including the related
notes and schedules thereto) shall fairly present the financial
position of the entity or entities to which it relates as of its
date, and each of the statements of operations and changes in
stockholders’ equity and cash flows or equivalent
statements in such Company Ongoing SEC Documents (including any
related notes and schedules thereto) shall fairly present the
results of operations, changes in stockholders’ equity and
changes in cash flows, as the case may be, of the entity or
entities to which it relates for the periods to which it
relates, in each case in accordance with GAAP consistently
applied during the periods involved, except, in each case, as
may be noted therein, subject to normal year-end audit
adjustments in the case of unaudited statements.

     
(hh) Non-Domestic Intellectual Property; Disbursement
Account.

     
(i) As soon as practicable after the date that the Company
shall acquire any item of Non-Domestic Intellectual Property,
but in no event later than the date twenty Business Days
thereafter, the Company shall take all actions necessary or
advisable to perfect to the maximum extent permitted or
recognized under applicable law (or attain the functional
equivalent of perfection of) the security interest granted to
the Holder in Non-Domestic Intellectual Property constituting
Collateral, other than specific items of Non-Domestic
Intellectual Property reasonably requested by the Company in
writing, including a description thereof in reasonable detail
(including without limitation identifying information for such
item, a description thereof, its location and an estimated
Dollar value therefor), which the Holder reasonably consents in
writing is not subject to perfection (or the functional
equivalent of perfection cannot be obtained) of the security
interest therein; provided, however, that any
failure to so perfect during such twenty Business Day period, as
may be

32

 

extended pursuant to this Section 7(hh)(i), other than a
failure arising from the Company or any agent of the Company
failing to take any such necessary or advisable action, shall
not during such period constitute an Event of Default hereunder
or under any other Loan Document. Upon the perfection (or
the functional equivalent of perfection) of the Holder’s
security interest in an items of Non-Domestic Intellectual
Property constituting Collateral, the Company shall as soon as
reasonably practicable cause the delivery to the Holder of a
legal opinion of its outside counsel with respect to such
perfection (or functional equivalent) in form consistent,
to the extent applicable, with other legal opinions delivered by
the Company’s counsel under this Note and the other
Transaction Documents and reasonably acceptable to the Holder.
Upon written request by the Company to the Holder for consent to
the non-perfection (or functional equivalent) of the
security interest in any item of Non-Domestic Intellectual
Property, complying with this Section 7(hh)(i), the Holder
shall endeavor to deliver a determination with respect to such
request within two Business Days after receipt thereof,
provided, that in the event the Holder shall not render
such determination within two Business Days, the twenty Business
Day period during which the Borrower is otherwise obligated
pursuant to this Section 7(hh)(i) to perfect the security
interest in such item shall automatically be extended by the
number of Business Days equal to the number of Business Days
after such two Business Day period through the date the Holder
renders such determination.

     
(ii) Upon the written request of the Holder, the Company
shall establish a deposit account, or reconstitute the
Disbursement Account, as a deposit or other account in which the
Holder has an ownership interest in addition to the security
interest granted pursuant to the Security Documents, or such
other account acceptable to the Holder and the Company, that is
in either case obtainable from a reputable financial institution
of recognized standing, which account shall in any case be
subject to the terms and conditions governing withdrawals set
forth in Section 7(b), into which the funds in the
Disbursement Account shall be transferred (if such new account
is separate from the Disbursement Account), and as to which all
interest and other income generated by the funds deposited
therein shall be owned exclusively by the Company and paid by
the Bank into a separate deposit account of the Company, and
which account shall thereafter be the Disbursement Account for
all purposes hereunder and under the other Loan Documents.

     
8.     Events of Default.

     
(a) If one or more of the following events (each an
“Event of Default”) occurs and is continuing,
the Holder shall be entitled to exercise any or all of the
remedies set forth in Section 8(b).

		
	 	     
    (i) The Company fails to pay any Obligation as and when
    that amount becomes due and payable.
	 
	 	     
    (ii) The Company (A) fails to perform or observe any
    covenant or agreement contained in Sections 7(a) - (d)
    (other than Section 7(c) to the extent capable of cure
    within 10 days of such failure), Sections 7(g) -
    (h), Section 7(i) (with respect to inspection rights),
    Sections 7(j) - (k), Sections 7(m) - (o),
    Sections 7(q) - (y) (other than clauses (ii),
    (iii) and (iv) of Section 7(y) to the extent
    capable of cure within 10 days of such failure), and
    Sections 7(aa) – (hh) to be performed or
    observed by it; or (B) fails to perform or observe any
    covenant or agreement other than those referred to in
    Section 8(a)(i) or clause (A) of this Subsection
    and does not remedy the failure on or before the 10th day
    after it occurs.
	 
	 	     
    (iii) Any representation or warranty of the Company in this
    Note or any other Loan Document proves to have been incorrect,
    incomplete or misleading in any material respect at the time it
    was made or deemed to have been made; provided,
    however, that from and after the Final Withdrawal Date,
    the Company’s inability to provide the certification
    described in Section 7(d)(iv)(B)(2) hereof shall not
    constitute an Event of Default under this Note or the other Loan
    Documents.
	 
	 	     
    (iv) Any of the Security Documents shall cease, for any
    reason, to be in full force and effect; or (ii) the Lien
    created by any of the Security Documents shall fail to
    constitute a Perfected Lien in the Collateral; provided,
    that (A) solely with respect to any individual item of
    Collateral having a fair market value of $25,000 (as reasonably
    determined by the Company in good faith and reasonably agreed to
    by the Holder) or less, such failure to maintain a Perfected
    Lien in such item of Collateral shall not constitute an Event of
    Default unless the Company does not remedy such failure on or
    before the 5th day

33

 

		
	 	
    after such failure occurs, (B) such failure to maintain a
    Perfected Lien in such item of Collateral shall not constitute
    an Event of Default if such failure results solely from any
    action or failure to act on the part of the Holder (following
    notice thereof from the Company) to maintain such Perfected Lien
    and which action or failure to act contravenes the provisions of
    this Note, the other Loan Documents or applicable law, and (C)
    notwithstanding anything herein or in any Loan Document to the
    contrary, the failure to perfect (or attain the functional
    equivalent of perfection of) the security interest granted to
    the Holder in any Non-Domestic Intellectual Property
    constituting Collateral prior to the date required therefor
    pursuant to Section 7(hh), shall not constitute an Event of
    Default.
	 
	 	     
    (v) The Company or any Subsidiary (A) fails to pay any
    of its other Indebtedness as and when that Indebtedness becomes
    due and payable; or (B) fails to perform or observe any
    covenant or agreement to be performed or observed by it
    contained in any other agreement or in any instrument evidencing
    any of its Indebtedness (and any cure period under such other
    agreement or instrument shall have expired) and, as a result of
    the failure, any other party to that agreement or instrument is
    entitled to exercise the right to accelerate the maturity of any
    amount owing thereunder.
	 
	 	     
    (vi) (A) A court enters a decree or order for relief
    with respect to the Company in an involuntary case under the
    Bankruptcy Code, which decree or order is not stayed or other
    similar relief is not granted under any applicable federal or
    state law; or (B) the continuance of any of the following
    events for 45 days unless dismissed, bonded or discharged:
    (x) an involuntary case is commenced against the Company,
    under any applicable bankruptcy, insolvency or other similar law
    now or hereafter in effect; or (y) a decree or order of a
    court for the appointment of a receiver, liquidator,
    sequestrator, trustee, custodian or other officer having similar
    powers over the Company, or over all or a substantial part of
    its property, is entered; or (z) a receiver, trustee or
    other custodian is appointed without the consent of the Company,
    for all or a substantial part of the property of the Company.
	 
	 	     
    (vii) (A) The Company commences a voluntary case under
    the Bankruptcy Code, or consents to the entry of an order for
    relief in an involuntary case or to the conversion of an
    involuntary case to a voluntary case under any such law or
    consents to the appointment of or taking possession by a
    receiver, trustee or other custodian for all or a substantial
    part of its property; or (B) the Company makes any
    assignment for the benefit of creditors; or (C) the Board
    of Directors adopts any resolution or otherwise authorizes
    action to approve any of the actions referred to in this
    Section 8(a)(vii).
	 
	 	     
    (viii) Any governmental authorization necessary for the
    performance of any obligation of the Company under this Note or
    the Loan Documents, or the consummation of the Proposed
    Transactions, is not or fails to remain valid and subsisting in
    full force and effect.
	 
	 	     
    (ix) Any governmental authority or court takes any action
    that, in the determination of the Holder could have a Material
    Adverse Effect on the Company.
	 
	 	     
    (x) One or more judgments for the payment of money in an
    aggregate amount in excess of $100,000 shall be rendered against
    the Company and the same shall remain undischarged for a period
    of 30 consecutive days during which execution shall not be
    effectively stayed, or any action shall be legally taken by a
    judgment creditor to attach or levy upon any assets of the
    Company to enforce any such judgment.
	 
	 	     
    (xi) The Company sells or otherwise disposes of all or a
    substantial part of its assets or ceases to conduct all or a
    substantial part of its business as now conducted, or merges or
    consolidates with any other Person without the prior written
    consent of the Holder.
	 
	 	     
    (xii) The Common Stock is suspended from trading on any of,
    or is not listed (and authorized) for trading on at least one
    of, The Nasdaq Stock Market, The Nasdaq SmallCap Market, The New
    York Stock Exchange, The American Stock Exchange or is not
    eligible for trading on the OTC Bulletin Board for an
    aggregate of 10 Trading Days in any 9 month-period.
	 
	 	     
    (xiii) There shall have occurred and be continuing an
    “Event of Default” (as such term is defined in the
    Novartis Note) under the Novartis Note.

34

 

     
(b) If any Event of Default occurs and is continuing, the
Holder may, by notice to the Company, (i) declare the
obligations of the Holder hereunder to be terminated, whereupon
those obligations shall terminate; and (ii) declare all
amounts payable hereunder or under the Loan Documents by the
Company that would otherwise be due after the date of
termination to be immediately due and payable, whereupon all
those amounts shall become immediately due and payable, all
without diligence, presentment, demand of payment, protest or
notice of any kind, which are expressly waived by the Company;
provided, however, that if any event
of a kind referred to in Section 8(a)(vi) or
Section 8(a)(vii) occurs, the obligations of the Holder
hereunder shall immediately terminate, and all amounts payable
hereunder by the Company that would otherwise be due after the
occurrence of that event shall become immediately due and
payable without any such notice or other formality waived by the
Company in this Section.

     
(c) Right of Setoff. If any amount payable hereunder
is not paid as and when due, the Company authorizes the Holder
and each Affiliate of the Holder to proceed, to the fullest
extent permitted by applicable law, without prior notice, by
right of setoff, banker’s Lien, counterclaim or otherwise,
against any assets of the Company in any currency that may at
any time be in the possession of the Holder or that Affiliate,
at any branch or office, to the full extent of all amounts due
and payable to the Holder hereunder.

     
(d) Rights Not Exclusive. The rights provided for
herein are cumulative and are not exclusive of any other rights,
powers, privileges or remedies provided by law.

     
9.     Governing Law. This Note
shall, pursuant to Sections 5-1401 and 5-1402 of the
General Obligations Law of the State of New York, be construed
and interpreted in accordance with the law of the State of New
York.

     
10.     Jurisdiction.
(a) The Company irrevocably submits to the jurisdiction of
the courts of the State of New York and of the United States
sitting in the Borough of Manhattan in respect of any action or
Proceeding relating in any way to this Note or any Note (a
“Proceeding”). The Company irrevocably appoints
CT Corporation System, which currently maintains a New York City
office situated at 111 Eighth Ave., 13th Floor, New York,
New York 10011, as its agent to receive service of process or
other legal summons for purposes of any Proceeding. So long as
the Company has any obligation under this Note, it will maintain
a duly appointed agent in New York City acceptable to the Holder
for the service of such process or summons and, if it fails to
maintain such an agent, any such process or summons may be
served on it by mailing a copy thereof by registered mail, or a
form of mail substantially equivalent thereto, addressed to the
Company at its address for notices hereunder.

     
(b) The Company irrevocably waives, to the fullest extent
permitted by applicable law, any objection that it may now or
hereafter have to the laying of venue of any Proceeding in the
Supreme Court of the State of New York, County of New York, or
the United States District Court for the Southern District of
New York and any claim that any Proceeding brought in any such
court has been brought in an inconvenient forum.

     
(c) The Company further irrevocably waives, to the fullest
extent permitted by applicable law, any claim that any
Proceeding should be dismissed or stayed by reason, or pending
the resolution, of any action or proceeding commenced by the
Company relating in any way to this Note or any other Loan
Document, whether or not commenced earlier. To the fullest
extent permitted by applicable law, the Company shall take all
measures necessary for the Proceeding to proceed to judgment
prior to the entry of judgment in any such action or proceeding
commenced by the Company.

35

 

     
11.     Notices. All notices and
other communications given to any party hereto pursuant to this
Note shall be in writing and shall be delivered by hand, fax or
email (and in the case of fax or email, receipt confirmed
immediately via telephone), or mailed first class postage
prepaid, registered or certified mail, addressed as follows:

		
	 	
    (a) If to the Company, to:
	 
	 	
    Emisphere Technologies, Inc.
	 	
    765 Old Saw Mill River Road
	 	
    Tarrytown, NY 10591
	 	
    Attention: Chief Executive Officer
	 	
    Phone: (914) 347-2220
	 	
    Fax: (914) 347-2498
	 	
    Email: mgoldberg@emisphere.com
	 
	 	
    with a copy to:
	 
	 	
    Brown Rudnick Berlack Israels LLP
	 	
    One Financial Center
	 	
    Boston, MA 02111
	 	
    Attn: Timothy C. Maguire, Esq.
	 	
    Fax: (617) 289-0413
	 
	 
	 	
    (b) If to the Holder, to:
	 
	 	
    MHR Institutional Partners IIA LP
	 	
    c/o MHR Fund Management LLC
	 	
    40 West 57th Street, 24th Floor
	 	
    New York, NY 10019
	 	
    Fax number: (212) 262-9356
	 	
    Attention: Hal Goldstein
	 	
    Phone: (212) 262-0005
	 	
    Fax: (212) 262-9356
	 	
    Email: hgoldstein@mhrfund.com
	 
	 	
    with a copy to:
	 
	 	
    Stroock & Stroock & Lavan LLP
	 	
    180 Maiden Lane
	 	
    New York, NY 10038
	 	
    Attn: Doron Lipshitz, Esq.
	 	
              Brett
    Lawrence, Esq.
	 	
    Phone: (212) 806-5400
	 	
    Fax: (212) 806-6006
	 	
    Email: dlipshitz@stroock.com
	 	
                blawrence@stroock.com

Each such notice or other communication shall for all purposes
be treated as being effective or having been given when
delivered, if delivered personally, by e-mail or facsimile with
confirmation of receipt or if by overnight courier or, if sent
by mail, upon actual receipt.

     
12.     Waivers. No failure or
delay on the part of the Holder in exercising any right
hereunder shall operate as a waiver of, or impair, any such
right. No single or partial exercise of any such right shall
preclude any other or further exercise thereof or the exercise
of any other right. No waiver of any such right or of any
obligation of the Company shall be effective unless given in
writing and executed by the Holder. No waiver of any such right
shall be deemed a waiver of any other right hereunder.

36

 

     
13.     Amendment. This Note may
be amended only by an instrument in writing executed by the
parties hereto.

     
14.     Replacement of Note.
Upon the loss, theft, destruction or mutilation of this Note,
and upon the execution and delivery by the Holder to the Company
of an affidavit in form and substance reasonably acceptable to
the Company attesting to such loss, theft, destruction or
mutilation, as the case may be, and an agreement, in form and
substance reasonably acceptable to the Company indemnifying and
holding the Company harmless from and against any liability or
damages arising therefrom, the Company shall execute and deliver
in lieu thereof a new Note, dated the date of the Note being
replaced, in the same principal amount.

     
15.     Further Assurances. The
Company shall do and perform, or cause to be done and performed,
all such further acts and things, and shall execute and deliver
all such other agreements, certificates, instruments and
documents, as the Holder may reasonably request in order to
carry out the intent and accomplish the purposes of this Note
and the consummation of the transactions contemplated hereby.

     
16.     Survival. The
obligations of the Company under
Section                     shall
survive the full repayment and the cancellation of this Note and
the termination of the other obligations of the Company
hereunder.

     
17.     Successors and Assigns.
This Note shall inure to the benefit of, be binding upon and be
enforceable by and against the parties hereto and their
respective successors and permitted assigns.

     
18.     Headings. The headings
of the sections of this Note are inserted for convenience only
and do not constitute a part of this Note.

     
19.     Nature of Obligations.
The Obligations under this Note, all other 11% Senior
Secured Convertible Notes issued by the Company in a form
substantially similar to this Note pursuant to the Investment
Agreement and the other Loan Documents referred to herein and
therein are executed and delivered in substitution for, but not
in satisfaction of, the obligations under the Loan Agreement and
the Loan Documents referred to therein (collectively, the
“Precedent Obligations”) and this Note shall
not constitute a refinancing, substitution or novation of the
Precedent Obligations.

[The Remainder of This Page is Intentionally Left Blank]

37

 

     
IN WITNESS WHEREOF, the Company has caused this Note to be
signed and to be dated the day and year first above written.

		
	 	
    EMISPHERE TECHNOLOGIES, INC.

			
	 	By: 	
     

		
	 	
     

	 	
    Name:
	 	
    Title:

Agreed and Assented to by Holder:

[Name of Holder]

		
	By: 	
     

 

Name: 

Title:

38

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