8-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

September 30, 2002
Date of Report
(Date of earliest event reported)

NASTECH PHARMACEUTICAL COMPANY INC.
(Exact name of registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of incorporation)

000-13789	11-2658569
(Commission File No.)	(IRS Employer Identification Number)

3450 Monte Villa Parkway
Bothell, Washington 98021
(Address of Principal Executive Offices)

425-908-3600
(Registrant’s Telephone Number, Including Area Code)

TABLE OF CONTENTS

	Item 2. Acquisition or Disposition of Assets
	Item 7. Financial Statements and Exhibits
SIGNATURES
INDEX TO EXHIBITS
EXHIBIT 2.1
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 99.1

Item 2. Acquisition or Disposition of Assets

     On September 30, 2002, Nastech Pharmaceutical Company Inc., a Delaware corporation (“Nastech”) reacquired all product, patent, trademark, licensing and regulatory rights related to the distribution of Nascobal® in the United States (the “Acquired Assets”) from Schwarz Pharma, Inc. (“Schwarz”). Nascobal is a pharmaceutical product designed for the treatment of vitamin B-12 deficiency. Pursuant to a License and Supply Agreement between Schwarz and Nastech (the “License Agreement”), Schwarz was the exclusive distributor of Nascobal in the United States prior to the acquisition. The acquisition terminated all rights and obligations outstanding pursuant to the License Agreement. Schwarz also relinquished its rights to receive any consideration from Nastech upon the future sale or license of intranasal scopolamine, a pharmaceutical product under development that is intended to prevent and treat motion sickness. In addition, Nastech and Schwarz agreed to terminate arbitration proceedings pending in connection with the License Agreement.

     Under the terms of the acquisition agreement, Nastech will pay Schwarz a total of $8,750,000 for the Acquired Assets, $1,500,000 of which was paid at closing, and the balance of which, plus interest, will be paid over a four-year period. Schwarz retained a security interest in the Acquired Assets to secure Nastech’s future principal and interest payments. The amount of consideration was determined by negotiation between the parties.

Item 7. Financial Statements and Exhibits

     (c)      Exhibits.

2.1	Asset Purchase Agreement dated as of September 30, 2002, between the registrant and Schwarz Pharma, Inc.
10.1	Loan Agreement dated as of September 30, 2002 between the registrant and Schwarz Pharma, Inc.
10.2	Security Agreement dated as of September 30, 2002 between the registrant and Schwarz Pharma, Inc.
10.3	Termination and Mutual Release Agreement dated as of September 30, 2002 between the registrant and Schwarz Pharma, Inc.
99.1	Press Release of registrant issued on October 1, 2002

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date:  October 15, 2002	NASTECH PHARMACEUTICAL COMPANY INC
	By:	/s/  Gregory L. Weaver
		Gregory L. Weaver Chief Financial Officer

INDEX TO EXHIBITS

Exhibit
Number	Description
2.1	Asset Purchase Agreement dated as of September 30, 2002, between the registrant and Schwarz Pharma, Inc.
10.1	Loan Agreement dated as of September 30, 2002 between the registrant and Schwarz Pharma, Inc.
10.2	Security Agreement dated as of September 30, 2002 between the registrant and Schwarz Pharma, Inc.
10.3	Termination and Mutual Release Agreement dated as of September 30, 2002 between the registrant and Schwarz Pharma, Inc.
99.1	Press Release of registrant issued on October 1, 2002

EX-2.1 3 v84849exv2w1.txt EXHIBIT 2.1 EXHIBIT 2.1 ASSET PURCHASE AGREEMENT Between SCHWARZ PHARMA, INC. and NASTECH PHARMACEUTICAL COMPANY, INC. Dated September 30, 2002 TABLE OF CONTENTS

Page ---- 1. DEFINITIONS.........................................................................1 1.1 Defined Terms................................................................1 1.2 Other Definitional and Interpretative Matters................................4 2. PURCHASE AND SALE OF ASSETS.........................................................4 2.1 Purchased Assets.............................................................4 2.2 Excluded Assets..............................................................5 2.3 Assumed Liabilities..........................................................5 2.4 Excluded Liabilities.........................................................5 2.5 Purchase Price...............................................................5 2.6 Further Assurances...........................................................6 2.7 Bulk Sales Law...............................................................6 2.8 Taxes........................................................................6 3. REPRESENTATIONS AND WARRANTIES OF SELLER............................................7 3.1 Organization.................................................................7 3.2 Enforceability of Agreement..................................................7 3.3 No Violation.................................................................7 3.4 Consents.....................................................................7 3.5 Title to Properties..........................................................8 3.6 Product Quality..............................................................8 3.7 Compliance with Laws.........................................................8 3.8 Legal Proceedings............................................................8 3.9 No Finder....................................................................8 4. REPRESENTATIONS AND WARRANTIES OF BUYER.............................................8 4.1 Organization.................................................................9 4.2 Enforceability of Agreement..................................................9 4.3 No Inconsistent Obligations..................................................9 4.4 Consents.....................................................................9 4.5 Legal Proceedings............................................................9 4.6 No Finder...................................................................10 5. CERTAIN COVENANTS..................................................................10 5.1 Tax Reporting and Allocation of Consideration...............................10 5.2 Effort to Close.............................................................10 5.3 Returned Products...........................................................10 5.4 Government Rebates, Chargebacks and Similar Items...........................10 5.5 Certain Names...............................................................10 5.6 Confidential Information....................................................11 5.7 NDC Number..................................................................11 5.8 Promotional Materials.......................................................11

-i- TABLE OF CONTENTS (Continued)

Page ---- 6. CLOSING............................................................................12 6.1 Documents to be Delivered by Seller.........................................12 6.2 Documents to be Delivered by Buyer..........................................12 6.3 Closing Date................................................................13 6.4 Contemporaneous Effectiveness...............................................13 7. CONDITIONS PRECEDENT TO CLOSING....................................................13 7.1 Legal Proceedings...........................................................13 7.2 Performance.................................................................13 7.3 Government Consents.........................................................13 8. INDEMNIFICATION....................................................................13 8.1 Survival of Representations and Warranties..................................14 8.2 General Agreement to Indemnify..............................................14 8.3 General Procedures for Indemnification......................................15 8.4 Indemnification Exclusive Remedy............................................16 9. MISCELLANEOUS PROVISIONS...........................................................17 9.1 Notices.....................................................................17 9.2 Expenses....................................................................18 9.3 Entire Agreement; Modification..............................................18 9.4 Assignment; Binding Effect; Severability....................................18 9.5 Governing Law...............................................................18 9.6 Submission to Jurisdiction..................................................18 9.7 Waiver of Jury Trial........................................................18 9.8 Execution in Counterparts...................................................19 9.9 Public Announcement.........................................................19 9.10 No Third-Party Beneficiaries................................................19 10. TERMINATION AND WAIVER.............................................................19 10.1 Termination.................................................................19 10.2 Effect of Termination.......................................................20 10.3 Waiver of Agreement.........................................................20 10.4 Amendment of Agreement......................................................20

-ii- TABLE OF CONTENTS (Continued)

Page ---- EXHIBITS Exhibit A - Form of Assignment and Bill of Sale [not included] Exhibit B - Form of Assumption Agreement [not included] Exhibit C - Form of Loan Agreement [executed copy filed as Exhibit 10.1 to Form 8-K filed on October 15, 2002] Exhibit D - Form of Security Agreement [executed copy filed as Exhibit 10.2 to Form 8-K filed on October 15, 2002] Exhibit E - Form of Trademark Security Agreement [not included] Exhibit F - Form of Patent Security Agreement [not included] Exhibit G - Form of Termination and Mutual Release Agreement [executed copy filed as Exhibit 10.3 to Form 8-K filed on October 15, 2002] Exhibit H - Form of Press Release [filed as Exhibit 99.1 to Form 8-K filed on October 15, 2002]

-iii- ASSET PURCHASE AGREEMENT This ASSET PURCHASE AGREEMENT, dated as of September 30, 2002 (this "Agreement"), is by and between Nastech Pharmaceutical Company, Inc., a Delaware corporation (the "Buyer") and Schwarz Pharma, Inc., a Delaware corporation (the "Seller"). WITNESSETH: WHEREAS, Buyer and Seller entered into that certain License and Supply Agreement, dated as of July 25, 1997 (as amended on November 24, 2000, the "License Agreement") in respect of the pharmaceutical product Nascobal; and WHEREAS, Seller wishes to sell, assign and transfer to Buyer and Buyer wishes to purchase from Seller all of Seller's right, title and interest in and to Nascobal arising out of the License Agreement or otherwise for the consideration and on the terms specified herein. NOW THEREFORE, in consideration of the premises, the mutual promises made herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. 1.1 Defined Terms. Capitalized terms used in this Agreement, including in the Recitals hereto, shall have the meanings given below or provided parenthetically herein: "Affiliate" of any Person means any Person, directly or indirectly controlled by, controlling or under common control with, such Person. For purposes of this Agreement, "control" means the power to direct the management and policies of a Person, whether through the ownership of voting securities, by agreement or otherwise. "Assumed Liabilities" means the liabilities and obligations of Seller assumed by Buyer pursuant to the Assumption Agreement and Section 2.3. "Best Efforts" means, as to any party obligated to use its Best Efforts to accomplish a particular objective, that the obligated party is required to make a diligent, reasonable and good faith effort to accomplish the applicable objective. Such obligation, however, does not require that the obligated party act in a manner that would be contrary to normal commercial practices in order to accomplish the objective. The fact that the objective is not actually accomplished is no indication that the obligated party did not in fact utilize its Best Efforts in attempting to accomplish the objective. "Business" means the development, manufacture, marketing, sale and distribution of Nascobal in the Territory. "Business Day" means a day that is not a Saturday, a Sunday or a statutory or civic holiday in the States of Wisconsin or Washington or any other day on which the principal offices of either Seller or Buyer are closed or become closed prior to 2:00 p.m. local time whether in -1- accordance with established company policy or as a result of unanticipated events, including adverse weather conditions. "Closing" means the closing of the transactions described in Article 6. "Closing Date" means the date of the Closing as determined pursuant to Section 6.3. "Code" means the Internal Revenue Code of 1986, as amended. "Collateral" has the meaning given in the Security Agreement. "Encumbrance" means any lien, claim, charge, security interest, mortgage, pledge, easement, conditional sale or other title retention agreement, covenant or other similar restrictions affecting the Purchased Assets. "Excluded Assets" means the properties and assets of the Business excluded from the Purchased Assets by Section 2.2. "Excluded Liabilities" means the liabilities and obligations that are not assumed by Buyer as provided in Section 2.4. "FDA" means the U.S. Food and Drug Administration. "GAAP" means U.S. generally accepted accounting principles consistently applied in accordance with past practices. "Governmental Body" means any legislative, executive or judicial unit of any governmental entity (federal, state or local) or any department, commission, board, agency, bureau, official or other regulatory, administrative or judicial authority thereof. "Governmental Permits" means all the governmental permits and licenses, certificates of inspection, approvals or other authorizations issued to Seller with respect to the Business and necessary for the operation of the Business. "Inventory" means any finished and unsold Nascobal units which Seller holds title to or is in possession immediately after the Closing. "IRS" means the U.S. Internal Revenue Service. "License Agreement" has the meaning given in the recitals hereto. "Loan Agreement" means a Loan Agreement in the form set forth at Exhibit C hereto. "Nascobal" means an intranasal form of cyanocobalamin/vitamin B-12 in all dosage strengths and sizes that may, pursuant to applicable laws and regulations, be manufactured, marketed and sold in the Territory under the approved NDA, together with all expansions and -2- improvements to Nascobal which may be included in any supplement, modification or addition to the NDA. "NDA" means New Drug Application No. 19-722. "Patent Security Agreement" means a Security Agreement in the form set forth at Exhibit F hereto. "Permitted Encumbrances" means (i) statutory Encumbrances for current taxes, assessments or other governmental charges not yet delinquent or the amount or validity of which is being contested in good faith by appropriate proceedings; (ii) mechanics', carriers', workers', repairers' and similar Encumbrances arising or incurred in the ordinary course of business that are not in the aggregate material to the Business; (iii) Liens created in connection with any Transaction Agreement; and (iv) such other imperfections in title, charges, easement, restrictions and encumbrances which do not in the aggregate have a material adverse effect on the Purchased Assets, taken as a whole. "Person" means any individual, corporation, partnership, limited liability company, firm, association, joint venture, joint stock company, trust, unincorporated organization or other entity, or any government or regulatory, administrative or political subdivision or agency, department or instrumentality thereof. "Proprietary Information" means all information (whether or not protectable by patent, copyright, mask works or trade secret rights) not generally known in the relevant trade (except for patents), including, but not limited to, works of authorship, inventions, discoveries, patentable subject matter, patents, patent applications, industrial models, industrial designs, trade secrets, trade secret rights, software, works, copyrightable subject matters, copyright rights and registrations, mask works, know-how, trademarks, trade names, service marks, emblems, logos, insignia and related marks and registrations, specifications, technical manuals and data, libraries, blueprints, drawings, proprietary processes, product information and development work-in-process. "Purchase Price" has the meaning assigned in Section 2.5. "Purchased Assets" has the meaning assigned in Section 2.1. "Security Agreement" means a Security Agreement in the form set forth at Exhibit D hereto. "Termination and Mutual Release Agreement" means a Termination and Mutual Release Agreement in the form set forth at Exhibit G hereto. "Territory" means the United States and its territories and possessions. "Third Party" means any Person not an Affiliate of the other referenced Person or Persons and not including the parties hereto or their Affiliates. -3- "Trademark Security Agreement" means a Security Agreement in the form set forth at Exhibit E hereto. "Transaction Agreements" mean this Agreement and, when executed and delivered by the parties hereto, the exhibits hereto and the agreements, documents and instruments contemplated hereby and thereby. 1.2 Other Definitional and Interpretative Matters. Unless otherwise provided, for purposes of this Agreement, the following rules of interpretation shall apply: Accounting Terms. All accounting terms not specifically defined in this Agreement shall be construed in accordance with GAAP. Calculation of Time Period. When calculating the period of time before which, within which or following which any act is to be done or step taken pursuant to this Agreement, the date that is the reference date in calculating such period shall be excluded. If the last day of such period is a non-Business Day, the period in question shall end on the next succeeding Business Day. Gender and Number. Any reference in this Agreement to gender shall include all genders, and words imparting the singular number only shall include the plural and vice versa. Headings. The provision of a Table of Contents, the division of this Agreement into Articles, Sections and other subdivisions and the insertion of headings are for convenience of reference only and shall not affect or be utilized in construing or interpreting this Agreement. All references in this Agreement to any "Section" are to the corresponding Section of this Agreement unless otherwise specified. Herein. The words such as "herein", "hereinafter", "hereof" and "hereunder" refer to this Agreement as a whole and not merely to a subdivision in which such words appear unless the context otherwise requires. Including. The word "including" or any variation thereof means "including, without limitation" and shall not be construed to limit any general statement that it follows to the specific or similar items or matters immediately following it. Schedules and Exhibits. The Schedules and Exhibits attached to this Agreement shall be construed with and as an integral part of this Agreement to the same extent as if the same had been set forth verbatim herein. 2. Purchase and Sale of Assets. 2.1 Purchased Assets. Upon the terms and subject to the conditions of this Agreement and in reliance on the representations and warranties contained herein, on the Closing Date, Seller shall grant, bargain, sell, transfer, assign, convey and deliver to Buyer, and Buyer shall purchase, acquire and accept from Seller, all of Seller's right, title and interest in, to and under the Purchased Assets. For purposes of this Agreement, "Purchased Assets" shall mean all -4- the assets, properties and rights set forth or described in this Section 2.1 (except in each case for the Excluded Assets), whether or not any of such assets, properties or rights have any value for accounting purposes or are carried or reflected on or specifically referred to in Seller's books or financial statements: (a) all rights of Seller arising under or by virtue of the License Agreement; (b) any existing mailing lists, customer lists and sales reports related exclusively to the Business; (c) all Inventory; and (d) all advertising, marketing and promotional material of Seller that is related exclusively to the Business. 2.2 Excluded Assets. Notwithstanding Section 2.1, it is hereby expressly acknowledged and agreed that the Purchased Assets shall not include, and Seller is not selling, transferring, assigning, conveying or delivering to Buyer, and Buyer is not purchasing, acquiring or accepting from Seller, any properties, assets, rights and interests of Seller or its Affiliates that do not exclusively relate to the Business (the "Excluded Assets"). 2.3 Assumed Liabilities. On the Closing Date, and subject to Sections 5.3 and 5.4, Buyer shall accept, assume and agree to pay, perform or otherwise discharge, in accordance with the respective terms and subject to the respective conditions thereof, all Assumed Liabilities. "Assumed Liabilities" shall mean all obligations and liabilities in respect of or stemming from any action taken by Buyer in connection with the Business prior to the Closing Date, including, without limitation, Buyer's manufacture, handling, sale or marketing of Nascobal, whether fixed, contingent, known or unknown, and whether arising before or after the Closing. 2.4 Excluded Liabilities. Except for the Assumed Liabilities, Buyer shall not assume any obligations or liabilities of Seller (the "Excluded Liabilities"), and Seller shall pay, satisfy and perform all of such Excluded Liabilities (other than the Assumed Liabilities), whether fixed, contingent, known or unknown, and whether existing as of the Closing or arising thereafter, which shall include, without limitation, (a) any violation by Seller of any law, ordinance or regulation in effect prior to the Closing, (b) any liability of Seller for expenses or taxes, if any, in connection with, resulting from or arising out of this Agreement or the transactions contemplated hereby, except as expressly provided in Section 2.8 hereof, (c) any liability of Seller under or arising by reason of this Agreement, (d) any compensation, benefits or other obligations or liabilities of Seller to independent contractors, consultants, employees or other service providers, in each case that are not related to the Business; or (e) except as expressly provided by any Transaction Agreement, all obligations and liabilities in respect of, or stemming from, any action taken by Seller in connection with its handling, marketing, sale or distribution of Nascobal prior to the Closing Date. -5- 2.5 Purchase Price. (a) Amount. The aggregate purchase price (the "Purchase Price") shall be the sum of (i) Eight Million Seven Hundred Fifty Thousand Dollars ($8,750,000) for the Purchased Assets (other than the Inventory), the Assumed Liabilities and the Termination and Mutual Release Agreement and (ii) the product of the total number of Nascobal units comprising the Inventory, as certified by an officer of Seller on the Closing Date, times $6.00 (such product, the "Inventory Purchase Price"). (b) Payment of Purchase Price. The Purchase Price shall be due from Buyer to Seller as of the Closing Date as follows: (i) on the Closing Date, Buyer shall pay to Seller a portion of the Purchase Price equal to One Million Five Hundred Thousand Dollars ($1,500,000) by wire transfer of immediately available funds to such account or accounts as are designated by Schwarz at least one Business Day prior to the Closing Date; and (ii) Buyer shall pay the remaining balance of the Purchase Price by delivering to Seller the Note in favor of Seller issued pursuant to the Loan Agreement. Buyer shall, upon receipt of the Inventory from Seller, pay the Inventory Purchase Price to Seller by wire transfer of immediately available funds to the account described in the foregoing sentence. On the Closing Date, Buyer shall execute the Loan Agreement and the Note provided for therein, evidencing Buyer's obligation to pay the unpaid balance of the Purchase Price, and the Security Agreement, the Patent Security Agreement and the Trademark Security Agreement, granting a first priority lien in favor of Seller with respect to the Collateral. 2.6 Further Assurances. (a) Performance of Obligations. Seller and Buyer shall use Best Efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable to carry out all of their respective obligations under this Agreement and to consummate the transactions contemplated by this Agreement. (b) Further Conveyances and Assumptions. After the Closing Date, Seller and Buyer shall, and shall cause their Affiliates to, execute, acknowledge and deliver all such further conveyances, notices, assumptions, releases and acquittances and such other instruments, and shall take such further actions, as may be necessary or appropriate to assure fully to Buyer and its respective successors or assigns, all of the properties, rights, titles, interests, estates, remedies, powers and privileges intended to be conveyed to Buyer hereunder and to assure fully to Seller and its Affiliates and their successors and assigns, the assumption of the liabilities and obligations intended to be assumed by Buyer hereunder and to otherwise make effective the transactions contemplated by this Agreement. 2.7 Bulk Sales Law. Buyer hereby waives compliance by Seller with the requirements and provisions of any "bulk-transfer" laws of any jurisdiction that may otherwise be applicable with respect to the sale of any or all of the Purchased Assets to Buyer. 2.8 Taxes. Buyer shall be responsible for the payment of all sales, use, excise, transfer, value added and similar taxes imposed by any Governmental Body in the State of -6- Washington in connection with the transactions contemplated herein but not for any income or capital gains tax liability of Seller. 3. Representations and Warranties of Seller. Seller represents and warrants to Buyer as follows: 3.1 Organization. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite power and authority to conduct its business. 3.2 Enforceability of Agreement. Seller has the full corporate power and authority to enter into and execute the Transaction Agreements and to carry out the transactions contemplated thereby in accordance with their respective terms. Except as contemplated by the Transaction Agreements, there are no outstanding contracts, demands, commitments or other agreements or arrangements under which Seller is or may become obligated to sell, transfer or assign any of the Purchased Assets. The Transaction Agreements and all transactions required thereunder to be performed by Seller have been duly and validly authorized and approved by all necessary corporate action and duly and validly executed and delivered on behalf of Seller by its duly authorized officers. The Transaction Agreements constitute the valid and legally binding obligation, subject to general equity principles, of Seller, enforceable against Seller in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the rights of creditors generally. 3.3 No Violation. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated herein will (a) result in a violation or breach of, or constitute a default under (with or without the giving of notice or lapse of time or both) (i) the certificate of incorporation or bylaws of Seller, (ii) any term or provision of any indenture, note, mortgage, bond, security agreement, loan agreement, guaranty, pledge, license or other instrument, contract, agreement or commitment, (iii) any writ, order, judgment, decree, law, rule, regulation, or ordinance, (iv) any applicable approval, ruling or order of or any exemption by any Governmental Body, or (v) any other commitment or restriction, to which Seller is a party or by which it or any of the Purchased Assets is subject or bound, except to the extent that any such violation, breach or default with respect to the matters specified in clauses (ii) through (v) could not reasonably be expected to have a material adverse effect on the Purchased Assets, taken as a whole; or (b) result in (i) the creation of any Encumbrance on any of the Purchased Assets, other than Permitted Encumbrances, (ii) the acceleration or creation of any material obligation of Seller, (iii) the forfeiture of any material right or privilege of Seller, or (iv) the forfeiture of any material right or privilege of Seller which may affect Seller's ability to perform under this Agreement. 3.4 Consents. The execution and delivery of this Agreement by Seller and the consummation of the transactions contemplated by this Agreement (a) other than notification to the FDA, do not require the consent, approval or action of, or any filing with or notice to, any person, firm or other entity, or any Governmental Body, (b) except for approvals that have already been obtained, do not require consent or approval of any of Seller's shareholders or -7- members of Seller's board of directors pursuant to any business combination, takeover or other similar law, rule, regulation or ordinance, and (c) other than notification to the FDA, do not impose any other term, condition or restriction on Buyer or the Purchased Assets pursuant to any business combination, takeover or other similar statute, rule or regulation. 3.5 Title to Properties. Except as set forth in the License Agreement, Seller has, and upon consummation of the transactions contemplated by this Agreement at the Closing, Buyer will have, good and marketable title to all of the Purchased Assets, free and clear of any and all Encumbrances of any kind or character, other than Permitted Encumbrances. 3.6 Product Quality. No Nascobal units included in the Inventory are adulterated within the meaning of the United States Food, Drug and Cosmetic Act (21 U.S.C. Section 301, et seq.) and the regulations promulgated thereunder, as currently in effect. 3.7 Compliance with Laws. Seller has at all times conducted, and is presently conducting, the Business so as to comply with all laws, ordinances and regulations applicable to the conduct or operation of the Business or the ownership or use of the Purchased Assets, in each case except where the failure to comply would not, individually or in the aggregate, have a material adverse effect on any of the Purchased Assets, taken as a whole. 3.8 Legal Proceedings. There is no claim, action, suit, proceeding, investigation or inquiry pending before any federal, state or other court or governmental or administrative agency or threatened against the Business or any of the Purchased Assets, or relating to the transactions contemplated by this Agreement that could reasonably be expected to have a material adverse effect on the Purchased Assets or the results of operations of the Business, nor does Seller know or have reasonable grounds to know of any basis for any such claim, action, suit, proceeding, investigation, or inquiry. Seller is not a party to or subject to the provisions of any judgment, order, writ, injunction, decree or award of any court, arbitrator or governmental, regulatory or administrative official, body or authority that relates to the Purchased Assets, taken as a whole, or that might affect the transactions contemplated by this Agreement. 3.9 No Finder. Seller has not taken any action that would give to any Person a right to a finder's fee or any type of brokerage commission in relation to, or in connection with, the transactions contemplated by this Agreement. EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE 3, THE SELLER MAKES NO REPRESENTATIONS OR WARRANTIES AND SPECIFICALLY DISCLAIMS ANY STATUTORY OR IMPLIED WARRANTIES. 4. Representations and Warranties of Buyer. Buyer represents and warrants to Seller as follows: 4.1 Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite power and authority to conduct its business. -8- 4.2 Enforceability of Agreement. Buyer has the full corporate power and authority to enter into and execute the Transaction Agreements and to carry out the transactions contemplated thereby in accordance with their respective terms. The Transaction Agreements and all transactions required thereunder to be performed by Buyer have been duly and validly authorized and approved by all necessary corporate action and duly and validly executed and delivered on behalf of Buyer by its duly authorized officers. The Transaction Agreements constitute the valid and legally binding obligation, subject to general equity principles, of Buyer, enforceable against Buyer in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the rights of creditors generally. 4.3 No Inconsistent Obligations. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated herein will (a) result in a violation or breach of, or constitute a default under (with or without the giving of notice or lapse of time or both) (i) the certificate of incorporation or bylaws of Buyer, (ii) any term or provision of any indenture, note, mortgage, bond, security agreement, loan agreement, guaranty, pledge, license or other instrument, contract, agreement or commitment, (iii) any writ, order, judgment, decree, law, rule, regulation, or ordinance, (iv) any applicable approval, ruling or order of or any exemption by any administrative or governmental body, or (v) any other commitment or restriction, to which Buyer is a party or by which it or any of the Purchased Assets is subject or bound, except to the extent that any such violation, breach or default with respect to the matters specified in clauses (ii) through (v) could not reasonably be expected to have a material adverse effect on the Purchased Assets, taken as a whole; or (b) result in (i) the creation of any claim, lien, charge or encumbrance on any of the Purchased Assets, (ii) the acceleration or creation of any obligation of Buyer, (iii) the forfeiture of any material right or privilege of Buyer, or (iv) the forfeiture of any material right or privilege of Buyer which may affect Buyer's ability to perform under this Agreement. 4.4 Consents. The execution and delivery of this Agreement by Buyer and the consummation of the transactions contemplated by this Agreement (a) other than notification to the FDA, do not require the consent, approval or action of, or any filing with or notice to, any person, firm or other entity, or any Governmental Body, (b) except for approvals that have already been obtained, do not require consent or approval of any of Buyer's shareholders or members of Buyer's board of directors pursuant to any business combination, takeover or other similar law, rule, regulation or ordinance, and (c) other than notification to the FDA, do not impose any other term, condition or restriction on Buyer or the Purchased Assets pursuant to any business combination, takeover or other similar statute, rule or regulation. 4.5 Legal Proceedings. There is no claim, action, suit, proceeding, investigation or inquiry pending before any federal, state or other court or governmental or administrative agency or threatened relating to the transactions contemplated by this Agreement, nor does Buyer know or have reasonable grounds to know of any basis for any such claim, action, suit, proceeding, investigation, or inquiry. Buyer is not a party to or subject to the provisions of any judgment, order, writ, injunction, decree or award of any court, arbitrator or governmental, regulatory or -9- administrative official, body or authority that might affect the transactions contemplated by this Agreement. 4.6 No Finder. Buyer has not taken any action that would give to any Person a right to a finder's fee or any type of brokerage commission in relation to, or in connection with, the transactions contemplated by this Agreement. EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE 4, BUYER MAKES NO REPRESENTATIONS OR WARRANTIES PURSUANT TO THIS AGREEMENT AND SPECIFICALLY DISCLAIMS ANY STATUTORY OR IMPLIED WARRANTIES. 5. Certain Covenants. 5.1 Tax Reporting and Allocation of Consideration. Buyer and Seller recognize their mutual obligations pursuant to Section 1060 of the Code to timely file IRS Form 8594 (the "Asset Acquisition Statement") with each of their respective federal income tax returns. 5.2 Effort to Close. Each party hereto shall use its Best Efforts prior to Closing to obtain all regulatory approvals and consents and to cause the conditions to Closing hereunder to be satisfied as promptly as practicable. 5.3 Returned Products. (a) Any Nascobal units sold by Seller that are returned to either Buyer or Seller following the Closing Date shall be allocated 84% for the account of Seller and 16% for the account of Buyer; provided, however, that, once the aggregate value of all such returns accepted by Buyer and Seller after the Closing Date equals $379,000, all returns accepted by either Buyer or Seller shall thereafter be allocated 100% for the account of Buyer. Seller shall give written notice to Buyer, and Buyer shall give written notice to Seller, as applicable, of any such returns accepted by either such party on a monthly or quarterly basis as provided by Section 5.3(c). Within fifteen (15) Business Days after receipt of such notice, Buyer or Seller, as applicable, shall remit the appropriate amount (either 16%, 84% or 100%, in accordance with this Section 5.3(a)) of such returns by check to the other party. Seller and Buyer shall destroy such returned Nascobal units. Seller shall not take any action intended to induce any purchaser of Nascobal units to return such Nascobal units. (b) Any Nascobal units sold by Buyer that are returned to either Buyer or Seller following the Closing Date shall be allocated 100% for the account of the Buyer. Seller shall give written notice to Buyer of any such returns accepted by Seller since the later of the Closing Date or the last such notice sent to Buyer. Within fifteen (15) Business Days after receipt of such notice, Buyer shall remit 100% of the amount of such returns by check to Seller. Seller shall promptly forward such returned Nascobal units to Buyer. (c) Reporting Procedures. No later than fifteen (15) Business Days after (i) the end of each month during the first twelve months after the Closing Date and (ii) the end of each fiscal quarter following the one-year anniversary of the Closing Date, until the earlier of (A) the date -10- on which the aggregate value of all returns accepted by Buyer or Seller as contemplated by Section 5.3(a), above, equals $379,000 or (B) June 30, 2005, Seller and Buyer shall each furnish to the other a report in respect of the returns accepted by the reporting party during the preceding month or quarter, as applicable, setting forth the date, quantity and NDC number of such returns, the customer from whom each return was accepted, the amount credited to such customers, whether such returns were destroyed or delivered to Buyer as provided by Sections 5.3(a) and 5.3(b), and any other information regarding such returns as Buyer or Seller, as applicable, shall reasonably request. 5.4 Government Rebates, Chargebacks and Similar Items. (a) Seller shall be responsible for administering and satisfying all requests for rebates owing to the Government or pursuant to managed care agreements and similar arrangements (collectively, "Rebates") and all chargebacks, allowances, administrative fees and similar arrangements (collectively, "Chargebacks") in each case arising with respect to Nascobal units that are sold by Seller on or before the Closing Date. Seller shall bear 84% and Buyer shall bear 16% of the liability for any such Rebates and Chargebacks accepted by Seller as follows: (i) Seller shall give written notice to Buyer of any such Rebates and Chargebacks accepted and paid by Seller since the later of the Closing Date or the last such notice sent to Buyer; and (ii) within 20 days after receipt of such notice, Buyer shall remit by check to Seller an amount equal to 16% of the amount of such Rebates or Chargebacks paid by Seller. (b) Buyer shall be solely responsible for administering and satisfying all requests for Rebates and Chargebacks arising with respect to Nascobal units that are sold by Buyer after the Closing Date. Buyer shall be solely liable for any such Rebates and Chargebacks accepted by it. Seller shall give written notice to Buyer of any requests for such Rebates and Chargebacks received by Seller since the later of the Closing Date or the last such notice sent to Buyer. Buyer shall indemnify Seller for any Losses incurred by Seller in connection with any such Rebates or Chargebacks by check to Seller. 5.5 Certain Names. Notwithstanding anything herein to the contrary, no interest in or right to use the name "Schwarz" or any derivation thereof or any logo, trademark or trade name in which Seller has any interest and which is not used in the Business (collectively, the "Retained Names and Marks") is being transferred to Buyer pursuant to the transactions contemplated hereby. Buyer agrees not to, and will cause its Affiliates not to, directly or indirectly use the Retained Names and Marks in the distribution, marketing or sale Nascobal units. Buyer acknowledges and agrees to re-label all Inventory purchased from Schwarz hereunder prior to the distribution, marketing or sale thereof so that such re-labeled Inventory contains no references to the Retained Names and Marks. 5.6 Confidential Information. (a) Buyer agrees that it will not disclose to any Third Party or use for its own benefit, any Confidential Information (as defined below) of Seller. Notwithstanding the foregoing, no Person shall have an obligation hereunder to keep confidential the Confidential Information of the Seller if and to the extent disclosure thereof is required by applicable law, regulation, court -11- order, or accounting rule or custom, as determined by legal counsel or accountants to such party, as applicable (provided that unless unlawful prior to such disclosure the party disclosing such information shall notify the party which originally provided the information in advance of such disclosure). (b) Seller agrees that it will not disclose to any Third Party or use for its own benefit, any Confidential Information of Buyer. Notwithstanding the foregoing, no Person shall have an obligation hereunder to keep confidential the Confidential Information of the Buyer if and to the extent disclosure thereof is required by applicable law, regulation, court order, or accounting rule or custom, as determined by legal counsel or accountants to such party, as applicable (provided that unless unlawful prior to such disclosure the party disclosing such information shall notify the party which originally provided the information in advance of such disclosure). (c) For purposes of this Agreement, "Confidential Information" shall mean information of either party disclosed to the other party that was marked "confidential," "Trade secret" or a similar designation if in tangible form, designated as confidential at time of disclosure whether in oral or written form or which by its nature should be understood by a reasonable party in the pharmaceutical industry to constitute confidential information provided that "Confidential Information" shall not include information which (i) is already lawfully in the receiving party's possession or within its knowledge, including all information contained in the Transaction Agreements or constituting Purchased Assets, or lawfully becomes available or known to such other party; provided that such information is not known by such other party to be subject to another confidentiality agreement with or other obligation of secrecy to such party, or (ii) becomes generally available to the public other than as a result of an impermissible disclosure by such other party or its directors, officers, employees, agents or advisors. (d) Anything in the Agreement to the contrary notwithstanding, the obligations under subsections (a) and (b) above shall survive for five years from the Closing Date. 5.7 NDC Number. Buyer shall use its Best Efforts to establish its own NDC number for Nascobal and market Nascobal thereunder as soon as practicable. In no event shall Buyer, and Buyer shall cause its Affiliates not to, directly or indirectly distribute, market or sell Nascobal units pursuant to Sellers NDC number. For purposes of determining whether the Nascobal units were sold by Buyer or Seller pursuant to this Agreement, including, without limitation, Sections 5.3 and 5.4, Buyer and Seller shall refer to the NDC number under which the relevant Nascobal units were sold. 5.8 Promotional Materials. Seller shall take all commercially reasonable steps necessary or reasonably requested by Buyer to cease all promotional, marketing and sales efforts in respect of Nascobal as of the Closing Date, including, without limitation, removing all references to Nascobal from Seller's (and its Affiliates') websites and destroying or returning to Buyer all promotional, sales and marketing materials relating to Nascobal in Seller's possession; provided, however, that Seller reserves the right to retain one copy of any written materials in respect of Nascobal for a period of five (5) years, which materials shall remain subject to the confidentiality provisions contained herein, and shall be used solely to monitor compliance with Seller's legal obligations. -12- 6. Closing. At the Closing, the following transactions shall take place: 6.1 Documents to be Delivered by Seller. On the Closing Date, Seller shall deliver, or execute and deliver, the following documents and agreements to Buyer: (a) the Termination and Mutual Release Agreement; (b) an Assignment and Bill of Sale in substantially the form set forth as Exhibit A with respect to the Purchased Assets; (c) a certificate of an appropriate officer of Seller, dated the Closing Date, certifying on behalf of Seller to the best of his or her knowledge the fulfillment of the conditions set forth in Sections 7.1 to 7.3; (d) all such other bills of sale, assignments and other instruments of assignment, transfer or conveyance as Buyer may reasonably request or as may be otherwise necessary to evidence and effect the sale, transfer, assignment, conveyance and delivery of the Purchased Assets to Buyer and to put Buyer in ownership, actual possession or control of the Purchased Assets. 6.2 Documents to be Delivered by Buyer. On the Closing Date, Buyer (and, in the case of the Security Agreement, each Subsidiary of Buyer having an interest in the Collateral (as defined in the Security Agreement)) shall deliver, or execute and deliver, the following funds, documents and agreements to Seller: (a) the Loan Agreement and the Note provided for therein; (b) the Security Agreement; (c) the Trademark Security Agreement; (d) the Patent Security Agreement; (e) the Termination and Mutual Release Agreement; (f) an Assumption Agreement in substantially the form of Exhibit B with respect to the Assumed Liabilities; (g) a certificate of an appropriate officer of Buyer, dated the Closing Date, certifying on behalf of Buyer to the best of his or her knowledge the fulfillment of the conditions set forth in Sections 7.1 to 7.3; and (h) all such other documents and instruments as Seller may reasonably request or as may be otherwise reasonably necessary or desirable to evidence and effect the assumption by Buyer of the Assumed Liabilities. -13- 6.3 Closing Date. The Closing shall take place at the offices of Mayer, Brown, Rowe & Maw, located at 1675 Broadway, New York, New York 10019, at 10:00 a.m. on September 30, 2002, or at such other place or time or on such other date as Seller and Buyer may agree upon in writing (such date and time being referred to herein as the "Closing Date"). 6.4 Contemporaneous Effectiveness. All acts and deliveries prescribed by this Article 6, regardless of chronological sequence, shall be deemed to occur contemporaneously and simultaneously on the occurrence of the last act or delivery, and none of such acts or deliveries shall be effective until the last of the same has occurred. The Closing shall be effective as of 11:59 pm, New York City time, on the Closing Date. 7. Conditions Precedent to Closing. The respective obligations of Buyer and Seller to effect the Closing of the transactions contemplated hereby are subject to the fulfillment, prior to or at the Closing, of each of the following conditions: 7.1 Legal Proceedings. No order of any court or administrative agency shall be in effect that enjoins, restrains, conditions or prohibits consummation of this Agreement. 7.2 Performance. In the case of Buyer, Seller shall have performed in all material respects all obligations and agreements and complied in all material respects with all covenants and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing, including executing and delivering the agreements and certificates specified in Section 6.1 hereof. In the case of Seller, Buyer shall have performed in all material respects all obligations and agreements and complied in all material respects with all covenants and conditions required by this Agreement to be performed or complied with by it prior to or at the Closing, including executing and delivering the agreements and certificates specified in Section 6.2 hereof. 7.3 Government Consents. Seller and Buyer shall have received from any and all persons, firms and other legal entities, or any public or governmental authorities, bodies or agencies or judicial authority having jurisdiction over the transactions contemplated by this Agreement, or any part hereof, such consents, authorizations and approvals as are necessary for the consummation thereof, and all notices required to be given to government authorities shall have been given and all applicable waiting periods shall have expired. 8. Indemnification. The rights and obligations of Buyer and Seller under this Agreement shall be subject to the following terms and conditions: 8.1 Survival of Representations and Warranties. The representations and warranties of Buyer and Seller contained in this Agreement shall survive the Closing for five (5) years. Neither Seller nor Buyer shall have any liability whatsoever with respect to any such representations or warranties after such period. -14- 8.2 General Agreement to Indemnify. (a) Each party shall indemnify, defend and hold harmless the other party hereto and any director, officer or Affiliate of the other party (each an "Indemnified Party") from and against any and all claims, actions, suits, proceedings, liabilities, obligations, losses, and damages, amounts paid in settlement, interest, costs and expenses (including reasonable attorney's fees, court costs and other out-of-pocket expenses incurred in investigating, preparing or defending the foregoing) (collectively, "Losses") incurred or suffered by any Indemnified Party to the extent that the Losses arise by reason of, or result from (i) the failure of any representation or warranty of such party contained in this Agreement to have been true in all material respects when made and as of the Closing Date or (ii) the breach by such party of any covenant or agreement of such party contained in this Agreement to the extent not expressly waived in writing by the other party. (b) Seller further agrees to indemnify and hold harmless Buyer from and against any Losses incurred by Buyer arising out of, resulting from, or relating to: (i) the Excluded Liabilities; and (ii) Buyer's waiver of any applicable Bulk Sales laws. (c) Buyer further agrees to indemnify and hold harmless Seller from and against any Losses incurred by Seller with respect to: (i) any failure of Buyer to discharge any of the Assumed Liabilities whether known or unknown, accrued or contingent, or now or subsequently incurred; and (ii) any liability arising out of the operation of the Business by Buyer after the Closing Date. (d) The amount of the Indemnifying Party's liability under this Agreement shall be reduced by any applicable insurance proceeds or proceeds from other available indemnity rights actually received by, and other savings, including tax savings, that reduce the overall impact of the Losses upon, the Indemnified Party. (e) The Indemnifying Party's liability for all claims including those made under Section 8.2(a) shall be subject to the following limitations: (i) the Indemnifying Party shall have no liability for such claims until the aggregate amount of the Losses incurred shall exceed 1% of the Purchase Price, in which case the Indemnifying Party shall be liable for such excess Losses only and (ii) the Indemnifying Party's aggregate liability for all such claims shall not exceed the then outstanding balance owing to Seller pursuant to the Loan Agreement. The Indemnified Party may not make a claim for indemnification under Section 8.3(a) for breach by the Indemnifying Party of a particular representation or warranty after the expiration of the survival period specified in Section 8.1. (f) Except as provided by the next sentence, the rights to indemnification under Section 8 shall not be subject to set-off for any claim by the Indemnifying Party against any Indemnified Party, whether or not arising from the same event giving rise to such Indemnified Party's claim for indemnification. NOTWITHSTANDING ANY PROVISION HEREIN TO THE CONTRARY, IN THE EVENT THAT BUYER OR ANY OF ITS DIRECTORS, OFFICERS OR AFFILIATES IS THE INDEMNIFIED PARTY HEREUNDER, THE SOLE RECOURSE OF SUCH INDEMNIFIED PARTY FOR ANY CLAIM FOR LOSSES IN -15- CONNECTION WITH THIS AGREEMENT, THE OTHER TRANSACTION AGREEMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY SHALL BE TO SET OFF THE AMOUNT OF SUCH LOSSES AGAINST AMOUNTS OWING TO SELLER PURSUANT TO THE LOAN AGREEMENT. 8.3 General Procedures for Indemnification. (a) The Indemnified Party seeking indemnification under this Agreement shall promptly notify the party against whom indemnification is sought (the "Indemnifying Party") of the assertion of any claim, or the commencement of any action, suit or proceeding by any Third Party, in respect of which indemnity may be sought hereunder and shall give the Indemnifying Party such information with respect thereto as the Indemnifying Party may reasonably request, but failure to give such notice shall not relieve the Indemnifying Party of any liability hereunder (unless the Indemnifying Party has suffered material prejudice by such failure). The Indemnifying Party shall have the right, but not the obligation, exercisable by written notice to the Indemnified Party within 30 days of receipt of notice from the Indemnified Party of the commencement of or assertion of any claim, action, suit or proceeding by a Third Party in respect of which indemnity may be sought hereunder (a "Third-Party Claim"), to assume the defense and control the settlement of such Third-Party Claim that (i) involves (and continues to involve) solely money damages or (ii) involves (and continues to involve) claims for both money damages and equitable relief against the Indemnified Party that cannot be severed, where the claims for money damages are the primary claims asserted by the Third Party and the claims for equitable relief are incidental to the claims for money damages. (b) The Indemnifying Party or the Indemnified Party, as the case may be, shall have the right to participate in (but not control), at its own expense, the defense of any Third-Party Claim that the other is defending, as provided in this Agreement. (c) The Indemnifying Party, if it has assumed the defense of any Third-Party Claim as provided in this Agreement, shall not consent to a settlement of, or the entry of any judgment arising from, any such Third-Party Claim without the Indemnified Party's prior written consent (which consent shall not be unreasonably withheld) unless such settlement or judgment relates solely to monetary damages. The Indemnifying Party shall not, without the Indemnified Party's prior written consent, enter into any compromise or settlement that (i) commits the Indemnified Party to take, or to forbear to take, any action or (ii) does not provide for a complete release by such Third Party of the Indemnified Party with respect to such Third-Party Claim. The Indemnified Party shall have the sole and exclusive right to settle any Third-Party Claim, on such terms and conditions as it deems reasonably appropriate, to the extent such Third-Party Claim involves equitable or other non-monetary relief against the Indemnified Party, and shall have the right to settle any Third-Party Claim involving money damages for which Seller has not assumed the defense pursuant to this Section 8.3 with the prior written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed. (d) In the event an Indemnified Party shall claim a right to payment pursuant to this Agreement, such Indemnified Party shall send written notice of such claim to the Indemnifying Party. Such notice shall specify the basis for such claim with reasonable specificity. As -16- promptly as possible after the Indemnified Party has given such notice, and subject to the limitations set forth herein, the Indemnified Party and the Indemnifying Party shall establish the merits and amount of such claim by mutual agreement. (e) From and after the Closing, Buyer shall maintain customary property, casualty, business interruption and other insurance in respect of the Business in accordance with Buyer's general practices provided that in no event shall such insurance provide coverage in an amount less than five million dollars ($5,000,000) in the aggregate. Indemnification claims shall be reduced by and to the extent that an Indemnified Party shall have received or reasonably expects to receive proceeds under insurance policies, risk sharing pools, or similar arrangements specifically as a result of, and in compensation for, the subject matter of an indemnification claim by such indemnitee. (f) No Indemnified Party will be entitled to indemnification pursuant to this Section 8: (i) with respect to consequential damages consisting of business interruption or lost profits, or with respect to punitive damages; or (ii) with respect to any obligation, liability or matter, arising under laws, regulations or statutes that arise or are promulgated or announced after the Closing Date. (g) The Indemnified Party shall utilize all commercially reasonable efforts, consistent with normal practices and policies and good commercial practice, to mitigate such Losses. (h) Any amounts payable under this Section 8.3 shall, for Tax reporting purposes, be treated by Buyer and Seller as an adjustment to the Purchase Price and shall be calculated after giving effect to (i) any proceeds received from insurance policies covering the damage, loss, liability or expense that is the subject of the claim for indemnity and (ii) to the extent reasonably determinable the actual recognized Tax benefit to the indemnitee resulting from the damage, loss, liability or expense that is the subject of the indemnity. For purposes of this Section 8.3, an actual recognized Tax benefit is an actual reduction in Taxes payable or a refund of Taxes previously paid. 8.4 Indemnification Exclusive Remedy. The sole recourse and exclusive remedy of Buyer and Seller after the Closing Date for the breach of any representation, warranty, agreement or covenant contained in this Agreement, any certificate, agreement or instrument contemplated hereby, any document relating hereto or thereto contained in any Exhibits to this Agreement, or otherwise arising from Buyer's acquisition of the Purchased Assets or in connection with this Agreement, shall be to assert a claim for indemnification under the indemnification provisions of this Section 8. The only legal action which may be asserted by any party hereto or any Indemnified Party against any other party hereto with respect to any matter which is the subject of this Section 8 shall be a contract action to enforce, or to recover Losses for the breach of, this Agreement, in accordance with and subject to this Section 8. Without limiting the generality of the foregoing, no legal action based upon predecessor or successor liability, contribution, tort or strict liability may be maintained by any party hereto against any other party hereto with respect -17- to any matter that is the subject of this Section 8. In furtherance of the foregoing, Buyer, on behalf of itself, its Affiliates and Subsidiaries, hereby releases and discharges any directors, officers, stockholders, employees, representatives and agents of each party hereto, from any lawsuits, claims or actions in respect of this Agreement and the agreements, instruments, transactions contemplated hereby. 9. Miscellaneous Provisions. 9.1 Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given upon receipt if (i) mailed by certified or registered mail, return receipt requested, (ii) sent by Federal Express or other express carrier, fee prepaid, (iii) sent via facsimile with receipt confirmed, or (iv) delivered personally, addressed as follows or to such other address or addresses of which the respective party shall have notified the other. (a) If to Seller, to: 6140 W. Executive Drive Mequon, Wisconsin 53092 Attn: General Counsel Facsimile: (262) 242-1641 With a copy to: Mayer, Brown, Rowe & Maw 1675 Broadway New York, New York 10019 Attn: Philip O. Brandes, Esq. Facsimile: (212) 262-1910 (b) If to Buyer, to: Nastech Pharmaceutical Company, Inc. 3450 Monte Villa Parkway Bothell, Washington 98021 Attention: President Facsimile Number: (425) 908-3600 With a copy to: Wilson Sonsini Goodrich & Rosati, P.C. 530 Carillon Point Kirkland, Washington 98033 Attn: Patrick Schultheis, Esq. Facsimile: (425) 576-5899 9.2 Expenses. Except as otherwise provided in this Agreement, each party to this Agreement shall bear all the fees, costs and expenses that are incurred by it in connection with the transactions contemplated hereby, whether or not such transactions are consummated. 9.3 Entire Agreement; Modification. The agreement of the parties, which is comprised of this Agreement, the Exhibits hereto and the documents referred to herein, sets forth the entire agreement and understanding between the parties and supersedes any prior agreement or understanding, written or oral, relating to the subject matter of this Agreement. No -18- amendment, supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the party to be bound thereby. 9.4 Assignment; Binding Effect; Severability. This Agreement may not be assigned by either party hereto without the other party's written consent. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the successors, legal representatives and permitted assigns of each party hereto. The provisions of this Agreement are severable, and in the event that any one or more provisions are deemed illegal or unenforceable the remaining provisions shall remain in full force and effect unless the deletion of such provision shall cause this Agreement to become materially adverse to either party, in which event the parties shall use Best Efforts to arrive at an accommodation that best preserves for the parties the benefits and obligations of the offending provision. 9.5 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED EXCLUSIVELY IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS PRINCIPLES OF CONFLICTS OF LAW. 9.6 Submission to Jurisdiction. Each party hereby irrevocably submits to and accepts for itself and its properties, generally and unconditionally, the non-exclusive jurisdiction of the courts of the State of New York and of the U.S. District Court for the Southern District of New York, waives any defense of forum non conveniens and agrees to be bound by any judgment rendered thereby arising under or in respect of this Agreement, the Transaction Agreements or any related document or obligation. Each party further irrevocably designates and appoints the individual identified in Section 9.1 as its agent to receive service of process pursuant to the notification provisions thereof; provided that, unless otherwise provided by Applicable Law, any failure to mail such copy shall not affect the validity of the service of such process. If any agent so appointed refuses to accept service, the designating party hereby agrees that service of process sufficient for personal jurisdiction in any action against it in the applicable jurisdiction may be made by registered or certified mail, return receipt requested, to its address provided in Section 9.1. Each party hereby acknowledges that such service shall be effective and binding in every law or shall limit the right of any party to bring any action or proceeding against the other party in any other jurisdiction. 9.7 Waiver of Jury Trial. THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER TRANSACTION AGREEMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE COMPANY OR ANY MEMBER. EACH OF THE PARTIES HERETO ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THE PROVISION (AND EACH OTHER PROVISION OF EACH OTHER DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE PARTIES HERETO ENTERING INTO THIS AGREEMENT AND EACH SUCH OTHER TRANSACTION AGREEMENT. -19- 9.8 Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 9.9 Public Announcement. Promptly after the Closing, Nastech shall issue the press release attached hereto as Exhibit H. Except for such press release, neither Seller nor Buyer shall, without the approval of the other party, make any press release or other announcement concerning the existence of this Agreement or the terms of the transactions contemplated by this Agreement, except as and to the extent that any such party shall be so obligated by law, in which case the other party shall be advised and the parties shall use their Best Efforts to cause a mutually agreeable release or announcement to be issued; provided, however, that the foregoing shall not preclude communications or disclosures necessary to comply with accounting and German or U.S. federal securities law disclosure obligations. 9.10 No Third-Party Beneficiaries. Nothing in this Agreement, express or implied, is intended to or shall (a) confer on any Person other than the parties hereto and their respective successors or assigns any rights (including Third-Party beneficiary rights), remedies, obligations or liabilities under or by reason of this Agreement or (b) constitute the parties hereto as partners or as participants in a joint venture. This Agreement shall not provide Third Parties with any remedy, claim, liability, reimbursement, cause of action or other right in excess of those existing without reference to the terms of this Agreement. No Third Party shall have any right, independent of any right that exists irrespective of this Agreement, under or granted by this Agreement, to bring any suit at law or equity for any matter governed by or subject to the provisions of this Agreement. 10. Termination and Waiver. 10.1 Termination. This Agreement may be terminated at any time prior to the Closing Date by: (a) Mutual Consent. The mutual written consent of Buyer and Seller; (b) Court or Administrative Order. Buyer or Seller if there shall be in effect a non-appealable order of a court or government administrative agency of competent jurisdiction prohibiting the consummation of the transactions contemplated hereby. (c) The Buyer or Seller if the Closing shall not have occurred by December 31, 2002, 2002, provided that the terminating party is not otherwise in material default or breach of this Agreement. 10.2 Effect of Termination. In the event of the termination of this Agreement, this Agreement shall become void and have no effect. 10.3 Waiver of Agreement. Any term or condition hereof may be waived at any time prior to the Closing Date by the party hereto which is entitled to the benefits thereof; provided, however, that such action shall be evidenced by a written instrument duly executed on behalf of -20- such party. The failure of either party to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision nor shall it in any way affect the validity of this Agreement or the right of such party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach. 10.4 Amendment of Agreement. This Agreement may be amended with respect to any provision contained herein; provided, however, that such amendment shall be evidenced by a written instrument duly executed on behalf of each party hereto. [Signatures Next Page] -21- IN WITNESS WHEREOF, each of Buyer and Seller has caused this Asset Purchase Agreement to be duly executed on its behalf by its duly authorized officer as of the date first written above. SCHWARZ PHARMA, INC. By: /s/ Ron Stratton Dr. Ron Stratton, President and COO NASTECH PHARMACEUTICAL COMPANY, INC. By: /s/ Gregory Weaver Name: Gregory Weaver Title: CFO -22- EX-10.1 4 v84849exv10w1.txt EXHIBIT 10.1 EXHIBIT 10.1 LOAN AGREEMENT Between NASTECH PHARMACEUTICAL COMPANY, INC. as Borrower, and SCHWARZ PHARMA, INC., as Lender Dated September 30, 2002 LOAN AGREEMENT This LOAN AGREEMENT, dated as of September 30, 2002, is among NASTECH PHARMACEUTICAL COMPANY, INC., a Delaware corporation (the "Borrower"), and SCHWARZ PHARMA, INC., a Delaware corporation (the "Lender"). W I T N E S S E T H: WHEREAS, Borrower and Lender entered into that certain License and Supply Agreement, dated July 15, 1997 (as amended on November 24, 2000, the "License Agreement") in respect of the pharmaceutical product Nascobal; and WHEREAS, on September 30, 2002, Borrower and Lender entered into that certain Asset Purchase Agreement (the "Asset Purchase Agreement") for the sale to Borrower of Lender's right, title and interest in and to Nascobal arising under the License Agreement; and WHEREAS, Borrower desires to obtain a Loan from Lender in order to pay the unpaid portion of purchase price due to Lender pursuant to the Asset Purchase Agreement; and WHEREAS, Lender is willing, on the terms and subject to the conditions hereinafter set forth (including Article V), to make such Loan to Borrower; NOW THEREFORE, in consideration of the premises, the mutual promises made herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.1. Defined Terms. The following terms (whether or not underscored) when used in this Agreement, including its preamble and recitals, shall, except where the context otherwise requires, have the following meanings (such meanings to be equally applicable to the singular and plural forms thereof): "Affiliate" of any Person means any other Person which, directly or indirectly, controls, is controlled by or is under common control with such Person. A Person shall be deemed to be "controlled by" any other Person if such other Person possesses, directly or indirectly, power to vote 50% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managing general partners. "Agreement" means, on any date, this Loan Agreement as originally in effect on the Effective Date and as thereafter from time to time amended, supplemented, amended and restated, or otherwise modified and in effect on such date. "Annual Net Sales" means, for any Year, the Net Sales for such Year. 1 "Business" means the development, manufacturing, marketing, sale and distribution of Nascobal in the Territory. "Business Day" means any day which is neither a Saturday or Sunday nor a legal holiday on which banks are authorized or required to be closed in Seattle, Washington or Milwaukee, Wisconsin. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. "Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time. "Collateral" is defined in the Security Agreement. "Controlled Group" means all members of a controlled group of corporations and all members of a controlled group of trades or businesses (whether or not incorporated) under common control which, together with Borrower, are treated as a single employer under Section 414(b) or 414(c) of the Code or Section 4001 of ERISA. "Constating Documents" shall mean the certificate of incorporation and bylaws of Borrower. "Contingent Liability" means any agreement, undertaking or arrangement by which any Person guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the indebtedness, obligation or any other liability of any other Person (other than by endorsements of instruments in the course of collection), or guarantees the payment of dividends or other distributions upon the shares of any other Person. The amount of any Person's obligation under any Contingent Liability shall (subject to any limitation set forth therein) be deemed to be the outstanding principal amount (or maximum principal amount, if larger) of the debt, obligation or other liability guaranteed thereby. "Default" means any Event of Default or any condition, occurrence or event which, after notice or lapse of time or both, would constitute an Event of Default. "Dollar" and the sign "$" mean lawful currency of the United States. "Effective Date" means the date this Agreement becomes effective pursuant to Section 7.8. "Environmental Laws" means all applicable federal, state or local statutes, laws, ordinances, codes, rules, regulations and guidelines (including consent decrees and administrative orders) relating to public health and safety and protection of the environment. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute of similar import, together with the regulations thereunder, in each case 2 as in effect from time to time. References to sections of ERISA also refer to any successor sections. "FDA" means the U.S. Food and Drug Administration or any successor thereto. "FDCA" means the Food, Drug and Cosmetic Act, 21 U.S.C. 1 et seq., as amended, or corresponding provisions of subsequent superseding federal laws. "F.R.S. Board" means the Board of Governors of the Federal Reserve System or any successor thereto. "Hazardous Material" means (a) any "hazardous substance," as defined by CERCLA; (b) any "hazardous waste," as defined by the Resource Conservation and Recovery Act, as amended; (c) any petroleum product; or (d) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material or substance within the meaning of any other applicable federal, state or local law, regulation, ordinance or requirement (including consent decrees and administrative orders) relating to or imposing liability or standards of conduct concerning any hazardous, toxic or dangerous waste, substance or material, all as amended or hereafter amended. "herein," "hereof," "hereto," "hereunder" and similar terms contained in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular Section, paragraph or provision of this Agreement or such other Loan Document. "including" means including without limiting the generality of any description preceding such term. "Indebtedness" of any Person means, without duplication: (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (b) all obligations, contingent or otherwise, relative to the face amount of all letters of credit, whether or not drawn, and banker's acceptances issued for the account of such Person; (c) net liabilities of such Person under all interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, and all other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency exchange rates; 3 (d) whether or not so included as liabilities in accordance with GAAP, all obligations of such Person to pay the deferred purchase price of property or services, and indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse; and (e) all Contingent Liabilities of such Person in respect of any of the foregoing. For all purposes of this Agreement, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture in which such Person is a general partner or a joint venturer. "Lien" means any security interest, mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or otherwise), charge against or interest in property to secure payment of a debt or performance of an obligation or other priority or preferential arrangement of any kind or nature whatsoever. "Loan Documents" means, collectively, this Agreement, the Note, the Security Agreement, the Trademark Security Agreement, the Patent Security Agreement, and each other agreement, certificate, document or instrument delivered in connection therewith. "Maturity Date" means September 30, 2006. "Nascobal" means an intranasal form of cyanocobalamin/vitamin B-12 in all dosage strengths and sizes that may, pursuant to applicable laws and regulations, be manufactured, marketed and sold in the Territory under the NDA, together with all expansions and improvements to, or any variations and deviations of, Nascobal which may be included in any supplement, modification or addition to the NDA, or any other application for marketing approval filed with the FDA. "NDA" means New Drug Application No. 19-722. "Net Sales" means, with respect to Nascobal, the gross amount invoiced to unrelated third parties for Nascobal in the Territory, less: (a) trade and reasonable and customary cash discounts allowed; (b) refunds, rebates, chargebacks, retroactive price adjustments and any other allowances which effectively reduce the net selling price; and (c) returns, credits and allowances. Such amounts shall be determined from books and records maintained in accordance with GAAP, consistently applied. "Note" means a promissory note of Borrower payable to Lender, in the form of Exhibit A hereto (as such promissory note may be amended, endorsed or otherwise modified from time to 4 time), evidencing the Loan Amount and also means all other promissory notes accepted from time to time in substitution therefor or renewal thereof, including, without limitation, pursuant to Section 2.2. "Obligations" means all obligations (monetary or otherwise) of Borrower arising under or in connection with this Agreement, the Note and each other Loan Document. "Patent Security Agreement" means the Patent Security Agreement, substantially in the form attached as Exhibit B to the Security Agreement. "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "Pension Plan" means a "pension plan," as such term is defined in section 3(2) of ERISA, which is subject to Title IV of ERISA (other than a multiemployer plan as defined in section 4001(a)(3) of ERISA), and to which Borrower or any corporation, trade or business that is, along with Borrower, a member of a Controlled Group, may have liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. "Person" means any natural person, corporation, partnership, firm, limited liability company, association, trust, government, governmental agency or any other entity, whether acting in an individual, fiduciary or other capacity. "Plan" means any Pension Plan or Welfare Plan. "Quarter" means, as the case may be, the three months ending on March 31, June 30, September 30 or December 31 in any Year. "Security Agreement" means agreements substantially in the form attached as Exhibit B hereto to be delivered at Closing by Borrower. "Subsidiary" means, with respect to any Person, any corporation, partnership, joint venture, business trust or similar entity of which more than 50% of the outstanding equity interest having ordinary voting power to elect a majority of the Board of Directors (or equivalent) of such entity, or to control the management or policy of such entity (irrespective of whether or not at the time equity interests of any other class or classes or type of such entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned by such Person, or by one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries. "Territory" means the United States and its territories and possessions. "Trademark Security Agreement" means the Trademark Security Agreement, substantially in the form attached as Exhibit A to the Security Agreement. 5 "United States" or "U.S." means the United States of America, its fifty States and the District of Columbia. "Welfare Plan" means a "welfare plan," as such term is defined in section 3(1) of ERISA. "Year" means the twelve months ending September 30 of each calendar year. SECTION 1.2. Other Defined Terms. The following terms are defined in the Sections or other areas indicated:

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

SECTION 1.3. Use of Defined Terms. Unless otherwise defined or the context otherwise requires, terms for which meanings are provided in this Agreement shall have such meanings when used in each Note, Loan Document, notice and other communication delivered from time to time in connection with this Agreement or any other Loan Document. Capitalized terms not defined herein shall have the meanings given them in the Asset Purchase Agreement. SECTION 1.4. Cross-References. Unless otherwise specified, references in this Agreement and in each other Loan Document to any Article or Section are references to such Article or Section of this Agreement or such other Loan Document, as the case may be, and, unless otherwise specified, references in any Article, Section or definition to any clause are references to such clause of such Article, Section or definition. SECTION 1.5. Accounting and Financial Determinations. Unless otherwise specified, all accounting terms used herein or in any other Loan Document shall be interpreted, and all accounting determinations and computations hereunder or thereunder shall be made, in accordance with those generally accepted accounting principles in effect in the United States from time to time applied on a consistent basis ("GAAP"). 6 ARTICLE II LOAN AND NOTE SECTION 2.1. Loan. On the terms and subject to the conditions of this Agreement (including Article III), Lender agrees to loan to Borrower (the "Loan") an amount equal to $7,250,000 (the "Loan Amount"). SECTION 2.2. Note. Lender's Loan shall be evidenced by a Note payable to the order of Lender in a principal amount equal to the Loan Amount. SECTION 2.3. Repayments and Prepayments. Borrower shall repay in full the unpaid principal amount of the Loan, and all accrued and unpaid interest owing thereon, on the Maturity Date. Prior thereto, Borrower: (a) shall make a scheduled repayment of the outstanding principal amount, if any, of the Loan on a semi-annual basis in accordance with the following schedule: March 31, 2003: The lesser of (i) twenty percent (20%) of Net Sales for the preceding six-month period, or (ii) $1,375,000. September 30, 2003: An amount equal to: (i) the greater of $2,750,000 or twenty percent (20%) of Net Sales for the preceding twelve-month period; (ii) minus the amount paid by Borrower on March 31, 2003. March 31, 2004: The lesser of: (i) twenty percent (20%) of Net Sales for the preceding six-month period, or (ii) $1,000,000. September 30, 2004: An amount equal to: (i) the greater of $2,000,000 or twenty percent (20%) of Net Sales for the preceding twelve-month period; (ii) minus the amount paid by Borrower on March 31, 2004. March 31, 2005 The lesser of: (i) twenty percent (20%) of Net Sales for the preceding six-month period, or (ii) $625,000. September 30, 2005: An amount equal to: (i) the greater of $1,250,000 or twenty percent (20%) of Net Sales for the preceding twelve-month period (ii) minus the amount paid by Borrower on March 31, 2005. 7 March 31, 2006 The lesser of: (i) twenty percent (20%) of Net Sales for the preceding six-month period, and (ii) 50% of the remaining unpaid portion of the Loan Amount. September 30, 2006: An amount equal to the remaining unpaid portion of the Loan Amount (after taking into account all payments made pursuant to the above schedule), plus any remaining accrued but unpaid interest thereon; provided that in no event shall the aggregate principal payments made by Borrower exceed the Loan Amount. Each Loan payment due under this Section 2.3(a) shall be calculated on the basis of Borrower's reasonable estimate of the Net Sales in respect of the applicable period preceding such payment date. To the extent that Borrower's estimate of the Net Sales for any six-month period is less than the actual Net Sales for such six-month period, the Loan payment due under this Section 2.3(a) in respect of the next succeeding six-month period shall be adjusted accordingly; (b) may, from time to time on any Business Day, make a voluntary prepayment, in whole or in part, without any prepayment penalty, of the outstanding principal amount of the Loan; and (c) shall, immediately upon any acceleration of the Maturity Date of the Loan pursuant to Section 6.2 or Section 6.3, repay all of the unpaid principal amount of the Loan, unless, pursuant to Section 6.3, only a portion of the Loan is so accelerated. SECTION 2.4. Interest Provisions. Subject to Section 2.5, interest shall accrue on the outstanding Obligations hereunder at a rate of 7.5% per annum and shall be payable, without duplication: (a) on the Maturity Date; (b) on the date of any payment or prepayment, in whole or in part, of principal outstanding on the Loan; and (c) on that portion of the Loan which is accelerated pursuant to Section 6.2 or Section 6.3, immediately upon such acceleration. Interest accrued on Loans or other monetary Obligations arising under this Agreement or any other Loan Document after the date such amount is due and payable (whether on the Maturity Date, upon acceleration or otherwise) shall be payable upon demand. 8 SECTION 2.5. Post-Maturity Rates. After the date any principal amount of the Loan is due and payable (whether on the Maturity Date, upon acceleration or otherwise), or after any other monetary Obligation of Borrower shall have become due and payable, Borrower shall pay, but only to the extent permitted by law, interest (after as well as before judgment) on such amounts at a rate per annum equal to 15%. SECTION 2.6. Taxes. All payments by Borrower of principal of, and interest on, the Loan and all other amounts payable hereunder shall be made free and clear of and without deduction for any present or future excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or other charges of any nature whatsoever imposed by any taxing authority, including any imputed income taxes owed by Lender on account of the Loan but excluding franchise taxes, income taxes and any other taxes imposed on or measured by Lender's net income or receipts (such non-excluded items being called "Taxes"). In the event that any withholding or deduction from any payment to be made by Borrower hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then Borrower will (a) pay directly to the relevant authority the full amount required to be so withheld or deducted; (b) promptly forward to the Lender an official receipt or other documentation satisfactory to Lender evidencing such payment to such authority; and (c) pay to Lender such additional amount or amounts as is necessary to ensure that the net amount actually received by Lender will equal the full amount Lender would have received had no such withholding or deduction been required. Moreover, if any Taxes are directly asserted against Lender with respect to any payment received by Lender hereunder, Lender may pay such Taxes and Borrower will promptly pay such additional amounts (including any penalties, interest or expenses) as is necessary in order that the net amount received by such person after the payment of such Taxes (including any Taxes on such additional amount) shall equal the amount such person would have received had no such Taxes been asserted. If Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to Lender the required receipts or other required documentary evidence, Borrower shall indemnify Lender for any incremental Taxes, interest or penalties that may become payable by Lender as a result of any such failure. SECTION 2.7. Payments, Computations, etc. All payments by Borrower to Lender pursuant to this Agreement, the Note or any other Loan Document shall be made by Borrower without setoff, deduction or counterclaim, not later than 2:00 p.m., Milwaukee, Wisconsin time, on the date due, in same day or immediately available funds, to such account as Lender shall specify from time to time by notice to Borrower. Funds received after that time shall be deemed to have been received by Lender on the next succeeding Business Day. Any interest and fees shall be computed on the basis of the actual number of days (including the first day but excluding the last day) occurring during the period for which such interest or fee is payable over a year comprised of 365 days. Whenever any payment to be made hereunder shall be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business 9 Day and such extension of time shall be included in computing interest and fees, if any, in connection with such payment. SECTION 2.8. Application of Funds. Unless otherwise provided in this Article 2, all funds received by the Lender in respect of the Loan under the Loan Documents shall be applied toward the Obligations as follows: (a) First, to the payment of all reasonable fees, charges and other sums (with the exception of principal and interest) due and payable to the Lender under the Note, this Agreement or the other Loan Documents at such time including, without limitation, all reasonable costs, expenses, disbursements and losses which shall have been incurred or sustained by the Lender in or incidental to the collection of the Obligations hereunder or the powers and privileges of the Lender under this Agreement, the Note, or any of the other Loan Documents and in and towards the provision of adequate indemnity to the Lender against all taxes or Liens which by law shall have, or may have priority over the rights of the Lender in and to such funds; (b) Second, to the payment of the interest that is due and payable on the principal of the Note at the time of such payment; and (c) Third, to the payment of payments of principal on the Loan. ARTICLE III CONDITIONS TO BORROWING SECTION 3.1. Conditions Precedent to the Loan. Lender's obligation to make the Loan hereunder is subject to the following conditions precedent, in each case in form and substance satisfactory to Lender: (a) Lender shall have received from Borrower a certificate, dated the date of the making of the Loan, of its authorized officer as to (i) resolutions of its Board of Directors then in full force and effect authorizing the execution, delivery and performance of this Agreement, the Note, the Security Agreement, and each other Loan Document executed or to be executed by it; and (ii) the incumbency and signatures of those of its officers authorized to act with respect to this Agreement, the Note, the Security Agreement, and each other Loan Document executed by it, upon which certificate Lender may conclusively rely until it shall have received a further certificate of Borrower canceling or amending such prior certificate. (b) Lender shall have received its Note duly executed and delivered by Borrower. 10 (c) Lender shall have received from Borrower an executed copy of the Security Agreement, the Trademark Security Agreement and the Patent Security Agreement. (d) Lender shall have received Uniform Commercial Code financing statements (Form UCC-1), naming Borrower as the debtor and Lender as the secured party, or other similar instruments or documents, properly executed and suitable for filing under the Uniform Commercial Code of all jurisdictions as may be necessary or, in the opinion of Lender, desirable to perfect the security interest of Lender pursuant to the Loan Agreement. (e) The conditions set forth in Sections 7.1 through 7.3 of the Asset Purchase Agreement to the obligations of the Borrower to consummate the Asset Purchase shall have been satisfied in full (without amendment or waiver of, or any other forbearance to exercise any rights with respect to, any of the terms or provisions thereof by the Borrower), and the transactions contemplated in the Asset Purchase Agreement shall have been consummated. (f) All documents executed or submitted pursuant hereto by or on behalf of Borrower shall be reasonably satisfactory in form and substance to Lender. ARTICLE IV REPRESENTATIONS AND WARRANTIES In order to induce Lender to enter into this Agreement and to make the Loan hereunder, Borrower represents and warrants unto Lender as set forth in this Article IV. SECTION 4.1. Organization, Qualifications and Corporate Power, etc. (a) Borrower is a corporation duly formed, validly existing and in good standing under the laws of the State of Delaware and is duly licensed or qualified to transact business as a foreign corporation and is in good standing in each jurisdiction in which the nature of the business transacted by it or the character of the properties owned or leased by it requires such licensing or qualification, except where the failure to be so qualified or in good standing would not have a material adverse effect on Borrower. Borrower has the power and authority (i) to own and hold its properties and to carry on its business as now conducted and as currently proposed to be conducted and (ii) to execute, deliver and perform this Agreement and each other Loan Document. (b) Except for Atossa HealthCare, Inc. ("Atossa"), Borrower has no Subsidiaries. SECTION 4.2. Authorization of Agreements, etc. The execution and delivery by Borrower of this Agreement and each other Loan Document and the performance by Borrower of its obligations hereunder and thereunder, including the issuance and delivery of the Note, have been duly authorized by all requisite action and will not (a) violate (i) any existing provision of law, rule or regulation to which Borrower is subject, (ii) any existing order or decree of any court or other agency of government to which Borrower is subject, (iii) Borrower's Constating Documents, (iv) any provision of any indenture, agreement, contract or other instrument to 11 which Borrower, or any of its properties or assets is bound; or (b) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement, contract or other instrument; or (c) result in the creation or imposition of any Lien upon any of the properties or assets of Borrower, other than pursuant to the Security Agreement. SECTION 4.3. Government Approval, Regulation, etc. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or other Person is required for the due execution, delivery or performance by Borrower of this Agreement, the Note or any other Loan Document. Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. SECTION 4.4. Validity, etc. This Agreement constitutes, and the Note and each other Loan Document executed by Borrower will, on the due execution and delivery thereof, constitute, the legal, valid and binding obligations of Borrower enforceable in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally. SECTION 4.5. Litigation; Compliance with Law. Except as disclosed on Borrower's public filings with the Securities and Exchange Commission, there is no (i) action, suit, claim, proceeding or investigation pending or, to Borrower's best knowledge, threatened against or affecting Borrower, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, , except for (A) matters that are fully covered by insurance (subject to customary deductibles), and (B) matters that, if decided adversely to Borrower, reasonably could not be expected to have a material adverse effect on Borrower, (ii) arbitration proceeding relating to Borrower pending under collective bargaining agreements or otherwise, except for (A) matters that are fully covered by insurance (subject to customary deductibles), and (B) matters that, if decided adversely to Borrower, reasonably could not be expected to have a material adverse effect on Borrower, or (iii) governmental inquiry pending or, to Borrower's best knowledge, threatened against or affecting Borrower (including, without limitation, any inquiry as to the qualification of Borrower to hold or receive any license or permit, except for matters that, if decided adversely to Borrower, reasonably could not be expected to have a material adverse effect on Borrower), and to Borrower's best knowledge there is no basis for any of the foregoing. Borrower is not in default with respect to any order, writ, injunction or decree known to or served upon Borrower of any court or of any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign including, without limitation, FDA. Borrower has complied in all respects with all laws, rules, regulations and orders applicable to its business, operations, properties, assets, products and services, except to the extent that noncompliance could not reasonably be expected to have a material adverse effect on Borrower, and Borrower has all necessary permits, licenses and other authorizations required to conduct its business as conducted and as currently proposed to be conducted, except to the extent that the failure to have such permits, licenses or other authorizations could not reasonably be expected to have a material adverse effect on Borrower. 12 Borrower is not aware of its non-compliance with any existing or proposed law, rule, regulation or order, whether federal or state, which noncompliance could reasonably be expected to have a material adverse effect on Borrower. SECTION 4.6. Title to Properties. Borrower has good and marketable title to the Collateral and its other properties and assets and the Collateral and all such properties and assets are free and clear of all Liens, except for Liens permitted pursuant to Section 5.2.4. SECTION 4.7. Taxes. (a) Borrower has filed all material tax returns, federal, state, county, local and foreign, required to be filed by it, as well as all informational returns required of it. All material amounts of taxes shown as due on all such returns have been paid or are being contested in good faith. Each such material return and filing is true and correct in all material respects and Borrower neither has nor will have any additional material liability for taxes with respect to any return or other filing heretofore filed or which was required by law to be filed. All taxes which Borrower is required by law to withhold or collect, including sales and use taxes, and amounts required to be withheld for taxes of employees, have been duly withheld or collected and, to the extent required, have been paid over to the proper governmental authorities or are held in separate bank accounts for such purpose, other than the failure to withhold, collect or pay any amounts which, individually or in the aggregate, could not reasonably be expected to have a material adverse effect on Borrower. All such taxes with respect to which Borrower has become obligated pursuant to elections made by Borrower in accordance with generally accepted practice have been paid and adequate reserves have been established for all taxes accrued but not yet payable. (b) The federal income tax returns of Borrower have never been audited by the Internal Revenue Service and there are no extensions of statutes of limitations other than those that result from late filed returns. No deficiency assessment with respect to or proposed adjustment of Borrower's federal, state, county or local taxes is pending or, to Borrower's best knowledge, threatened, and Borrower is not aware of any fact which would constitute grounds for the assessment of any additional material taxes by any taxing authority with respect to the taxable years of Borrower beginning on or before the date hereof. Borrower has not granted or been requested to grant waivers of any statutes of limitations applicable to any material claim for taxes. There is no tax lien, whether imposed by any Federal, state, county or local taxing authority, outstanding against the assets, properties or business of Borrower. SECTION 4.8. Pension and Welfare Plans. During the twelve-consecutive-month period prior to the date of the execution and delivery of this Agreement and prior to the date of the making of the Loans hereunder, no steps have been taken to terminate any Pension Plan, and no contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a Lien under section 302(f) of ERISA. No condition exists or event or transaction has occurred with respect to any Pension Plan which might result in the incurrence by Borrower or any member of the Controlled Group of any material liability, fine or penalty. Neither Borrower nor any member of the Controlled Group has any contingent liability with respect to any post-retirement 13 benefit under a Welfare Plan, other than liability for continuation coverage described in Part 6 of Title I of ERISA. ARTICLE V COVENANTS SECTION 5.1. Affirmative Covenants. Borrower agrees with Lender that, until all Obligations have been paid and performed in full, Borrower will perform the obligations set forth in this Section 5.1. SECTION 5.1.1. Existence. Except as permitted by Section 5.2.1., Borrower will maintain its existence, rights and franchises in full force and effect. SECTION 5.1.2. Insurance. The Borrower will, and will cause each of its Subsidiaries to, maintain or cause to be maintained with responsible insurance companies insurance with respect to its properties and business against such casualties and contingencies and of such types and in such amounts as is customary in the case of similar businesses and will, upon request of the Lender, furnish to the Lender at reasonable intervals a certificate of an authorized officer of the Borrower setting forth the nature and extent of all insurance maintained by the Borrower and its Subsidiaries in accordance with this Section. SECTION 5.1.3. Compliance with Laws. Borrower will comply, and cause each of its Subsidiaries to comply, with all applicable laws, rules, regulations and orders, including Environmental Laws and ERISA, noncompliance with which could reasonably be expected to materially adversely affect its business or condition, financial or otherwise. Each of Borrower and its Subsidiaries will obtain all consents, approvals, licenses and permits required by federal, state, local and foreign law to carry on its business, except for such consents, approvals, licenses and permits which, if lacking, could not reasonably be expected to have a materially adverse effect on Borrower. SECTION 5.1.4. Taxes. Borrower will pay and discharge, and cause each of its Subsidiaries to pay and discharge, promptly all taxes, assessments and governmental charges or levies imposed upon it or its income or profits or in respect of its property, before the same shall become in default, as well as all lawful claims for labor and supplies or otherwise which, if unpaid, might become a lien or charge upon such properties or any part thereof; provided, however, that Borrower shall not be required to pay and discharge or to cause to be paid and discharged any tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and Borrower shall set aside on its books such reserves as are required by GAAP with respect to any such tax, assessment, charge, levy or claim so contested. SECTION 5.1.5. Further Assurances. Borrower will cure promptly or will cause any or all of its Subsidiaries to cure promptly any defects in the creation and issuance of the Note and in the execution and delivery of this Agreement and any other Loan Document, Borrower, at its reasonable expense, will promptly execute and deliver or will cause any or all of its Subsidiaries to execute and deliver promptly to Lender upon request all such other and further documents, 14 agreements and instruments in compliance with or pursuant to its covenants and agreements herein, and obtain any consents and take any further action as may be reasonably necessary or appropriate in connection therewith. SECTION 5.1.6. Default Notice. Borrower shall furnish, or shall cause to be furnished, to Lender as soon as practicable and in any event within five Business Days after Borrower becomes aware of the occurrence of each Default a statement setting forth details of such Default and the action that Borrower has taken and proposes to take with respect thereto. SECTION 5.1.7. Financial Information, Reports, Notices, etc. Borrower will furnish, or will cause to be furnished, to the Lender copies of the following financial statements, reports, notices and information: (a) immediately upon becoming aware of the institution of any steps by the Borrower or any other Person to terminate any Pension Plan, or the failure to make a required contribution to any Pension Plan if such failure is sufficient to give rise to a Lien under section 302(f) of ERISA, or the taking of any action with respect to a Pension Plan which could result in the requirement that the Borrower furnish a bond or other security to the PBGC or such Pension Plan, or the occurrence of any event with respect to any Pension Plan which could result in the incurrence by the Borrower of any material liability, fine or penalty, or any material increase in the contingent liability of the Borrower with respect to any post-retirement Welfare Plan benefit, notice thereof and copies of all documentation relating thereto; and (b) such other information respecting the condition or operations, financial or otherwise, of the Borrower or any of its Subsidiaries as the Lender may from time to time reasonably request. SECTION 5.1.8. Records and Audit. Borrower and its Affiliates shall keep full, true and accurate books of account containing all particulars that may be necessary for the purpose of showing the amounts payable to Lender under Section 2.3(a). Such books of account shall be kept at Borrower's principal place of business or the principal place of business of the appropriate Affiliate of Borrower to which this Agreement relates. Such books and the supporting data shall be open, at all reasonable times and upon reasonable notice during the term of this Agreement and for two Years after its termination, to the inspection of a firm of certified public accountants selected by Lender and reasonably acceptable to Borrower, for the limited purpose of verifying Borrower's payments under Section 2.3(a); provided, however, that such examination shall not take place more often than once each Year and shall not cover more than the preceding three Years, with no right to audit any period previously audited. Except as otherwise provided in this Section, the cost of any such examination shall be paid by Lender. In the event that any such inspection reveals a deficiency in excess of five percent (5%) of the reported royalty for the period covered by the inspection, Borrower shall promptly pay Lender the deficiency, plus interest, and shall reimburse Lender for the reasonable fees and expenses paid to such accountants in connection with their inspection. The parties agree that neither party shall be required to retain books and records with respect to the above other than books and records relating to the current Year and the immediately preceding three Years. 15 SECTION 5.1.9. Net Sales Reports. In any Quarter, Borrower shall, within 30 days after the end of each Quarter, deliver to Lender true and accurate reports, certified by an authorized officer of Borrower, setting forth the actual Net Sales for such Quarter. SECTION 5.2. Negative Covenants. Borrower agrees with Lender that, until all Obligations have been paid and performed in full, Borrower will comply with the restrictions set forth in this Section 5.2. SECTION 5.2.1. Consolidation, Merger, etc. Borrower will not, and will not permit any of its Subsidiaries to, liquidate or dissolve, or consolidate with, or merge into or with, any other corporation, or purchase or otherwise acquire all or substantially all of the assets of any Person (or of any division thereof) except (a) any such Subsidiary may liquidate or dissolve voluntarily into, and may merge with and into, Borrower or any other Subsidiary, and the assets or stock of any Subsidiary may be purchased or otherwise acquired by Borrower or any other Subsidiary; and (b) so long as no Default has occurred and is continuing or would occur after giving effect thereto, Borrower or any of its Subsidiaries may purchase all or substantially all of the assets of any Person, or acquire such Person by merger. The foregoing notwithstanding, Atossa may liquidate or dissolve voluntarily into, and may merge with and into, any other Person, and the assets or stock of Atossa may be purchased or otherwise acquired by any other Person; provided, in each case that, at the time of any such transaction, Atossa does not hold any assets comprising or rights material to the Business. SECTION 5.2.2. Modification of Certain Agreements. Borrower will not and will not permit its Subsidiaries to enter into, or consent to any amendment, supplement or other modification of any of the terms or provisions contained in, or applicable to, any agreement that relates to Nascobal if the effect could reasonably be expected to be materially adverse to the Business. SECTION 5.2.3. Transactions with Affiliates. Other than arrangements disclosed in Borrower's most recent Form 10-Q filed with the Securities and Exchange Commission, Borrower will not, and will not permit any of its Subsidiaries to, enter into, or cause, suffer or permit to exist any arrangement or contract with any of its other Affiliates unless such arrangement or contract is fair and equitable to Borrower or such Subsidiary and is an arrangement or contract of the kind which would be entered into by a prudent Person in the position of Borrower or such Subsidiary with a Person which is not one of its Affiliates. SECTION 5.2.4. Liens. Borrower will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon the Collateral except: (a) Liens granted or permitted under the Loan Documents; (b) Liens for taxes, assessments or other governmental charges or levies not at the time delinquent or thereafter payable without penalty or being diligently contested in 16 good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (c) Liens of carriers, warehousemen, mechanics, materialmen and landlords incurred in the ordinary course of business for sums not overdue or being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (d) judgment Liens in existence less than 30 days after the entry thereof or with respect to which execution has been stayed or the payment of which is covered in full (subject to a customary deductible) by insurance maintained with nationally recognized insurance companies; and (e) implied or express licenses pursuant to any agreements entered into in the ordinary course for the day-to-day operation of the Business, as described under Section 5.2.2. SECTION 5.2.5. Asset Dispositions, etc. Except as provided in Section 5.2.1, neither Borrower nor any of its Subsidiaries will sell, transfer, lease, contribute or otherwise convey, or grant options or other rights with respect to, all or substantially all of its assets or all or any material part of the Business, in each case other than the sale of product in the ordinary course of business. SECTION 5.2.6. Negative Pledges, Restrictive Agreements, etc. Neither Borrower nor any of its Subsidiaries will enter into any agreement (excluding this Agreement and any other Loan Document) prohibiting or restricting the creation or assumption of any Lien upon any item of Collateral or the ability of Borrower to amend or otherwise modify this Agreement or any other Loan Document or to perform its obligations hereunder and thereunder. ARTICLE VI EVENTS OF DEFAULT SECTION 6.1. Listing of Events of Default. Each of the following events or occurrences described in this Section 6.1 shall constitute an "Event of Default". SECTION 6.1.1. Non-Payment of Obligations. Borrower shall default in the payment when due of any principal of or interest on any Loan (and such default shall continue for five days from such due date), or Borrower shall default in the payment when due of any other Obligation (and such default shall continue unremedied for a period of 20 days after notice thereof shall have been given to Borrower by Lender). SECTION 6.1.2. Breach of Warranty. Any representation or warranty of Borrower made hereunder or in any other Loan Document or any other writing or certificate furnished by or on behalf of Borrower to Lender for the purposes of or in connection with this Agreement or any such other Loan Document (including any certificates delivered pursuant to Article III) is or shall be false when made in any material respect. 17 SECTION 6.1.3. Non-Performance of Certain Covenants and Obligations. Borrower shall default in the due performance and observance of any of its obligations under Section 5.1.6 or Section 5.2. SECTION 6.1.4. Non-Performance of Other Covenants and Obligations. Borrower shall default in the due performance and observance of any other agreement contained herein or in any other Loan Document, and such default shall continue unremedied for a period of 30 days after notice thereof shall have been given to Borrower by Lender. SECTION 6.1.5. Default on Other Indebtedness. A default shall occur in the payment due upon the final stated maturity of any Indebtedness (other than Indebtedness described in Section 6.1.1) of Borrower having a principal amount in excess of $250,000, or a default shall occur in the performance or observance of any obligation or condition with respect to such Indebtedness if the effect of such default is to accelerate the maturity of any such Indebtedness. SECTION 6.1.6. Judgments. Any judgment or order for the payment of money in excess of $250,000 not covered by insurance shall be rendered against Borrower or any of its Subsidiaries and either (a) enforcement proceedings shall have been commenced by any creditor upon such judgment or order; or (b) there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect. SECTION 6.1.7. Pension Plans. Any of the following events shall occur with respect to any Pension Plan (a) the institution of any steps by Borrower, any member of its Controlled Group or any other Person to terminate a Pension Plan if, as a result of such termination, Borrower or any such member could be required to make a contribution to such Pension Plan, or could reasonably expect to incur a liability or obligation to such Pension Plan, in excess of $250,000; or (b) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA. SECTION 6.1.8. Bankruptcy, Insolvency, etc. Borrower or any of its Subsidiaries shall (a) generally fail to pay, or admit in writing its inability or unwillingness to pay, debts as they become due; (b) apply for, consent to, or acquiesce in, the appointment of a trustee, receiver, sequestrator or other custodian for Borrower or any of its Subsidiaries or any property of any thereof, or make a general assignment for the benefit of creditors; 18 (c) in the absence of such application, consent or acquiescence, permit or suffer to exist the appointment of a trustee, receiver, sequestrator or other custodian for Borrower or any of its Subsidiaries or for a substantial part of its property and such trustee, receiver, sequestrator or other custodian shall not be discharged within 60 days, provided that Borrower and each Subsidiary hereby expressly authorizes Lender to appear in any court conducting any relevant proceeding during such 60-day period to preserve, protect and defend its rights under the Loan Documents; (d) permit or suffer to exist the commencement of any bankruptcy, reorganization, debt arrangement or other case or proceeding under any bankruptcy or insolvency law, or any dissolution, winding up or liquidation proceeding, in respect of Borrower or any of its Subsidiaries, and, if any such case or proceeding is not commenced by Borrower or each Subsidiary, such case or proceeding shall be consented to or acquiesced in by Borrower or such Subsidiary or shall result in the entry of an order for relief or shall remain for 60 days undismissed, provided that Borrower and each Subsidiary hereby expressly authorizes Lender to appear in any court conducting any such case or proceeding during such 60-day period to preserve, protect and defend their rights under the Loan Documents; or (e) take any action authorizing, or in furtherance of, any of the foregoing. SECTION 6.1.9. Impairment of Security, etc. Any Loan Document, or any Lien granted thereunder, shall (except in accordance with its terms), in whole or in part, terminate, cease to be effective or cease to be the legally valid, binding and enforceable obligation of Borrower or any Lien securing any Obligation shall, in whole or in part, cease to be a perfected Lien, subject only to those exceptions expressly permitted by such Loan Document. SECTION 6.2. Action if Bankruptcy. If any Event of Default described in clauses (a) through (d) of Section 6.1.8 shall occur, all of the outstanding principal amount of the Loan and all other Obligations shall automatically be and become immediately due and payable, without notice or demand. SECTION 6.3. Action if Other Event of Default. If any Event of Default (other than any Event of Default described in clauses (a) through (d) of Section 6.1.8) shall occur for any reason, whether voluntary or involuntary, and be continuing, Lender may by notice to Borrower declare all or any portion of the outstanding principal amount of the Loan and other Obligations to be due and payable, whereupon the full unpaid amount of such Loan and other Obligations which shall be so declared due and payable shall be and become immediately due and payable, without further notice, demand or presentment. SECTION 6.4. Reinstatement Option. From time to time after the occurrence of an Event of Default, Lender may, at its option (to be exercised in its sole discretion), require Borrower to grant Lender the exclusive right to distribute Nascobal in the Territory (the "Reinstatement Option") by sending Borrower a written notice stating that Lender has exercised such Reinstatement Option. In the event that Lender exercises the Reinstatement Option, Lender and Borrower shall, promptly and, in any event, within 10 Business Days, negotiate in good faith a mutually acceptable license and supply agreement (the "New License Agreement") which shall 19 be in form and substance substantially the same as the License Agreement; provided, however, that the New License Agreement shall provide that: (a) Lender, as distributor, shall be entitled to 100% of the Net Sales generated from Lender's distribution and sale of Nascobal, (b) Lender may require that the manufacture of the Products is transferred to its manufacturing facility. Borrower will do all things to assist Lender to effect such manufacturing transfer, (c) Lender's net profits, calculated on a post-Tax (including Taxes measured by Lender's income, but excluding Taxes that would have been owing had such Obligations otherwise been paid hereunder) basis shall offset the Obligations then owing hereunder, and (d) the New License Agreement shall terminate after all Obligations then owing hereunder are offset as described in clause (c) above. ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 7.1. Waivers, Amendments, etc. The provisions of this Agreement and of each other Loan Document may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by Borrower and Lender. No failure or delay on the part of Lender or the holder of any Note in exercising any power or right under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on Borrower in any case shall entitle it to any notice or demand in similar or other circumstances. No waiver or approval by Lender or the holder of any Note under this Agreement or any other Loan Document shall, except as may be otherwise stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval hereunder shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. SECTION 7.2. Notices. All notices and other communications provided to any party hereto under this Agreement or any other Loan Document shall be in writing or by facsimile and addressed, delivered or transmitted to such party at its address or facsimile number set forth below its signature hereto or at such other address or facsimile number as may be designated by such party in a notice to the other parties. Any notice, if mailed and properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when received; any notice, if transmitted by facsimile, shall be deemed given when transmitted and electronically confirmed. SECTION 7.3. Payment of Costs and Expenses. Subject to Section 2.6, Borrower agrees to pay, and to save Lender harmless from all liability for, any stamp or other taxes which may be payable in connection with the execution or delivery of this Agreement, the borrowings hereunder, or the issuance of the Note or any other Loan Documents. Borrower also agrees to 20 reimburse Lender upon demand for all reasonable out-of-pocket expenses (including reasonable attorneys' fees and reasonable legal expenses in excess of $10,000 in the aggregate) incurred by Lender in connection with (x) the negotiation of any restructuring or "work-out," whether or not consummated, of any Obligations and (y) the enforcement of any Obligations or any Loan Document. SECTION 7.4. Indemnification. In consideration of the execution and delivery of this Agreement by Lender and the making of the Loan, Borrower hereby indemnifies, exonerates and holds Lender and its officers, directors, employees and agents (collectively, the "Indemnified Parties"), irrespective of whether any such Indemnified Party is a party to the action for which indemnification hereunder is sought, free and harmless from and against any and all losses, costs, liabilities and damages, and expenses, including reasonable attorneys' fees and reasonable disbursements (collectively, the "Indemnified Liabilities"), incurred by the Indemnified Parties or any of them as a result of, arising out of, or relating to (i) any breach by Borrower of this Agreement or any other Loan Document, (ii) the enforcement by Lender of the terms of this Agreement or any other Loan Agreement, or (iii) any investigation, litigation or proceeding related to any environmental cleanup, audit, compliance or other matter relating to the protection of the environment or the Release by Borrower or any of its Subsidiaries of any Hazardous Material, except, in each case, for any such Indemnified Liabilities arising for the account of a particular Indemnified Party by reason of the relevant Indemnified Party's gross negligence or willful misconduct. If and to the extent that the foregoing undertaking may be unenforceable for any reason, Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. SECTION 7.5. Survival. The obligations of Borrower under Section 7.4(iii) shall survive any termination of this Agreement and the payment in full of all Obligations for a period of three years. SECTION 7.6. Severability. Any provision of this Agreement or any other Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement or such Loan Document or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 7.7. Headings. The various headings of this Agreement and of each other Loan Document are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or such other Loan Document or any provisions hereof or thereof. SECTION 7.8. Execution in Counterparts, Effectiveness, etc. This Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. This Agreement shall become effective when counterparts hereof executed on behalf of Borrower and Lender. SECTION 7.9. Governing Law; Entire Agreement. THIS AGREEMENT, THE NOTE AND EACH OTHER LOAN DOCUMENT SHALL EACH BE DEEMED TO BE A 21 CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTERESTS GRANTED HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. This Agreement, the Note and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral, with respect thereto. SECTION 7.10. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that: (a) Borrower may not assign or transfer its rights or obligations hereunder without the prior written consent of Lender; (b) Lender may assign to any Person (each Person to whom such assignment and delegation is to be made being hereinafter referred to as an "Assignee Lender"), all or any fractional share of Lender's total Loans; provided, that such fractional share shall not be less than 25% of the Loan; provided, however, that Borrower shall be entitled to continue to deal solely and directly with Lender in connection with the interests so assigned to an Assignee Lender until written notice of such assignment, together with payment instructions, addresses and related information with respect to such Assignee Lender, shall have been given to Borrower by Lender and such Assignee Lender. Within three Business Days after its receipt of notice of any such assignment, Borrower shall execute and deliver to the Assignee Lender a new Note evidencing such Assignee Lender's assigned Loans and, if the assignor Lender has retained Loans hereunder, a replacement Note to the assignor Lender in the principal amount of the Loans retained by the assignor Lender hereunder (such Note to be in exchange for, but not in payment of, that Note then held by such assignor Lender). (c) The Lender may at any time sell to one or more Persons (each such Person a "Participant") participating interests in the Loan or other interests of Lender hereunder; provided, however that (i) no such participation shall relieve such Lender from its obligations hereunder or under any Loan Document, (ii) Borrower shall continue to deal solely and directly with the Lender in connection with this Agreement and the other Loan Documents, and (iii) Borrower shall not be required to pay any amount hereunder that is greater than the amount the Borrower would have had to pay had such participation not taken place. SECTION 7.11. Other Transactions. Nothing contained herein shall preclude Lender from engaging in any transaction, in addition to those contemplated by this Agreement or any other Loan Document, with Borrower or any of its Affiliates in which Borrower or such Affiliate is not restricted hereby from engaging with any other Person. SECTION 7.12. Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS 22 AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE LENDER OR THE BORROWER SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE LENDER'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. SECTION 7.13. Waiver of Jury Trial. LENDER AND BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF LENDER OR BORROWER. BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR LENDER ENTERING INTO THIS AGREEMENT AND EACH SUCH OTHER LOAN DOCUMENT. [REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK] 23 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first above written. NASTECH PHARMACEUTICAL COMPANY, INC. By: /s/ Gregory Weaver Name: Gregory Weaver Title: CFO Address: 3450 Monte Villa Parkway Bothell, WA 98021 Facsimile: (425) 908-3650 Attention: President SCHWARZ PHARMA, INC. By: /s/ Ron Stratton Dr. Ron Stratton President and COO Address: 6140 W. Executive Drive Mequon, Wisconsin 53092 Facsimile: (262) 242-1641 Attention: General Counsel EXHIBIT A NOTE September 30, 2002 FOR VALUE RECEIVED, the undersigned, NASTECH PHARMACEUTICAL COMPANY, INC., a Delaware corporation (the "Borrower"), unconditionally promises to pay to the order of SCHWARZ PHARMA, INC., a Delaware corporation (the "Lender") the principal sum of $7,250,000 or, if less, the aggregate unpaid principal amount of all Loans made by Lender pursuant to that certain Loan Agreement, dated as of September 30, 2002 (together with all amendments and other modifications, if any, from time to time thereafter made thereto, the "Loan Agreement"), between Borrower and Lender, payable on the Maturity Date (as defined in the Loan Agreement). The Borrower also promises to pay interest on the unpaid principal amount hereof from time to time outstanding from the date hereof until maturity (whether by acceleration or otherwise) and, after maturity, until paid, at the rates per annum and on the dates specified in the Loan Agreement. The outstanding principal of this Note and unpaid accrued interest may be prepaid, in whole or in part without penalty, from time to time on any Business Day in accordance with Loan Agreement. Payments of both principal and interest are to be made in lawful money of the United States of America in same day or immediately available funds to such account or accounts as are designated by Lender by a written notice given pursuant to the Loan Agreement. This Note is a Note referred to in, and evidences Indebtedness incurred under, the Loan Agreement, to which reference is made for a description of the security for this Note and for a statement of the terms and conditions on which Borrower is permitted and required to make prepayments and repayments of principal of the Indebtedness evidenced by this Note and on which such Indebtedness may be declared to be immediately due and payable. Unless otherwise defined, terms used herein have the meanings provided in the Loan Agreement. All parties hereto, whether as makers, endorsers, or otherwise, severally waive presentment for payment, demand, protest and notice of dishonor. THIS NOTE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. [Signature next page] NASTECH PHARMACEUTICAL COMPANY, INC. By: ------------------------------------- Name: Title: TABLE OF CONTENTS

PAGE ARTICLE I DEFINITIONS AND ACCOUNTING TERMS..........................................1 SECTION 1.1. Defined Terms..................................................1 SECTION 1.2. Other Defined Terms............................................6 SECTION 1.3. Use of Defined Terms...........................................6 SECTION 1.4. Cross-References...............................................6 SECTION 1.5. Accounting and Financial Determinations........................6 ARTICLE II LOAN AND NOTE.............................................................7 SECTION 2.1. Loan...........................................................7 SECTION 2.2. Note...........................................................7 SECTION 2.3. Repayments and Prepayments.....................................7 SECTION 2.4. Interest Provisions............................................8 SECTION 2.5. Post-Maturity Rates............................................9 SECTION 2.6. Taxes..........................................................9 SECTION 2.7. Payments, Computations, etc....................................9 SECTION 2.8. Application of Funds..........................................10 ARTICLE III CONDITIONS TO BORROWING..................................................10 SECTION 3.1. Conditions Precedent to the Loan..............................10 ARTICLE IV REPRESENTATIONS AND WARRANTIES...........................................11 SECTION 4.1. Organization, Qualifications and Corporate Power, etc.........11 SECTION 4.2. Authorization of Agreements, etc..............................11 SECTION 4.3. Government Approval, Regulation, etc..........................12 SECTION 4.4. Validity, etc.................................................12 SECTION 4.5. Litigation; Compliance with Law...............................12 SECTION 4.6. Title to Properties...........................................13 SECTION 4.7. Taxes.........................................................13 SECTION 4.8. Pension and Welfare Plans.....................................13 ARTICLE V COVENANTS................................................................14 SECTION 5.1. Affirmative Covenants.........................................14 SECTION 5.1.1. Existence..............................................14

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PAGE SECTION 5.1.2. Insurance..............................................14 SECTION 5.1.3. Compliance with Laws...................................14 SECTION 5.1.4. Taxes..................................................14 SECTION 5.1.5. Further Assurances.....................................14 SECTION 5.1.6. Default Notice.........................................15 SECTION 5.1.7. Financial Information, Reports, Notices, etc...........15 SECTION 5.1.8. Records and Audit......................................15 SECTION 5.1.9. Net Sales Reports......................................16 SECTION 5.2. Negative Covenants............................................16 SECTION 5.2.1. Consolidation, Merger, etc.............................16 SECTION 5.2.2. Modification of Certain Agreements.....................16 SECTION 5.2.3. Transactions with Affiliates...........................16 SECTION 5.2.4. Liens..................................................16 SECTION 5.2.5. Asset Dispositions, etc................................17 SECTION 5.2.6. Negative Pledges, Restrictive Agreements, etc..........17 ARTICLE VI EVENTS OF DEFAULT........................................................17 SECTION 6.1. Listing of Events of Default..................................17 SECTION 6.1.1. Non-Payment of Obligations.............................17 SECTION 6.1.2. Breach of Warranty.....................................17 SECTION 6.1.3. Non-Performance of Certain Covenants and Obligations............................................18 SECTION 6.1.4. Non-Performance of Other Covenants and Obligations.....18 SECTION 6.1.5. Default on Other Indebtedness..........................18 SECTION 6.1.6. Judgments..............................................18 SECTION 6.1.7. Pension Plans..........................................18 SECTION 6.1.8. Bankruptcy, Insolvency, etc............................18 SECTION 6.1.9. Impairment of Security, etc............................19 SECTION 6.2. Action if Bankruptcy..........................................19 SECTION 6.3. Action if Other Event of Default..............................19 SECTION 6.4. Reinstatement Option..........................................19

-ii- TABLE OF CONTENTS (continued)

PAGE ARTICLE VII MISCELLANEOUS PROVISIONS.................................................20 SECTION 7.1. Waivers, Amendments, etc......................................20 SECTION 7.2. Notices.......................................................20 SECTION 7.3. Payment of Costs and Expenses.................................20 SECTION 7.4. Indemnification...............................................21 SECTION 7.5. Survival......................................................21 SECTION 7.6. Severability..................................................21 SECTION 7.7. Headings......................................................21 SECTION 7.8. Execution in Counterparts, Effectiveness, etc.................21 SECTION 7.9. Governing Law; Entire Agreement...............................21 SECTION 7.10. Successors and Assigns........................................22 SECTION 7.11. Other Transactions............................................22 SECTION 7.12. Forum Selection and Consent to Jurisdiction...................22 SECTION 7.13. Waiver of Jury Trial..........................................23

-iii- EX-10.2 5 v84849exv10w2.txt EXHIBIT 10.2 EXHIBIT 10.2 SECURITY AGREEMENT This SECURITY AGREEMENT (as amended, supplemented, amended and restated or otherwise modified from time to time, this "Security Agreement"), dated as of September 30, 2002, is made by NASTECH PHARMACEUTICAL COMPANY, INC., a Delaware corporation (the "Grantor"), in favor of SCHWARZ PHARMA, INC., a Delaware corporation (the "Beneficiary"). W I T N E S S E T H: WHEREAS, pursuant to that certain Loan Agreement, dated as of the date hereof (as amended, supplemented, amended and restated or otherwise modified from time to time, the "Loan Agreement"), among the Grantor and the Beneficiary, the Beneficiary has extended commitments to the Grantor; WHEREAS, as a condition precedent to the Loan Agreement, the Grantor is required to execute and deliver this Security Agreement; and WHEREAS, the Grantor has duly authorized the execution, delivery and performance of this Security Agreement; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Grantor agrees, for the benefit of Beneficiary, as follows: ARTICLE I DEFINITIONS SECTION 1.1. Certain Terms. The following terms (whether or not underscored) when used in this Security Agreement, including its preamble and recitals, shall have the following meanings (such definitions to be equally applicable to the singular and plural forms thereof): "Beneficiary" is defined in the preamble. "Best Efforts" is defined in the Asset Purchase Agreement. "Business" means the development, manufacturing, marketing and sale of Nascobal in the Territory. "Collateral" is defined in Section 2.1. "Collateral Account" is defined in Section 4.1.2(b). "Computer Hardware and Software Collateral" means, in each case to the extent that they are used in the Business: 1 (a) all computer and other electronic data processing hardware, integrated computer systems, central processing units, memory units, display terminals, printers, features, computer elements, card readers, tape drives, hard and soft disk drives, cables, electrical supply hardware, generators, power equalizers, accessories and all peripheral devices and other related computer hardware; (b) all software programs (including, both source code, object code and all related applications and data files), whether now owned, licensed or leased or hereafter acquired by the Grantor, designed for use on the computers and electronic data processing hardware described in clause (a) above; (c) all firmware associated therewith; (d) all documentation (including flow charts, logic diagrams, manuals, guides and specifications) with respect to such hardware, software and firmware described in the preceding clauses (a) through (c); and (e) all rights with respect to all of the foregoing, including any and all copyrights, licenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications and any substitutions, replacements, additions or model conversions of any of the foregoing. "Copyright Collateral" means all copyrights of the Grantor, whether statutory or common law, registered or unregistered, now or hereafter in force throughout the Territory including all of the Grantor's right, title and interest in and to all copyrights registered in the United States Copyright Office, and all applications for registration thereof, whether pending or in preparation, all copyright licenses, the right to sue for past, present and future infringements of any thereof, all rights corresponding thereto throughout the Territory, all extensions and renewals of any thereof and all proceeds of the foregoing, including licenses, royalties, income, payments, claims, damages and proceeds of suit, in each case to the extent that they are used in the Business. "Equipment" is defined in clause (b) of Section 2.1. "Grantor" is defined in the preamble. "Intellectual Property Collateral" means, collectively, the Computer Hardware and Software Collateral, the Copyright Collateral, the Patent Collateral, the Trademark Collateral and the Trade Secrets Collateral. "Inventory" is defined in clause (c) of Section 2.1. "Loan Agreement" is defined in the first recital. "Patent Collateral" means, in each case only to the extent that they are used in the Business: 2 (a) all letters patent and applications for letters patent throughout the Territory, including all patent applications in preparation for filing anywhere in the Territory and including each patent and patent application referred to in Item A of Schedule II attached hereto; (b) all reissues, divisions, continuations, continuations-in-part, extensions, renewals and reexaminations of any of the items described in clause (a); (c) all patent licenses, including each patent license referred to in Item B of Schedule II attached hereto; and (d) all proceeds of, and rights associated with, the foregoing (including license royalties and proceeds of infringement suits), the right to sue third parties for past, present or future infringements of any patent or patent application, including any patent or patent application referred to in Item A of Schedule II attached hereto, and for breach or enforcement of any patent license, including any patent license referred to in Item B of Schedule II attached hereto, and all rights corresponding thereto throughout the Territory. "Permits and Approvals" means the NDA, the INDs, any future New Drug Approvals or Investigational New Drug Approvals filed with the FDA with respect to the Business and all other regulatory filings, registrations and governmental authorizations that relate to the Business. "Receivables" is defined in clause (d) of Section 2.1. "Related Contracts" is defined in clause (d) of Section 2.1. "Security Agreement" is defined in the preamble. "Trademark Collateral" in each case to the extent they are used in the Business: (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, certification marks, collective marks, logos, other source of business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of a like nature (all of the foregoing items in this clause (a) being collectively called a "Trademark"), now existing anywhere in the Territory or hereafter adopted or acquired, whether currently in use or not, all registrations and recordings thereof and all applications in connection therewith, whether pending or in preparation for filing, including registrations, recordings and applications in the United States Patent and Trademark Office or in any office or agency of the United States of America or any State thereof, including those referred to in Item A of Schedule III attached hereto; (b) all Trademark licenses, including each Trademark license referred to in Item B of Schedule III attached hereto; 3 (c) all reissues, extensions or renewals of any of the items described in clauses (a) and (b); (d) all of the goodwill of the business connected with the use of, and symbolized by the items described in, clauses (a) and (b); and (e) all proceeds of, and rights associated with, the foregoing, including any claim by the Grantor against third parties for past, present or future infringement or dilution of any Trademark, Trademark registration or Trademark license, including any Trademark, Trademark registration or Trademark license referred to in Item A and Item B of Schedule III attached hereto, or for any injury to the goodwill associated with the use of any such Trademark or for breach or enforcement of any Trademark license. "Trade Secrets Collateral" means all common law and statutory trade secrets and all other confidential or proprietary or useful information and all know-how obtained by or used in the Business of the Grantor (all of the foregoing being collectively called a "Trade Secret"), whether or not such Trade Secret has been reduced to a writing or other tangible form, including all documents and things embodying, incorporating or referring in any way to such Trade Secret, all Trade Secret licenses, including each Trade Secret license referred to in Schedule IV attached hereto, and including the right to sue for and to enjoin and to collect damages for the actual or threatened misappropriation of any Trade Secret and for the breach or enforcement of any such Trade Secret license, in each case to the extent that they are used in the Business. "U.C.C." means the Uniform Commercial Code, as in effect from time to time in the State of New York; provided, that if, with respect to any Filing Statement or by reason of any provisions of law, the perfection or the effect of perfection or non-perfection of the security interests granted to the Beneficiary pursuant the applicable Loan Document is governed by the Uniform Commercial Code as in effect in a jurisdiction of the United States other than New York, UCC means the Uniform Commercial Code as in effect from time to time in such other jurisdiction for purposes of the provisions of each Loan Document and any Filing Statement relating to such perfection or effect of perfection or non-perfection.. SECTION 1.2. Loan Agreement Definitions. Unless otherwise defined herein or the context otherwise requires, terms used in this Security Agreement, including its preamble and recitals, have the meanings provided in the Loan Agreement. SECTION 1.3. U.C.C. Definitions. Unless otherwise defined herein or in the Loan Agreement or the context otherwise requires, terms for which meanings are provided in the U.C.C. are used in this Security Agreement, including its preamble and recitals, with such meanings. ARTICLE II SECURITY INTEREST 4 SECTION 2.1. Grant of Security. The Grantor hereby pledges to the Beneficiary, and hereby grants to the Beneficiary, a security interest in all of the following, whether now or hereafter existing or acquired by the Grantor, but only to the extent such items are used in or designated for use in the Business in the Territory (the "Collateral"): (a) all equipment in all of its forms of the Grantor, wherever located, including all parts thereof and all accessions, additions, attachments, improvements, substitutions and replacements thereto and therefor and all accessories related thereto (any and all of the foregoing being the "Equipment"); (b) all inventory in all of its forms of the Grantor, wherever located, including (i) all raw materials and work in process therefor, finished goods thereof, and materials used or consumed in the manufacture or production thereof, (ii) all goods in which the Grantor has an interest in mass or a joint or other interest or right of any kind (including goods in which the Grantor has an interest or right as consignee), and (iii) all goods which are returned to or repossessed by the Grantor, and all accessions thereto, products thereof and documents therefor (any and all such inventory, materials, goods, accessions, products and documents being the "Inventory"); (c) all accounts, contracts, contract rights, chattel paper, documents, instruments, and general intangibles (including tax refunds) of the Grantor, whether or not arising out of or in connection with the sale or lease of goods or the rendering of services, relating to the Business and all rights of the Grantor now or hereafter existing in and to all security agreements, guaranties, leases and other contracts securing or otherwise relating to any such accounts, contracts, contract rights, chattel paper, documents, instruments, and general intangibles (any and all such accounts, contracts, contract rights, chattel paper, documents, instruments, and general intangibles being the "Receivables", and any and all such security agreements, guaranties, leases and other contracts being the "Related Contracts"); (d) all Intellectual Property Collateral of the Grantor; (e) all books, records, writings, data bases, information and other property relating to, or used in connection with, evidencing, embodying, incorporating or referring to, any of the foregoing in this Section 2.1; 5 (f) all of the Grantor's other property and rights of every kind and description and interests therein to the extent that such property and rights are used in the Business; (g) all Permits and Approvals of the Grantor; and (h) all products, rents, issues, profits, returns, income and proceeds of and from any and all of the foregoing Collateral (including proceeds which constitute property of the types described in clauses (a), (b), (c), (d), (e), (f) and (g), proceeds deposited from time to time in the Collateral Account and in any lock boxes of the Grantor, and, to the extent not otherwise included, all payments under insurance (whether or not the Beneficiary is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral). Notwithstanding the foregoing, "Collateral" shall not include (i) any general intangibles or other rights arising under any contracts, instruments, licenses or other documents as to which the grant of a security interest would constitute a violation of a valid and enforceable restriction in favor of a third party on such grant, unless and until any required consents shall have been obtained; or (ii) any equipment (including any accessions, replacements, substitutions and proceeds thereof) to the extent financed pursuant to that certain Master Equipment Lease, dated as of April 9, 2002, by and between Grantor and General Electric Capital Corporation. Upon the request of the Beneficiary, the Grantor agrees to use Best Efforts to promptly obtain any such required consent. SECTION 2.2. Security for Obligations. This Security Agreement secures the payment of all Obligations of the Grantor now or hereafter existing under the Loan Agreement, the Note and each other Loan Document to which the Grantor is or may become a party, whether for principal, interest, costs, fees, expenses or otherwise. SECTION 2.3. Continuing Security Interest; Transfer of Notes. This Security Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until payment in full in cash of all Obligations, (b) be binding upon the Grantor, its successors, transferees and assigns, and (c) inure, together with the rights and remedies of the Beneficiary hereunder, to the benefit of the Beneficiary. Without limiting the generality of the foregoing clause (c), the Beneficiary may assign or otherwise transfer (in whole or in part) the Note held by it to any other Person or entity, and such other Person or entity shall thereupon become vested with all the rights and benefits in respect thereof granted to the Beneficiary under any Loan Document (including this Security Agreement) or otherwise. Upon the payment in full in cash of all 6 Obligations, the security interest granted herein shall terminate and all rights to the Collateral shall revert to the Grantor. Upon any such termination, the Beneficiary will, at the Grantor's sole expense, promptly execute and deliver to the Grantor such documents as the Grantor shall reasonably request to evidence such termination. SECTION 2.4. Grantor Remains Liable. Anything herein to the contrary notwithstanding (a) the Grantor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein, and shall perform all of its duties and obligations under such contracts and agreements to the same extent as if this Security Agreement had not been executed, (b) the exercise by the Beneficiary of any of its rights hereunder shall not release the Grantor from any of its duties or obligations under any such contracts or agreements included in the Collateral, and (c) the Beneficiary shall not have any obligation or liability under any such contracts or agreements included in the Collateral by reason of this Security Agreement, nor shall the Beneficiary be obligated to perform any of the obligations or duties of the Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1. Representations and Warranties. The Grantor represents and warrants to the Beneficiary as set forth in this Section. SECTION 3.1.1. Location of Collateral, etc. All of the Equipment and Inventory of the Grantor are located at the places specified in Item A and Item B, respectively, of Schedule I hereto. The place(s) of business and chief executive office of the Grantor and the office(s) where the Grantor keeps its records concerning the Receivables, and all originals of all chattel paper which evidence Receivables, are located at the address set forth in Item C of Schedule I hereto. The Grantor has no corporate names, company names, or fictitious business names other than those set forth in Item D of Schedule I hereto. During the four months preceding the date hereof, the Grantor has not been known by any legal name different from the one set forth on the signature page hereto. SECTION 3.1.2. Ownership, No Liens, etc. The Grantor owns its Collateral free and clear of any Lien, security interest, charge or encumbrance except for the security interest created by this Security Agreement and except as permitted by the Loan Agreement. No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of the Beneficiary relating to this Security Agreement or as have been filed in connection with Liens permitted pursuant to the Loan Agreement. 7 SECTION 3.1.3. Possession and Control. The Grantor has exclusive possession and control of its Equipment and Inventory, other than the Nascobal inventory being transferred to Grantor pursuant to the Asset Purchase Agreement dated as of the date hereof, by and between Grantor and Beneficiary. SECTION 3.1.4. Intellectual Property Collateral. With respect to any Intellectual Property Collateral: (a) such Intellectual Property Collateral is subsisting and has not been adjudged invalid or unenforceable, in whole or in part; (b) to Grantor's knowledge, such Intellectual Property Collateral is valid and enforceable; (c) to Grantor's knowledge, the Grantor has made all necessary filings and recordations to protect its interest in such Intellectual Property Collateral, including recordations of all of its interests in the Patent Collateral and Trademark Collateral in the United States Patent and Trademark Office and its claims to the Copyright Collateral in the United States Copyright Office; (d) to Grantor's knowledge, no claim has been made that the use of such Intellectual Property Collateral does or may violate the asserted rights of any third party; and (e) subject to Section 4.1.4, the Grantor has performed all reasonable acts and has paid and will continue to pay all required fees and taxes to maintain each and every item of Intellectual Property Collateral in full force and effect throughout the Territory, as applicable. The Grantor owns directly or is entitled to use by license or otherwise, all patents, Trademarks, Trade Secrets, copyrights, mask works, licenses, technology, know-how, processes and rights with respect to any of the foregoing used in, necessary for or of importance to the conduct of the Business. SECTION 3.1.5. Validity, etc. This Security Agreement creates a valid first priority security interest in the Collateral, securing the payment of the Obligations, and all filings and other actions necessary to be taken by Grantor to perfect and protect such security interest have been or will be duly taken. SECTION 3.1.6. Authorization, Approval, etc. Except as have been obtained or made and are in full force and effect, no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (a) for the grant by the Grantor of the security interest granted hereby or for the execution, delivery and performance of this Security Agreement by the Grantor, or 8 (b) for the perfection of or the exercise by the Beneficiary of its rights and remedies hereunder. SECTION 3.1.7. Compliance with Laws. The Grantor is in compliance with the requirements of all applicable laws, rules, regulations and orders of every governmental authority, the non-compliance with which might materially adversely affect the value of the Collateral or the worth of the Collateral as collateral security. ARTICLE IV COVENANTS SECTION 4.1. Certain Covenants. The Grantor covenants and agrees that, so long as any portion of the Obligations shall remain unpaid, the Grantor will, unless the Beneficiary shall otherwise consent in writing, perform, comply with and be bound by the obligations set forth in this Article IV. SECTION 4.1.1. As to Equipment and Inventory. The Grantor hereby agrees that it shall (a) keep all the Equipment and Inventory (other than Inventory sold in the ordinary course of business) at the places therefor specified in Section 3.1.1 or, upon 30 days' prior written notice to the Beneficiary, at such other places in a jurisdiction where all representations and warranties set forth in Article III (including Section 3.1.6) shall be true and correct, and all action required pursuant to the first sentence of Section 4.1.6 shall have been taken with respect to the Equipment and Inventory; (b) cause the Equipment to be maintained and preserved in the same condition, repair and working order as when new, ordinary wear and tear excepted, and forthwith, or in the case of any loss or damage to any of the Equipment, as quickly as practicable after the occurrence thereof, make or cause to be made all repairs, replacements, and other improvements in connection therewith which are necessary or desirable to such end; and (c) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Equipment and Inventory, except to the extent the validity thereof is being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP have been set aside. SECTION 4.1.2. As to Receivables. (a) The Grantor shall keep its place(s) of business and chief executive office and the office(s) where it keeps its records concerning the Receivables, and all originals of all chattel paper which evidenced Receivables, located at the address(es) set forth in Item D of Schedule I hereto, or, upon 30 days' prior 9 written notice to the Beneficiary, at such other locations in a jurisdiction where all actions required by the first sentence of Section 4.1.6 shall have been taken with respect to the Receivables; not change its name except upon 30 days' prior written notice to the Beneficiary; hold and preserve such records and chattel paper; and permit representatives of the Beneficiary at any time on a reasonable notice during normal business hours to inspect and make abstracts from such records and chattel paper. In addition, the Grantor shall give the Beneficiary a supplement to Schedule I hereto on each date a Compliance Certificate is required to be delivered to the Beneficiary under the Loan Agreement, which shall set forth any changes to the information set forth in Section 3.1.1. (b) Upon the occurrence and continuation of an Event of Default and upon written notice by the Beneficiary to the Grantor pursuant to this Section 4.1.2(b), all proceeds of Collateral received by the Grantor shall be delivered in kind to the Beneficiary for deposit to a deposit account (the "Collateral Account") of the Grantor maintained with a financial institution designated by the Beneficiary, and the Grantor shall not commingle any such proceeds, and shall hold separate and apart from all other property, all such proceeds in express trust for the benefit of the Beneficiary until delivery thereof is made to the Beneficiary. (c) The Beneficiary shall have the right to apply any amount in the Collateral Account to the payment of any Obligations which are due and payable or payable upon demand, or to the payment of any Obligations at any time that an Event of Default shall exist. SECTION 4.1.3. As to Collateral. (a) Until the occurrence and continuance of an Event of Default, and such time as the Beneficiary shall notify the Grantor of the revocation of such power and authority, the Grantor (i) may in the ordinary course of its business (except as otherwise permitted under the Loan Agreement), at its own expense, sell, lease or furnish under the contracts of service any of the Inventory normally held by the Grantor for such purpose, and use and consume, in the ordinary course of its business (except as otherwise permitted under the Loan Agreement), any raw materials, work in process or materials normally held by the Grantor for such purpose, (ii) will, at its own expense, endeavor to collect, as and when due, all amounts due with respect to any of the Collateral, including the taking of such action with respect to such collection as the Beneficiary may reasonably request during the existence of an Event of Default or, in the absence of such request, as the Grantor may deem advisable, and (iii) may grant, in the ordinary course of business (except as otherwise permitted under the Loan Agreement), to any party obligated on any of the Collateral, any rebate, refund or allowance to which such party may be lawfully entitled, and may accept, in connection therewith, the return of goods, the sale or lease of which shall have given rise to such Collateral. The Beneficiary, however, may, at any time during the existence of an Event of Default of the nature set forth in Section 6.1.8 of the Loan Agreement or an Event 10 of Default, whether before or after any revocation of such power and authority or the maturity of any of the Obligations, notify any parties obligated on any of the Collateral to make payment to the Beneficiary of any amounts due or to become due thereunder and enforce collection of any of the Collateral by suit or otherwise and surrender, release, or exchange all or any part thereof, or compromise or extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder or evidenced thereby. Upon request of the Beneficiary during the existence of an Event of Default, the Grantor will, at its own expense, notify any parties obligated on any of the Collateral to make payment to the Beneficiary of any amounts due or to become due thereunder. (b) In the exercise of the power detailed in subparagraph (a), the Beneficiary is authorized to endorse, in the name of the Grantor, any item, howsoever received by the Beneficiary, representing any payment on or other proceeds of any of the Collateral and, thereupon, the amount of such item will be applied to reduce the Obligations. SECTION 4.1.4. As to Intellectual Property Collateral. The Grantor covenants and agrees to comply with the following provisions as such provisions relate to any Intellectual Property Collateral of the Grantor: (a) The Grantor shall not, unless the Grantor shall either (i) reasonably and in good faith determine that any of the Patent Collateral is of negligible economic value to the Grantor, or (ii) have a valid business purpose to do otherwise, do any act, or omit to do any act, whereby any of the Patent Collateral may lapse or become abandoned or dedicated to the public or unenforceable. (b) The Grantor shall not, and the Grantor shall not permit any of its licensees to, unless the Grantor shall either (i) reasonably and in good faith determine that any of the Trademark Collateral is of negligible economic value to the Grantor, or (ii) have a valid business purpose to do otherwise, (i) fail to continue to use any of the Trademark Collateral in order to maintain all of the Trademark Collateral in full force free from any claim of abandonment for non-use, (ii) fail to maintain the quality of products and services offered under all of the Trademark Collateral in a manner consistent with past practices, and (iii) do or permit any act or knowingly omit to do any act whereby any of the Trademark Collateral may lapse or become invalid or unenforceable. (c) The Grantor shall not, unless the Grantor shall either 11 (i) reasonably and in good faith determine that any of the Copyright Collateral or any of the Trade Secrets Collateral is of negligible economic value to the Grantor, or (ii) have a valid business purpose to do otherwise, do or permit any act or knowingly omit to do any act whereby any of the Copyright Collateral or any of the Trade Secrets Collateral may lapse or become invalid or unenforceable or placed in the public domain except upon expiration of the end of an unrenewable term of a registration thereof. (d) The Grantor shall notify the Beneficiary promptly if it knows, or has reason to know, that any application or registration relating to any material item of the Intellectual Property Collateral may become abandoned or dedicated to the public or placed in the public domain or invalid or unenforceable, or of any adverse determination or development (including the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office or any foreign counterpart thereof or any court) regarding the Grantor's ownership of any of the Intellectual Property Collateral, its right to register the same or to keep and maintain and enforce the same. (e) In no event shall the Grantor or any of its agents, employees, designees or licensees file an application for the registration of any Intellectual Property Collateral with the United States Patent and Trademark Office, the United States Copyright Office unless it promptly informs the Beneficiary, and upon request of the Beneficiary, executes and delivers any and all agreements, instruments, documents and papers as the Beneficiary may reasonably request to evidence the Beneficiary's security interest in such Intellectual Property Collateral and the goodwill and general intangibles of the Grantor relating thereto or represented thereby. (f) The Grantor shall take all necessary steps, including in any proceeding before the United States Patent and Trademark Office, the United States Copyright Office to maintain and pursue any application (and to obtain the relevant registration) filed by Grantor with respect to, and to maintain any registration of, the Intellectual Property Collateral, including the filing of applications for renewal, affidavits of use, affidavits of incontestability and opposition, interference and cancellation proceedings and the payment of fees and taxes (except to the extent that dedication, abandonment or invalidation is permitted under the foregoing clauses (a), (b) and (c)). (g) The Grantor shall, contemporaneously herewith, execute and deliver to the Beneficiary, (i) a Trademark Security Agreement in the form of Exhibit A hereto, and (ii) a Patent Security Agreement in the form of Exhibit B hereto, and shall execute and deliver to the Beneficiary any other document required to acknowledge or register or perfect the Beneficiary's interest in any part of the Intellectual Property Collateral. 12 SECTION 4.1.5. Transfers and Other Liens. The Grantor shall not (a) sell, assign (by operation of law or otherwise), license or otherwise dispose of any of the Collateral, except Inventory in the ordinary course of business and except as permitted by the Loan Agreement; or (b) create or suffer to exist any Lien or other charge or encumbrance upon or with respect to any of the Collateral to secure Indebtedness of any Person or entity, except for the security interest created by this Security Agreement and except as permitted by the Loan Agreement. SECTION 4.1.6. Further Assurances, etc. The Grantor agrees that, from time to time at its own expense, it will promptly execute and deliver all further instruments and documents, and take all further action required, or that the Beneficiary may reasonably request, in order to perfect, preserve and protect any security interest granted or purported to be granted hereby or to enable the Beneficiary to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, the Grantor will (a) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices (including any assignment of claim form under or pursuant to the federal assignment of claims statute, 31 U.S.C. Section 3726, any successor or amended version thereof or any regulation promulgated under or pursuant to any version thereof), as may be necessary or as the Beneficiary may reasonably request, in order to perfect and preserve the security interests and other rights granted or purported to be granted to the Beneficiary hereby; and (b) furnish to the Beneficiary, from time to time at the Beneficiary's request, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Beneficiary may reasonably request, all in reasonable detail. With respect to the foregoing and the grant of the security interest hereunder, the Grantor hereby authorizes the Beneficiary to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of the Grantor where permitted by law. A carbon, photographic or other reproduction of this Security Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. ARTICLE V THE BENEFICIARY SECTION 5.1. Beneficiary Appointed Attorney-in-Fact. Following the occurrence and continuation of a Default or an Event of Default, the Grantor hereby irrevocably appoints the Beneficiary the Grantor's attorney-in-fact, with full authority in 13 the place and stead of the Grantor and in the name of the Grantor or otherwise, from time to time in the Beneficiary's discretion, to take any action and to execute any instrument which the Beneficiary may deem necessary or advisable to accomplish the purposes of this Security Agreement, including: (a) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (b) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) above; (c) to file any claims or take any action or institute any proceedings which the Beneficiary may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Beneficiary with respect to any of the Collateral; and (d) to perform the affirmative obligations of the Grantor hereunder (including all obligations of the Grantor pursuant to Section 4.1.6). The Grantor hereby acknowledges, consents and agrees that the power of attorney granted pursuant to this Section is irrevocable and coupled with an interest. Beneficially shall give notice to Grantor concurrently with taking any of the above actions. SECTION 5.2. Beneficiary May Perform. If the Grantor fails to perform any agreement contained herein after receiving written notice of such failure from the Beneficiary, the Beneficiary may itself perform, or cause performance of, such agreement, and the reasonable expenses of the Beneficiary incurred in connection therewith shall be payable by the Grantor pursuant to Section 6.2. SECTION 5.3. Beneficiary Has No Duty. In addition to, and not in limitation of, Section 2.4, the powers conferred on the Beneficiary hereunder are solely to protect its interest in the Collateral and shall not impose any duty on it to exercise any such powers. Except for reasonable care of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Beneficiary shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. SECTION 5.4. Reasonable Care. The Beneficiary is required to exercise reasonable care in the custody and preservation of any of the Collateral in its possession; provided, however, the Beneficiary shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral if it takes such action for that purpose as the Grantor reasonably requests in writing at times other than upon the occurrence and during the continuance of any Default or Event of Default, but failure of the Beneficiary to comply with any such request at any time shall not in itself be deemed a failure to exercise reasonable care. 14 ARTICLE VI REMEDIES SECTION 6.1. Certain Remedies. If any Event of Default shall have occurred and be continuing: (a) The Beneficiary may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the U.C.C. (whether or not the U.C.C. applies to the affected Collateral) and (i) also may require the Grantor to, and the Grantor hereby agrees that it will, at its expense and upon request of the Beneficiary, forthwith assemble all or part of the Collateral as directed by the Beneficiary and make it available to the Beneficiary at a place to be designated by the Beneficiary which is reasonably convenient to both parties, and (ii) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Beneficiary's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Beneficiary may deem commercially reasonable. The Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' prior notice to the Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Grantor further agrees that Beneficiary may purchase the Collateral or any part thereof at any such sale. The Beneficiary shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Beneficiary may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) All cash proceeds received by the Beneficiary in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Beneficiary, be held by the Beneficiary as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to the Beneficiary pursuant to Section 6.2) in whole or in part by the Beneficiary against, all or any part of the Obligations in such order as the Beneficiary shall elect; provided that any application to the Note shall be applied first to accrued but unpaid interest and the balance to the installments due on the Notes in the inverse order thereof. Any surplus of such cash or cash proceeds held by the Beneficiary and remaining after payment in full in cash of all the Obligations shall be paid over to the Grantor or to whomsoever may be lawfully entitled to receive such surplus. 15 SECTION 6.2. Indemnity and Expenses. (a) The Grantor agrees to indemnify the Beneficiary from and against any and all claims, losses and liabilities arising out of or resulting from this Security Agreement (including enforcement of this Security Agreement), except claims, losses or liabilities resulting from the Beneficiary's gross negligence or wilful misconduct. (b) The Grantor will upon demand pay to the Beneficiary the amount of any and all reasonable expenses, including the reasonable fees and disbursements of its counsel, costs associated with internal personnel, and the reasonable fees and expenses of any experts and agents, which the Beneficiary may incur in connection with (i) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, and (ii) the exercise or enforcement of any of the rights of the Beneficiary or the Secured Parties hereunder, or (iii) the failure by the Grantor to perform or observe any of the provisions hereof. ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 7.1. Loan Document. This Security Agreement is a Loan Document executed pursuant to the Loan Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof. SECTION 7.2. Amendments; etc. No amendment to or waiver of any provision of this Security Agreement nor consent to any departure by the Grantor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Beneficiary and Grantor, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 7.3. Addresses for Notices. All notices and other communications provided for hereunder shall be in writing (including telegraphic communication) and mailed or telecopied or delivered to either party hereto, addressed to such party at the address of such party specified in the Loan Agreement. All such notices and other communications, when mailed and properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when received; any such notice or communication, if transmitted by telecopier, shall be deemed given when transmitted and electronically confirmed. 16 SECTION 7.4. Section Captions. Section captions used in this Security Agreement are for convenience of reference only, and shall not affect the construction of this Security Agreement. SECTION 7.5. Severability. Wherever possible each provision of this Security Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Security Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Security Agreement. SECTION 7.6. Counterparts. This Security Agreement may be executed by the parties hereto in several counterparts, each of which shall be deemed an original and all of which shall constitute together but one and the same agreement. SECTION 7.7. Governing Law, Entire Agreement, etc. THIS SECURITY AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED EXCLUSIVELY BY THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING FOR SUCH PURPOSE SECTIONS 5-1401 AND 5-1402 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. THIS SECURITY AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE ENTIRE UNDERSTANDING AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND THEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH RESPECT THERETO. [SIGNATURES NEXT PAGE] 17 IN WITNESS WHEREOF, the Grantor has caused this Security Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. NASTECH PHARMACEUTICAL COMPANY, INC. By: /s/ Gregory Weaver Name: Gregory Weaver Title: CFO SCHWARZ PHARMA, INC. By: /s/ Ron Stratton Dr. Ron Stratton, President and COO 18 EX-10.3 6 v84849exv10w3.txt EXHIBIT 10.3 EXHIBIT 10.3 TERMINATION AND MUTUAL RELEASE AGREEMENT THIS TERMINATION AND MUTUAL RELEASE AGREEMENT ("Agreement") is made and entered into this 30th day of September 2002 by and among Nastech Pharmaceutical Company, Inc., a Delaware corporation (the "Buyer") and Schwarz Pharma, Inc., a Delaware corporation ("Seller"). W I T N E S S E T H: WHEREAS, Seller and Buyer entered into that certain License and Supply Agreement, dated as of July 25, 1997 (as amended on November 24, 2000, the "Nascobal Agreement"), in respect of the pharmaceutical product Nascobal; and WHEREAS, Seller and Buyer entered into that certain Letter Agreement, dated as of December 15, 1999 (as amended, the "Scopolamine Agreement"), in respect of the pharmaceutical product Scopolamine; and WHEREAS, there are certain arbitration proceedings pending between Seller and Buyer; referred to as AAA/ICDR No. 50 T 133 00374 02 (the "Arbitration Proceedings"), in connection with the Nascobal Agreement; and WHEREAS, pursuant to an Asset Purchase Agreement dated as of September 30, 2002 between Buyer and Seller (the "Purchase Agreement"), Seller agreed to sell, assign and transfer to Buyer and Buyer agreed to purchase and assume from Seller the Purchased Assets and the Assumed Liabilities, including all of Seller's right, title and interest in and to Nascobal arising out of the Nascobal Agreement; and WHEREAS, Buyer and Seller have agreed in the Purchase Agreement to enter into this Agreement to set forth their agreement concerning the termination of each of the Nascobal Agreement and the Scopolamine Agreement and the respective rights and obligations of the parties thereunder, and the execution and delivery of this Agreement is a material condition of each party's obligation to consummate the transactions contemplated by the Purchase Agreement; WHEREAS, Buyer and Seller desire and intend to terminate the Arbitration Proceedings, with prejudice, and to release each other from all obligations and liabilities stemming from the Scopalamine Agreement, the Arbitration Proceedings, and any matter related thereto. NOW, THEREFORE, for and in consideration of the premises, each party's execution of the Purchase Agreement and the consummation of the transactions contemplated therein and for other good and valuable consideration, the receipt and sufficiency is hereby acknowledged, the parties hereto agree as follows: 1. DEFINITIONS. Capitalized terms used but not defined herein shall have the meanings given in the Purchase Agreement. 2. DISPOSITION OF AGREEMENTS. Effective the date hereof each of the Nascobal Agreement and the Scopolamine Agreement shall be and each of them is terminated and no party to either such agreement shall have any rights or obligations thereunder. 3. DISPOSITION OF PROCEEDINGS. Buyer and Seller hereby agree to terminate the Arbitration Proceedings and to dismiss, with prejudice, all claims and causes of action against each other, including but not limited to those that are the subject of the Arbitration Proceedings, and those set forth in the Demand for Arbitration, dated June 28, 2002. To effectuate this agreement, the parties agree to take all necessary steps to terminate the Arbitration Proceedings, including but not limited to: (1) prepare and execute a Stipulation of Discontinuance with prejudice, and (2) prepare and execute any other reasonable documentation required by the American Arbitration Association/International Center for Dispute Resolution to terminate the Arbitration Proceedings. Each of the Buyer and the Seller shall be responsible for its own costs and expenses incurred in connection with the Arbitration Proceedings. 4. MUTUAL RELEASE. Each party hereto (each as a "Releasing Party") for itself, its predecessors, successors, assigns, affiliates, officers, directors, agents and employees, does hereby release, remise and forever discharge each other party hereto and its respective successors, affiliates, assigns, officers, directors, agents and employees (collectively with each party hereto, the "Releasees" of each party hereto), from any and all claims, demands, rights of action, causes of action, lawsuits, arbitrations, damages, indebtedness, liabilities, obligations, losses or expenses of any nature whatsoever and remedies therefor, duty or relationship, acts, omissions, misfeasance, malfeasance, causes of action, sums of money, accounts, compensation, contracts, controversies, promises, choices in action, rights of indemnity or liability of any type, kind, nature, description or character whatsoever, and irrespective of how, why or by reason of what facts, whether known or unknown, suspected or unsuspected, whether heretofore now existing or hereafter arising, which could, might or may be claimed to exist, whether liquidated or unliquidated, whether existing in law or equity and whether known or unknown, foreseen or unforeseen, which the Releasing Party has or has had, or may hereafter claim to have had, against any Releasees relating to, concerning, or arising from, under or in connection with the Arbitration Proceedings, Nascobal Agreement or the Scopolamine Agreement or the negotiation thereof or the relationships created thereunder, and any transactions and documents in connection therewith, related thereto or contemplated thereby; provided, however that nothing in this Agreement shall affect the validity or effect the rights, obligations and liabilities of the parties under this Agreement, the Purchase Agreement, or the other Transaction Agreements. 5. REMEDIES. 5.1 In the event of any breach or threatened breach by either party hereto of any covenant, warranty, agreement, understanding or provision (the "terms") of this Agreement, each party acknowledges and agrees that the other parties would be irreparably harmed; and, in the event of any breach of the terms of this Agreement, each party agrees that each of the other parties shall be entitled, if it so elects, in addition to any other legal or equitable remedies available to it, to institute and prosecute any proceeding in any court of competent jurisdiction, either at law or in equity, and shall be entitled to such relief as may be available to it, at law or in equity, including, but not limited to, an injunction or an order for specific performance. 5.2 If, for any reason, a part of this Agreement is deemed unenforceable in any court of law of competent jurisdiction, the remaining provisions of this Agreement shall be enforced to the greatest extent possible as if said unenforceable part were omitted. Failure by any party at any time to require performance by the other party of any provision hereto shall in no way affect the full right to require such performance at any time thereafter, nor shall the waiver by either party of the breach of any provision hereof be a waiver of any succeeding breach of the same or any other provision. 6. MISCELLANEOUS. 6.1 The parties hereby agree that this Agreement shall be exclusively governed by and construed in accordance with the laws of the State of New York, without regard to any conflict of law provisions. The parties further agree to fully and irrevocably waive any challenge to the applicability of New York law to any matter arising out of, relating to, or concerning, in any way whatsoever, this Agreement. 6.2 Each party hereto has voluntarily entered into and executed this Agreement after having had the opportunity to be advised by legal counsel of its choice of the effects, significance and consequence of this Agreement. 6.3 This Agreement contains the entire agreement between the parties with respect to the subject matter hereof and cannot be modified or amended except by an agreement made in writing by all the parties hereto. 6.4 Each party hereto acknowledges that it has not relied upon any representation of any kind made by any other party in making the foregoing release. 6.5 It is hereby further understood and agreed that the acceptance of delivery of this Agreement by the parties released hereby shall not be deemed or construed as an admission of liability of any nature whatsoever arising from or related to the subject of this Agreement. 6.6 This Agreement may be signed in any number of counterparts, all of which together shall constitute one and the same document. 6.7 Forum Selection and Consent to Jurisdiction. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. EACH OF THE PARTIES HERETO HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. EACH OF PARTIES HERETO FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF NEW YORK. BOTH PARTIES HEREBY EXPRESSLY AND IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH THEY MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. [SIGNATURES NEXT PAGE] IN WITNESS WHEREOF, the parties have duly executed this Termination, Confidentiality and Mutual Release Agreement as of the day and year first above written. SELLER: SCHWARZ PHARMA, INC. By: /s/ Ron Stratton Dr. Ron Stratton, President and COO BUYER: NASTECH PHARMACEUTICAL COMPANY, INC. By: /s/ Gregory Weaver Name: Gregory Weaver Title: CFO EX-99.1 7 v84849exv99w1.txt EXHIBIT 99.1 EXHIBIT 99.1 FOR IMMEDIATE RELEASE Contact: Matthew D. Haines Director, Corporate Communications (212) 297-6198 mhaines@nastech.com Noonan Russo Presence Euro RSCG David Walsey, 212-845-4257 (investors) Robert Stanislaro, 212-845-4268 (media) NASTECH REACQUIRES NASCOBAL(R) (CYANOCOBALAMIN, USP) GEL FROM SCHWARZ PHARMA AND SIGNS CONTRACT SALES AGREEMENT WITH CARDINAL HEALTH BOTHELL, WA, October 1, 2002 - Nastech Pharmaceutical Company Inc. (NASDAQ NMS: NSTK) announced it has reacquired all product, patent, trademark, licensing and regulatory rights for Nascobal(R) in the United States from Schwarz Pharma. Under terms of the acquisition agreement, Nastech will pay Schwarz a total of $8.75 million plus interest in installments over a four-year period, including an upfront payment of $1.5 million. Under the agreement, Schwarz relinquishes its rights to receive any consideration from Nastech from a second-generation dosage form of cyanocobalamin as well as upon the future sale or license of intranasal scopolamine. This latter agreement eliminates a contingent liability from Nastech to Schwarz of approximately $4.0 million as of September 30, 2002. In connection with Nastech's reacquiring all commercialization rights to Nascobal, Nastech signed a contract sales agreement with Cardinal Health, Inc., a leading provider of products and services supporting the health care industry. Under the terms of the agreement, Cardinal Health will detail Nascobal through a network of 50 direct sales representatives who will regularly call on more than 6,000 gastroenterologists across the U.S. Nastech will pay Cardinal Health a monthly fee for these contract sales services. Nastech will also conduct promotional and marketing campaigns in support of sales of Nascobal, including a comprehensive medical education campaign that encompasses a diversified mix of journal ads, trade shows, medical education conferences, direct-to-consumer advertising and the Internet. "We are very excited to reacquire the rights to Nascobal(R)," stated Steven C. Quay, M.D., Ph.D., Chairman, President, and Chief Executive Officer of Nastech. "Since 94 percent of the 800,000 patients annually given Vitamin B12 prescriptions in the U.S. are for the intramuscular injection, converting these prescriptions to Nascobal is a significant growth opportunity. In addition, with approval of the NDA supplement in July 2002, Nascobal becomes the only cobalamin formulation specifically labeled for treatment of vitamin B12 deficiency in Crohn's disease and we look forward to working with Cardinal Health to expand Nascobal's franchise with this patient population. Finally, this transaction frees Nastech to fully exploit its nasal formulation expertise to enhance and extend Nascobal's proprietary product lifecycle by developing a second generation nasal dosage form, which has been under development for some time now and which is currently in the final stage of clinical testing before FDA submission." In July 2002, the FDA approved a labeling supplement to the Nascobal(R) NDA that states that Nascobal can be used in patients with HIV, AIDS, multiple sclerosis, and Crohn's disease, conditions which can result in vitamin B12 deficiency, and for which Nascobal is indicated to maintain hematologic status. Nastech manufactures Nascobal at its FDA approved, cGMP facility in Hauppauge, New York. Significant peer-reviewed published clinical research supports the importance of the maintenance of proper vitamin B12 levels in this diverse group of patients. For example: In a study of over 300 patients that were sero-positive for the human immunodeficiency virus, participants with low serum vitamin B12 concentrations (< 120 pmol/L) had significantly shorter AIDS-free time than those with adequate vitamin B12 concentrations (median AIDS-free time = 4 vs. 8 y, respectively, P = 0.004). With the high cost of therapy and the toxicity associated with AIDS treatment, any process that extends the time from sero-positivity to AIDS is significant and may contribute to the overall health and well being of this patient group. In one study, over 70 percent of AIDS patients had either frank vitamin B12 deficiency or had an abnormal Schilling test, a test of vitamin B12 oral absorption. In addition, up to 30 percent of late stage AIDS patients have an AIDS associated dementia complex, including a myeolopathy, that has recently been shown to be associated with an abnormality of the vitamin B12-dependent transmethylation pathway, the pathway by which the body maintains the myelin-sheath (or insulation) that surrounds nerves. Literally all Crohn's disease patients who have had a surgical resection have vitamin B12 deficiency. Deficiency even predates surgery, probably due to the malabsorption caused by the disease itself. One study found up to 60 percent of patients with Crohn's disease who had not had surgery had signs of vitamin B12 deficiency. In one study of over 200 consecutive, multiple sclerosis (MS) patients over 20 percent had abnormally low serum vitamin B12 levels. Cerebral spinal fluid levels of vitamin B12 are also reduced in patients with MS and some investigators speculate that vitamin B12 associated transmethylation may be an important component in the demyelination that is characteristic of MS. In the U.S. alone there are approximately 500,000 patients with Crohn's disease, of which approximately 175,000 are candidates for vitamin B12 therapy. Among the nation's 800,000 HIV and AIDS patients, between 10 and 20 percent, or 80,000 to 160,000 people are vitamin B12 deficient. Finally, over 350,000 people in the U.S. have multiple sclerosis. Symptoms of vitamin B12 deficiency include fatigue, weakness, sore tongue, forgetfulness, weight loss, lack of coordination and difficulty walking. Vitamin B12 deficiency may lead to anemia, intestinal problems, and irreversible nerve damage. In addition certain drug therapies for cancer, viral infections (HIV and AIDS), acid reflux and Gastroesophageal Reflux Disease (GERD) may lead to B12 deficiencies requiring B12 therapy. Patients or physicians seeking additional information on Nascobal(R) should contact Nastech's customer service department toll-free at 1-888-627-2579, or email mailto:gcignarella@nastech.com, or visit our website at http://www.nastech.com/nascobal. NASTECH CONFERENCE CALL AND WEBCAST -- TODAY Management will discuss the Nascobal transactions during a conference call today, October 1, 2002, at 10:30 a.m. EST. The public is invited to access the call via a live audio webcast at: http://www.firstcallevents.com/service/ajwz366101982gf12.html. A telephone replay of the conference call will also be available from approximately 1:00 p.m. (EST) today through October 8, 2002. To access the replay of the conference call, United States and Canadian participants should call 800-934-2127. International callers should call 402-220-1139. The Conference ID number is V834. ABOUT NASTECH Nastech Pharmaceutical Company Inc., recognized worldwide as a leader in nasal drug delivery technology, is dedicated to improving patient care by using "Formulation Science," a systematic approach to drug development using biophysics, physical chemistry, and pharmacology to improve efficacy and safety, and to provide new therapeutic options. Additional information on Nastech is available at http://www.nastech.com/. NASTECH SAFE HARBOR STATEMENT This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 including, without limitation, statements regarding the following: (a) the growth of the Nascobal market over the next several years; (b) the Company's expansion of the Nascobal franchise; and (c) the Company's enhancement and expansion of Nascobal's proprietary lifecycle by the development of a second generation nasal dosage form. There are a number of important factors that could cause actual results to differ materially from those projected or suggested in any forward-looking statement made by the Company. These factors include, but are not limited to: (i) the Company's and/or the Company's partner's ability to successfully complete product research and development, including pre-clinical and clinical studies and commercialization; (ii) the Company's and/or the Company's partner's ability to obtain required governmental approvals, including product and patent approvals; (iii) the Company's ability to attract and/or maintain manufacturing, sales, distribution and marketing partners; and (iv) the Company's and/or the Company's partner's ability to develop and commercialize products before its competitors. In addition, significant fluctuations in quarterly results may occur as a result of the timing of milestone payments and the timing of costs and expenses related to the Company's research and development program. A detailed discussion of additional factors that could cause actual results to differ materially from those projected or suggested in any forward-looking statements is contained in the Company's filings with the Securities and Exchange Commission, including those factors discussed under the caption "Risk Factors" in the Company's most recent Annual Report on Form 10-K. Nastech undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this press release. ABOUT CARDINAL HEALTH, INC. Cardinal Health, Inc. (www.cardinal.com) is the leading provider of products and services supporting the health care industry. Cardinal Health companies develop, manufacture, package and market products for patient care; develop drug-delivery technologies; distribute pharmaceuticals, medical-surgical and laboratory supplies; and offer consulting and other services that improve quality and efficiency in health care. Headquartered in Dublin, Ohio, Cardinal Health employs more than 49,000 people on five continents and produces annual revenues of more than $44 billion. Cardinal Health is ranked #23 on the current Fortune 500 list and was named one of the "The World's Best" companies by Forbes magazine in 2002. CARDINAL HEALTH SAFE HARBOR STATEMENT Except for historical information, all other information in this news release consists of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. The most significant of these uncertainties are described in Cardinal Health's Form 10-K, Form 8-K and Form 10-Q reports and exhibits to those reports, and include (but are not limited to) the costs, difficulties, and uncertainties related to the integration of acquired businesses, the loss of one or more key customer or supplier relationships, changes in the distribution outsourcing patterns for health-care products and/or services, the costs and other effects of governmental regulation and legal and administrative proceedings, and general economic conditions. Cardinal undertakes no obligation to update or revise any forward-looking statements. Contact: Matthew D. Haines Director, Corporate Communications (212) 297-6198 mhaines@nastech.com Noonan Russo Presence Euro RSCG David Walsey, 212-845-4257 (investors) Robert Stanislaro, 212-845-4268 (media) -----END PRIVACY-ENHANCED MESSAGE-----

EX-2.1

                                                                     EXHIBIT 2.1





                            ASSET PURCHASE AGREEMENT

                                     Between

                              SCHWARZ PHARMA, INC.

                                       and

                      NASTECH PHARMACEUTICAL COMPANY, INC.


                            Dated September 30, 2002







                                TABLE OF CONTENTS



                                                                                          Page
                                                                                          ----
                                                                                    

1.      DEFINITIONS.........................................................................1
        1.1    Defined Terms................................................................1
        1.2    Other Definitional and Interpretative Matters................................4
2.      PURCHASE AND SALE OF ASSETS.........................................................4
        2.1    Purchased Assets.............................................................4
        2.2    Excluded Assets..............................................................5
        2.3    Assumed Liabilities..........................................................5
        2.4    Excluded Liabilities.........................................................5
        2.5    Purchase Price...............................................................5
        2.6    Further Assurances...........................................................6
        2.7    Bulk Sales Law...............................................................6
        2.8    Taxes........................................................................6
3.      REPRESENTATIONS AND WARRANTIES OF SELLER............................................7
        3.1    Organization.................................................................7
        3.2    Enforceability of Agreement..................................................7
        3.3    No Violation.................................................................7
        3.4    Consents.....................................................................7
        3.5    Title to Properties..........................................................8
        3.6    Product Quality..............................................................8
        3.7    Compliance with Laws.........................................................8
        3.8    Legal Proceedings............................................................8
        3.9    No Finder....................................................................8
4.      REPRESENTATIONS AND WARRANTIES OF BUYER.............................................8
        4.1    Organization.................................................................9
        4.2    Enforceability of Agreement..................................................9
        4.3    No Inconsistent Obligations..................................................9
        4.4    Consents.....................................................................9
        4.5    Legal Proceedings............................................................9
        4.6    No Finder...................................................................10
5.      CERTAIN COVENANTS..................................................................10
        5.1    Tax Reporting and Allocation of Consideration...............................10
        5.2    Effort to Close.............................................................10
        5.3    Returned Products...........................................................10
        5.4    Government Rebates, Chargebacks and Similar Items...........................10
        5.5    Certain Names...............................................................10
        5.6    Confidential Information....................................................11
        5.7    NDC Number..................................................................11
        5.8    Promotional Materials.......................................................11




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                               TABLE OF CONTENTS
                                  (Continued)



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6.      CLOSING............................................................................12
        6.1    Documents to be Delivered by Seller.........................................12
        6.2    Documents to be Delivered by Buyer..........................................12
        6.3    Closing Date................................................................13
        6.4    Contemporaneous Effectiveness...............................................13
7.      CONDITIONS PRECEDENT TO CLOSING....................................................13
        7.1    Legal Proceedings...........................................................13
        7.2    Performance.................................................................13
        7.3    Government Consents.........................................................13
8.      INDEMNIFICATION....................................................................13
        8.1    Survival of Representations and Warranties..................................14
        8.2    General Agreement to Indemnify..............................................14
        8.3    General Procedures for Indemnification......................................15
        8.4    Indemnification Exclusive Remedy............................................16
9.      MISCELLANEOUS PROVISIONS...........................................................17
        9.1    Notices.....................................................................17
        9.2    Expenses....................................................................18
        9.3    Entire Agreement; Modification..............................................18
        9.4    Assignment; Binding Effect; Severability....................................18
        9.5    Governing Law...............................................................18
        9.6    Submission to Jurisdiction..................................................18
        9.7    Waiver of Jury Trial........................................................18
        9.8    Execution in Counterparts...................................................19
        9.9    Public Announcement.........................................................19
        9.10   No Third-Party Beneficiaries................................................19
10.     TERMINATION AND WAIVER.............................................................19
        10.1   Termination.................................................................19
        10.2   Effect of Termination.......................................................20
        10.3   Waiver of Agreement.........................................................20
        10.4   Amendment of Agreement......................................................20




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                               TABLE OF CONTENTS
                                  (Continued)



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EXHIBITS

Exhibit A      -      Form of Assignment and Bill of Sale [not included]
Exhibit B      -      Form of Assumption Agreement [not included]
Exhibit C      -      Form of Loan Agreement [executed copy filed as Exhibit 10.1 to
                      Form 8-K filed on October 15, 2002]
Exhibit D      -      Form of Security Agreement [executed copy filed as Exhibit 10.2 to Form
                      8-K filed on October 15, 2002]
Exhibit E      -      Form of Trademark Security Agreement [not included]
Exhibit F      -      Form of Patent Security Agreement [not included]
Exhibit G      -      Form of Termination and Mutual Release Agreement [executed copy filed
                      as Exhibit 10.3 to Form 8-K filed on October 15, 2002]
Exhibit H      -      Form of Press Release [filed as Exhibit 99.1 to Form 8-K filed on
                      October 15, 2002]




                                     -iii-


                            ASSET PURCHASE AGREEMENT


        This ASSET PURCHASE AGREEMENT, dated as of September 30, 2002 (this
"Agreement"), is by and between Nastech Pharmaceutical Company, Inc., a Delaware
corporation (the "Buyer") and Schwarz Pharma, Inc., a Delaware corporation (the
"Seller").

                                   WITNESSETH:

        WHEREAS, Buyer and Seller entered into that certain License and Supply
Agreement, dated as of July 25, 1997 (as amended on November 24, 2000, the
"License Agreement") in respect of the pharmaceutical product Nascobal; and

        WHEREAS, Seller wishes to sell, assign and transfer to Buyer and Buyer
wishes to purchase from Seller all of Seller's right, title and interest in and
to Nascobal arising out of the License Agreement or otherwise for the
consideration and on the terms specified herein.

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

        1. Definitions.

        1.1 Defined Terms. Capitalized terms used in this Agreement, including
in the Recitals hereto, shall have the meanings given below or provided
parenthetically herein:

        "Affiliate" of any Person means any Person, directly or indirectly
controlled by, controlling or under common control with, such Person. For
purposes of this Agreement, "control" means the power to direct the management
and policies of a Person, whether through the ownership of voting securities, by
agreement or otherwise.

        "Assumed Liabilities" means the liabilities and obligations of Seller
assumed by Buyer pursuant to the Assumption Agreement and Section 2.3.

        "Best Efforts" means, as to any party obligated to use its Best Efforts
to accomplish a particular objective, that the obligated party is required to
make a diligent, reasonable and good faith effort to accomplish the applicable
objective. Such obligation, however, does not require that the obligated party
act in a manner that would be contrary to normal commercial practices in order
to accomplish the objective. The fact that the objective is not actually
accomplished is no indication that the obligated party did not in fact utilize
its Best Efforts in attempting to accomplish the objective.

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

        "Business Day" means a day that is not a Saturday, a Sunday or a
statutory or civic holiday in the States of Wisconsin or Washington or any other
day on which the principal offices of either Seller or Buyer are closed or
become closed prior to 2:00 p.m. local time whether in



                                      -1-


accordance with established company policy or as a result of unanticipated
events, including adverse weather conditions.

        "Closing" means the closing of the transactions described in Article 6.

        "Closing Date" means the date of the Closing as determined pursuant to
Section 6.3.

        "Code" means the Internal Revenue Code of 1986, as amended.

        "Collateral" has the meaning given in the Security Agreement.

        "Encumbrance" means any lien, claim, charge, security interest,
mortgage, pledge, easement, conditional sale or other title retention agreement,
covenant or other similar restrictions affecting the Purchased Assets.

        "Excluded Assets" means the properties and assets of the Business
excluded from the Purchased Assets by Section 2.2.

        "Excluded Liabilities" means the liabilities and obligations that are
not assumed by Buyer as provided in Section 2.4.

        "FDA" means the U.S.  Food and Drug Administration.

        "GAAP" means U.S. generally accepted accounting principles consistently
applied in accordance with past practices.

        "Governmental Body" means any legislative, executive or judicial unit of
any governmental entity (federal, state or local) or any department, commission,
board, agency, bureau, official or other regulatory, administrative or judicial
authority thereof.

        "Governmental Permits" means all the governmental permits and licenses,
certificates of inspection, approvals or other authorizations issued to Seller
with respect to the Business and necessary for the operation of the Business.

        "Inventory" means any finished and unsold Nascobal units which Seller
holds title to or is in possession immediately after the Closing.

        "IRS" means the U.S.  Internal Revenue Service.

        "License Agreement" has the meaning given in the recitals hereto.

        "Loan Agreement" means a Loan Agreement in the form set forth at Exhibit
C hereto.

        "Nascobal" means an intranasal form of cyanocobalamin/vitamin B-12 in
all dosage strengths and sizes that may, pursuant to applicable laws and
regulations, be manufactured, marketed and sold in the Territory under the
approved NDA, together with all expansions and



                                      -2-


improvements to Nascobal which may be included in any supplement, modification
or addition to the NDA.

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

        "Patent Security Agreement" means a Security Agreement in the form set
forth at Exhibit F hereto.

        "Permitted Encumbrances" means (i) statutory Encumbrances for current
taxes, assessments or other governmental charges not yet delinquent or the
amount or validity of which is being contested in good faith by appropriate
proceedings; (ii) mechanics', carriers', workers', repairers' and similar
Encumbrances arising or incurred in the ordinary course of business that are not
in the aggregate material to the Business; (iii) Liens created in connection
with any Transaction Agreement; and (iv) such other imperfections in title,
charges, easement, restrictions and encumbrances which do not in the aggregate
have a material adverse effect on the Purchased Assets, taken as a whole.

        "Person" means any individual, corporation, partnership, limited
liability company, firm, association, joint venture, joint stock company, trust,
unincorporated organization or other entity, or any government or regulatory,
administrative or political subdivision or agency, department or instrumentality
thereof.

        "Proprietary Information" means all information (whether or not
protectable by patent, copyright, mask works or trade secret rights) not
generally known in the relevant trade (except for patents), including, but not
limited to, works of authorship, inventions, discoveries, patentable subject
matter, patents, patent applications, industrial models, industrial designs,
trade secrets, trade secret rights, software, works, copyrightable subject
matters, copyright rights and registrations, mask works, know-how, trademarks,
trade names, service marks, emblems, logos, insignia and related marks and
registrations, specifications, technical manuals and data, libraries,
blueprints, drawings, proprietary processes, product information and development
work-in-process.

        "Purchase Price" has the meaning assigned in Section 2.5.

        "Purchased Assets" has the meaning assigned in Section 2.1.

        "Security Agreement" means a Security Agreement in the form set forth at
Exhibit D hereto.

        "Termination and Mutual Release Agreement" means a Termination and
Mutual Release Agreement in the form set forth at Exhibit G hereto.

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

        "Third Party" means any Person not an Affiliate of the other referenced
Person or Persons and not including the parties hereto or their Affiliates.



                                      -3-


        "Trademark Security Agreement" means a Security Agreement in the form
set forth at Exhibit E hereto.

        "Transaction Agreements" mean this Agreement and, when executed and
delivered by the parties hereto, the exhibits hereto and the agreements,
documents and instruments contemplated hereby and thereby.

        1.2 Other Definitional and Interpretative Matters. Unless otherwise
provided, for purposes of this Agreement, the following rules of interpretation
shall apply:

        Accounting Terms. All accounting terms not specifically defined in this
Agreement shall be construed in accordance with GAAP.

        Calculation of Time Period. When calculating the period of time before
which, within which or following which any act is to be done or step taken
pursuant to this Agreement, the date that is the reference date in calculating
such period shall be excluded. If the last day of such period is a non-Business
Day, the period in question shall end on the next succeeding Business Day.

        Gender and Number. Any reference in this Agreement to gender shall
include all genders, and words imparting the singular number only shall include
the plural and vice versa.

        Headings. The provision of a Table of Contents, the division of this
Agreement into Articles, Sections and other subdivisions and the insertion of
headings are for convenience of reference only and shall not affect or be
utilized in construing or interpreting this Agreement. All references in this
Agreement to any "Section" are to the corresponding Section of this Agreement
unless otherwise specified.

        Herein. The words such as "herein", "hereinafter", "hereof" and
"hereunder" refer to this Agreement as a whole and not merely to a subdivision
in which such words appear unless the context otherwise requires.

        Including. The word "including" or any variation thereof means
"including, without limitation" and shall not be construed to limit any general
statement that it follows to the specific or similar items or matters
immediately following it.

        Schedules and Exhibits. The Schedules and Exhibits attached to this
Agreement shall be construed with and as an integral part of this Agreement to
the same extent as if the same had been set forth verbatim herein.

        2. Purchase and Sale of Assets.

        2.1 Purchased Assets. Upon the terms and subject to the conditions of
this Agreement and in reliance on the representations and warranties contained
herein, on the Closing Date, Seller shall grant, bargain, sell, transfer,
assign, convey and deliver to Buyer, and Buyer shall purchase, acquire and
accept from Seller, all of Seller's right, title and interest in, to and under
the Purchased Assets. For purposes of this Agreement, "Purchased Assets" shall
mean all



                                      -4-


the assets, properties and rights set forth or described in this Section 2.1
(except in each case for the Excluded Assets), whether or not any of such
assets, properties or rights have any value for accounting purposes or are
carried or reflected on or specifically referred to in Seller's books or
financial statements:

        (a) all rights of Seller arising under or by virtue of the License
Agreement;

        (b) any existing mailing lists, customer lists and sales reports related
exclusively to the Business;

        (c) all Inventory; and

        (d) all advertising, marketing and promotional material of Seller that
is related exclusively to the Business.

        2.2 Excluded Assets. Notwithstanding Section 2.1, it is hereby expressly
acknowledged and agreed that the Purchased Assets shall not include, and Seller
is not selling, transferring, assigning, conveying or delivering to Buyer, and
Buyer is not purchasing, acquiring or accepting from Seller, any properties,
assets, rights and interests of Seller or its Affiliates that do not exclusively
relate to the Business (the "Excluded Assets").

        2.3 Assumed Liabilities. On the Closing Date, and subject to Sections
5.3 and 5.4, Buyer shall accept, assume and agree to pay, perform or otherwise
discharge, in accordance with the respective terms and subject to the respective
conditions thereof, all Assumed Liabilities. "Assumed Liabilities" shall mean
all obligations and liabilities in respect of or stemming from any action taken
by Buyer in connection with the Business prior to the Closing Date, including,
without limitation, Buyer's manufacture, handling, sale or marketing of
Nascobal, whether fixed, contingent, known or unknown, and whether arising
before or after the Closing.

        2.4 Excluded Liabilities. Except for the Assumed Liabilities, Buyer
shall not assume any obligations or liabilities of Seller (the "Excluded
Liabilities"), and Seller shall pay, satisfy and perform all of such Excluded
Liabilities (other than the Assumed Liabilities), whether fixed, contingent,
known or unknown, and whether existing as of the Closing or arising thereafter,
which shall include, without limitation, (a) any violation by Seller of any law,
ordinance or regulation in effect prior to the Closing, (b) any liability of
Seller for expenses or taxes, if any, in connection with, resulting from or
arising out of this Agreement or the transactions contemplated hereby, except as
expressly provided in Section 2.8 hereof, (c) any liability of Seller under or
arising by reason of this Agreement, (d) any compensation, benefits or other
obligations or liabilities of Seller to independent contractors, consultants,
employees or other service providers, in each case that are not related to the
Business; or (e) except as expressly provided by any Transaction Agreement, all
obligations and liabilities in respect of, or stemming from, any action taken by
Seller in connection with its handling, marketing, sale or distribution of
Nascobal prior to the Closing Date.



                                      -5-


        2.5 Purchase Price.

        (a) Amount. The aggregate purchase price (the "Purchase Price") shall be
the sum of (i) Eight Million Seven Hundred Fifty Thousand Dollars ($8,750,000)
for the Purchased Assets (other than the Inventory), the Assumed Liabilities and
the Termination and Mutual Release Agreement and (ii) the product of the total
number of Nascobal units comprising the Inventory, as certified by an officer of
Seller on the Closing Date, times $6.00 (such product, the "Inventory Purchase
Price").

        (b) Payment of Purchase Price. The Purchase Price shall be due from
Buyer to Seller as of the Closing Date as follows: (i) on the Closing Date,
Buyer shall pay to Seller a portion of the Purchase Price equal to One Million
Five Hundred Thousand Dollars ($1,500,000) by wire transfer of immediately
available funds to such account or accounts as are designated by Schwarz at
least one Business Day prior to the Closing Date; and (ii) Buyer shall pay the
remaining balance of the Purchase Price by delivering to Seller the Note in
favor of Seller issued pursuant to the Loan Agreement. Buyer shall, upon receipt
of the Inventory from Seller, pay the Inventory Purchase Price to Seller by wire
transfer of immediately available funds to the account described in the
foregoing sentence. On the Closing Date, Buyer shall execute the Loan Agreement
and the Note provided for therein, evidencing Buyer's obligation to pay the
unpaid balance of the Purchase Price, and the Security Agreement, the Patent
Security Agreement and the Trademark Security Agreement, granting a first
priority lien in favor of Seller with respect to the Collateral.

        2.6 Further Assurances.

        (a) Performance of Obligations. Seller and Buyer shall use Best Efforts
to take, or cause to be taken, all action, and to do, or cause to be done, all
things necessary, proper or advisable to carry out all of their respective
obligations under this Agreement and to consummate the transactions contemplated
by this Agreement.

        (b) Further Conveyances and Assumptions. After the Closing Date, Seller
and Buyer shall, and shall cause their Affiliates to, execute, acknowledge and
deliver all such further conveyances, notices, assumptions, releases and
acquittances and such other instruments, and shall take such further actions, as
may be necessary or appropriate to assure fully to Buyer and its respective
successors or assigns, all of the properties, rights, titles, interests,
estates, remedies, powers and privileges intended to be conveyed to Buyer
hereunder and to assure fully to Seller and its Affiliates and their successors
and assigns, the assumption of the liabilities and obligations intended to be
assumed by Buyer hereunder and to otherwise make effective the transactions
contemplated by this Agreement.

        2.7 Bulk Sales Law. Buyer hereby waives compliance by Seller with the
requirements and provisions of any "bulk-transfer" laws of any jurisdiction that
may otherwise be applicable with respect to the sale of any or all of the
Purchased Assets to Buyer.

        2.8 Taxes. Buyer shall be responsible for the payment of all sales, use,
excise, transfer, value added and similar taxes imposed by any Governmental Body
in the State of



                                      -6-


Washington in connection with the transactions contemplated herein but not for
any income or capital gains tax liability of Seller.

        3. Representations and Warranties of Seller.

        Seller represents and warrants to Buyer as follows:

        3.1 Organization. Seller is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite power and authority to conduct its business.

        3.2 Enforceability of Agreement. Seller has the full corporate power and
authority to enter into and execute the Transaction Agreements and to carry out
the transactions contemplated thereby in accordance with their respective terms.
Except as contemplated by the Transaction Agreements, there are no outstanding
contracts, demands, commitments or other agreements or arrangements under which
Seller is or may become obligated to sell, transfer or assign any of the
Purchased Assets. The Transaction Agreements and all transactions required
thereunder to be performed by Seller have been duly and validly authorized and
approved by all necessary corporate action and duly and validly executed and
delivered on behalf of Seller by its duly authorized officers. The Transaction
Agreements constitute the valid and legally binding obligation, subject to
general equity principles, of Seller, enforceable against Seller in accordance
with their respective terms, except as the same may be limited by bankruptcy,
insolvency, reorganization or similar laws affecting the rights of creditors
generally.

        3.3 No Violation. Neither the execution and delivery of this Agreement,
nor the consummation of the transactions contemplated herein will (a) result in
a violation or breach of, or constitute a default under (with or without the
giving of notice or lapse of time or both) (i) the certificate of incorporation
or bylaws of Seller, (ii) any term or provision of any indenture, note,
mortgage, bond, security agreement, loan agreement, guaranty, pledge, license or
other instrument, contract, agreement or commitment, (iii) any writ, order,
judgment, decree, law, rule, regulation, or ordinance, (iv) any applicable
approval, ruling or order of or any exemption by any Governmental Body, or (v)
any other commitment or restriction, to which Seller is a party or by which it
or any of the Purchased Assets is subject or bound, except to the extent that
any such violation, breach or default with respect to the matters specified in
clauses (ii) through (v) could not reasonably be expected to have a material
adverse effect on the Purchased Assets, taken as a whole; or (b) result in (i)
the creation of any Encumbrance on any of the Purchased Assets, other than
Permitted Encumbrances, (ii) the acceleration or creation of any material
obligation of Seller, (iii) the forfeiture of any material right or privilege of
Seller, or (iv) the forfeiture of any material right or privilege of Seller
which may affect Seller's ability to perform under this Agreement.

        3.4 Consents. The execution and delivery of this Agreement by Seller and
the consummation of the transactions contemplated by this Agreement (a) other
than notification to the FDA, do not require the consent, approval or action of,
or any filing with or notice to, any person, firm or other entity, or any
Governmental Body, (b) except for approvals that have already been obtained, do
not require consent or approval of any of Seller's shareholders or



                                      -7-


members of Seller's board of directors pursuant to any business combination,
takeover or other similar law, rule, regulation or ordinance, and (c) other than
notification to the FDA, do not impose any other term, condition or restriction
on Buyer or the Purchased Assets pursuant to any business combination, takeover
or other similar statute, rule or regulation.

        3.5 Title to Properties. Except as set forth in the License Agreement,
Seller has, and upon consummation of the transactions contemplated by this
Agreement at the Closing, Buyer will have, good and marketable title to all of
the Purchased Assets, free and clear of any and all Encumbrances of any kind or
character, other than Permitted Encumbrances.

        3.6 Product Quality. No Nascobal units included in the Inventory are
adulterated within the meaning of the United States Food, Drug and Cosmetic Act
(21 U.S.C. Section 301, et seq.) and the regulations promulgated thereunder, as
currently in effect.

        3.7 Compliance with Laws. Seller has at all times conducted, and is
presently conducting, the Business so as to comply with all laws, ordinances and
regulations applicable to the conduct or operation of the Business or the
ownership or use of the Purchased Assets, in each case except where the failure
to comply would not, individually or in the aggregate, have a material adverse
effect on any of the Purchased Assets, taken as a whole.

        3.8 Legal Proceedings. There is no claim, action, suit, proceeding,
investigation or inquiry pending before any federal, state or other court or
governmental or administrative agency or threatened against the Business or any
of the Purchased Assets, or relating to the transactions contemplated by this
Agreement that could reasonably be expected to have a material adverse effect on
the Purchased Assets or the results of operations of the Business, nor does
Seller know or have reasonable grounds to know of any basis for any such claim,
action, suit, proceeding, investigation, or inquiry. Seller is not a party to or
subject to the provisions of any judgment, order, writ, injunction, decree or
award of any court, arbitrator or governmental, regulatory or administrative
official, body or authority that relates to the Purchased Assets, taken as a
whole, or that might affect the transactions contemplated by this Agreement.

        3.9 No Finder. Seller has not taken any action that would give to any
Person a right to a finder's fee or any type of brokerage commission in relation
to, or in connection with, the transactions contemplated by this Agreement.

        EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE 3, THE SELLER MAKES NO
REPRESENTATIONS OR WARRANTIES AND SPECIFICALLY DISCLAIMS ANY STATUTORY OR
IMPLIED WARRANTIES.

        4. Representations and Warranties of Buyer.

        Buyer represents and warrants to Seller as follows:

        4.1 Organization. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite power and authority to conduct its business.



                                      -8-


        4.2 Enforceability of Agreement. Buyer has the full corporate power and
authority to enter into and execute the Transaction Agreements and to carry out
the transactions contemplated thereby in accordance with their respective terms.
The Transaction Agreements and all transactions required thereunder to be
performed by Buyer have been duly and validly authorized and approved by all
necessary corporate action and duly and validly executed and delivered on behalf
of Buyer by its duly authorized officers. The Transaction Agreements constitute
the valid and legally binding obligation, subject to general equity principles,
of Buyer, enforceable against Buyer in accordance with their respective terms,
except as the same may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting the rights of creditors generally.

        4.3 No Inconsistent Obligations. Neither the execution and delivery of
this Agreement, nor the consummation of the transactions contemplated herein
will (a) result in a violation or breach of, or constitute a default under (with
or without the giving of notice or lapse of time or both) (i) the certificate of
incorporation or bylaws of Buyer, (ii) any term or provision of any indenture,
note, mortgage, bond, security agreement, loan agreement, guaranty, pledge,
license or other instrument, contract, agreement or commitment, (iii) any writ,
order, judgment, decree, law, rule, regulation, or ordinance, (iv) any
applicable approval, ruling or order of or any exemption by any administrative
or governmental body, or (v) any other commitment or restriction, to which Buyer
is a party or by which it or any of the Purchased Assets is subject or bound,
except to the extent that any such violation, breach or default with respect to
the matters specified in clauses (ii) through (v) could not reasonably be
expected to have a material adverse effect on the Purchased Assets, taken as a
whole; or (b) result in (i) the creation of any claim, lien, charge or
encumbrance on any of the Purchased Assets, (ii) the acceleration or creation of
any obligation of Buyer, (iii) the forfeiture of any material right or privilege
of Buyer, or (iv) the forfeiture of any material right or privilege of Buyer
which may affect Buyer's ability to perform under this Agreement.

        4.4 Consents. The execution and delivery of this Agreement by Buyer and
the consummation of the transactions contemplated by this Agreement (a) other
than notification to the FDA, do not require the consent, approval or action of,
or any filing with or notice to, any person, firm or other entity, or any
Governmental Body, (b) except for approvals that have already been obtained, do
not require consent or approval of any of Buyer's shareholders or members of
Buyer's board of directors pursuant to any business combination, takeover or
other similar law, rule, regulation or ordinance, and (c) other than
notification to the FDA, do not impose any other term, condition or restriction
on Buyer or the Purchased Assets pursuant to any business combination, takeover
or other similar statute, rule or regulation.

        4.5 Legal Proceedings. There is no claim, action, suit, proceeding,
investigation or inquiry pending before any federal, state or other court or
governmental or administrative agency or threatened relating to the transactions
contemplated by this Agreement, nor does Buyer know or have reasonable grounds
to know of any basis for any such claim, action, suit, proceeding,
investigation, or inquiry. Buyer is not a party to or subject to the provisions
of any judgment, order, writ, injunction, decree or award of any court,
arbitrator or governmental, regulatory or



                                      -9-


administrative official, body or authority that might affect the transactions
contemplated by this Agreement.

        4.6 No Finder. Buyer has not taken any action that would give to any
Person a right to a finder's fee or any type of brokerage commission in relation
to, or in connection with, the transactions contemplated by this Agreement.

        EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE 4, BUYER MAKES NO
REPRESENTATIONS OR WARRANTIES PURSUANT TO THIS AGREEMENT AND SPECIFICALLY
DISCLAIMS ANY STATUTORY OR IMPLIED WARRANTIES.

        5. Certain Covenants.

        5.1 Tax Reporting and Allocation of Consideration. Buyer and Seller
recognize their mutual obligations pursuant to Section 1060 of the Code to
timely file IRS Form 8594 (the "Asset Acquisition Statement") with each of their
respective federal income tax returns.

        5.2 Effort to Close. Each party hereto shall use its Best Efforts prior
to Closing to obtain all regulatory approvals and consents and to cause the
conditions to Closing hereunder to be satisfied as promptly as practicable.

        5.3 Returned Products.

        (a) Any Nascobal units sold by Seller that are returned to either Buyer
or Seller following the Closing Date shall be allocated 84% for the account of
Seller and 16% for the account of Buyer; provided, however, that, once the
aggregate value of all such returns accepted by Buyer and Seller after the
Closing Date equals $379,000, all returns accepted by either Buyer or Seller
shall thereafter be allocated 100% for the account of Buyer. Seller shall give
written notice to Buyer, and Buyer shall give written notice to Seller, as
applicable, of any such returns accepted by either such party on a monthly or
quarterly basis as provided by Section 5.3(c). Within fifteen (15) Business Days
after receipt of such notice, Buyer or Seller, as applicable, shall remit the
appropriate amount (either 16%, 84% or 100%, in accordance with this Section
5.3(a)) of such returns by check to the other party. Seller and Buyer shall
destroy such returned Nascobal units. Seller shall not take any action intended
to induce any purchaser of Nascobal units to return such Nascobal units.

        (b) Any Nascobal units sold by Buyer that are returned to either Buyer
or Seller following the Closing Date shall be allocated 100% for the account of
the Buyer. Seller shall give written notice to Buyer of any such returns
accepted by Seller since the later of the Closing Date or the last such notice
sent to Buyer. Within fifteen (15) Business Days after receipt of such notice,
Buyer shall remit 100% of the amount of such returns by check to Seller. Seller
shall promptly forward such returned Nascobal units to Buyer.

        (c) Reporting Procedures. No later than fifteen (15) Business Days after
(i) the end of each month during the first twelve months after the Closing Date
and (ii) the end of each fiscal quarter following the one-year anniversary of
the Closing Date, until the earlier of (A) the date



                                      -10-


on which the aggregate value of all returns accepted by Buyer or Seller as
contemplated by Section 5.3(a), above, equals $379,000 or (B) June 30, 2005,
Seller and Buyer shall each furnish to the other a report in respect of the
returns accepted by the reporting party during the preceding month or quarter,
as applicable, setting forth the date, quantity and NDC number of such returns,
the customer from whom each return was accepted, the amount credited to such
customers, whether such returns were destroyed or delivered to Buyer as provided
by Sections 5.3(a) and 5.3(b), and any other information regarding such returns
as Buyer or Seller, as applicable, shall reasonably request.

        5.4 Government Rebates, Chargebacks and Similar Items.

        (a) Seller shall be responsible for administering and satisfying all
requests for rebates owing to the Government or pursuant to managed care
agreements and similar arrangements (collectively, "Rebates") and all
chargebacks, allowances, administrative fees and similar arrangements
(collectively, "Chargebacks") in each case arising with respect to Nascobal
units that are sold by Seller on or before the Closing Date. Seller shall bear
84% and Buyer shall bear 16% of the liability for any such Rebates and
Chargebacks accepted by Seller as follows: (i) Seller shall give written notice
to Buyer of any such Rebates and Chargebacks accepted and paid by Seller since
the later of the Closing Date or the last such notice sent to Buyer; and (ii)
within 20 days after receipt of such notice, Buyer shall remit by check to
Seller an amount equal to 16% of the amount of such Rebates or Chargebacks paid
by Seller.

        (b) Buyer shall be solely responsible for administering and satisfying
all requests for Rebates and Chargebacks arising with respect to Nascobal units
that are sold by Buyer after the Closing Date. Buyer shall be solely liable for
any such Rebates and Chargebacks accepted by it. Seller shall give written
notice to Buyer of any requests for such Rebates and Chargebacks received by
Seller since the later of the Closing Date or the last such notice sent to
Buyer. Buyer shall indemnify Seller for any Losses incurred by Seller in
connection with any such Rebates or Chargebacks by check to Seller.

        5.5 Certain Names. Notwithstanding anything herein to the contrary, no
interest in or right to use the name "Schwarz" or any derivation thereof or any
logo, trademark or trade name in which Seller has any interest and which is not
used in the Business (collectively, the "Retained Names and Marks") is being
transferred to Buyer pursuant to the transactions contemplated hereby. Buyer
agrees not to, and will cause its Affiliates not to, directly or indirectly use
the Retained Names and Marks in the distribution, marketing or sale Nascobal
units. Buyer acknowledges and agrees to re-label all Inventory purchased from
Schwarz hereunder prior to the distribution, marketing or sale thereof so that
such re-labeled Inventory contains no references to the Retained Names and
Marks.

        5.6 Confidential Information.

        (a) Buyer agrees that it will not disclose to any Third Party or use for
its own benefit, any Confidential Information (as defined below) of Seller.
Notwithstanding the foregoing, no Person shall have an obligation hereunder to
keep confidential the Confidential Information of the Seller if and to the
extent disclosure thereof is required by applicable law, regulation, court



                                      -11-


order, or accounting rule or custom, as determined by legal counsel or
accountants to such party, as applicable (provided that unless unlawful prior to
such disclosure the party disclosing such information shall notify the party
which originally provided the information in advance of such disclosure).

        (b) Seller agrees that it will not disclose to any Third Party or use
for its own benefit, any Confidential Information of Buyer. Notwithstanding the
foregoing, no Person shall have an obligation hereunder to keep confidential the
Confidential Information of the Buyer if and to the extent disclosure thereof is
required by applicable law, regulation, court order, or accounting rule or
custom, as determined by legal counsel or accountants to such party, as
applicable (provided that unless unlawful prior to such disclosure the party
disclosing such information shall notify the party which originally provided the
information in advance of such disclosure).

        (c) For purposes of this Agreement, "Confidential Information" shall
mean information of either party disclosed to the other party that was marked
"confidential," "Trade secret" or a similar designation if in tangible form,
designated as confidential at time of disclosure whether in oral or written form
or which by its nature should be understood by a reasonable party in the
pharmaceutical industry to constitute confidential information provided that
"Confidential Information" shall not include information which (i) is already
lawfully in the receiving party's possession or within its knowledge, including
all information contained in the Transaction Agreements or constituting
Purchased Assets, or lawfully becomes available or known to such other party;
provided that such information is not known by such other party to be subject to
another confidentiality agreement with or other obligation of secrecy to such
party, or (ii) becomes generally available to the public other than as a result
of an impermissible disclosure by such other party or its directors, officers,
employees, agents or advisors.

        (d) Anything in the Agreement to the contrary notwithstanding, the
obligations under subsections (a) and (b) above shall survive for five years
from the Closing Date.

        5.7 NDC Number. Buyer shall use its Best Efforts to establish its own
NDC number for Nascobal and market Nascobal thereunder as soon as practicable.
In no event shall Buyer, and Buyer shall cause its Affiliates not to, directly
or indirectly distribute, market or sell Nascobal units pursuant to Sellers
NDC number. For purposes of determining whether the Nascobal units were sold by
Buyer or Seller pursuant to this Agreement, including, without limitation,
Sections 5.3 and 5.4, Buyer and Seller shall refer to the NDC number under which
the relevant Nascobal units were sold.

        5.8 Promotional Materials. Seller shall take all commercially reasonable
steps necessary or reasonably requested by Buyer to cease all promotional,
marketing and sales efforts in respect of Nascobal as of the Closing Date,
including, without limitation, removing all references to Nascobal from Seller's
(and its Affiliates') websites and destroying or returning to Buyer all
promotional, sales and marketing materials relating to Nascobal in Seller's
possession; provided, however, that Seller reserves the right to retain one copy
of any written materials in respect of Nascobal for a period of five (5) years,
which materials shall remain subject to the confidentiality provisions contained
herein, and shall be used solely to monitor compliance with Seller's legal
obligations.



                                      -12-


        6. Closing.

        At the Closing, the following transactions shall take place:

        6.1 Documents to be Delivered by Seller. On the Closing Date, Seller
shall deliver, or execute and deliver, the following documents and agreements to
Buyer:

        (a) the Termination and Mutual Release Agreement;

        (b) an Assignment and Bill of Sale in substantially the form set forth
as Exhibit A with respect to the Purchased Assets;

        (c) a certificate of an appropriate officer of Seller, dated the Closing
Date, certifying on behalf of Seller to the best of his or her knowledge the
fulfillment of the conditions set forth in Sections 7.1 to 7.3;

        (d) all such other bills of sale, assignments and other instruments of
assignment, transfer or conveyance as Buyer may reasonably request or as may be
otherwise necessary to evidence and effect the sale, transfer, assignment,
conveyance and delivery of the Purchased Assets to Buyer and to put Buyer in
ownership, actual possession or control of the Purchased Assets.

        6.2 Documents to be Delivered by Buyer. On the Closing Date, Buyer (and,
in the case of the Security Agreement, each Subsidiary of Buyer having an
interest in the Collateral (as defined in the Security Agreement)) shall
deliver, or execute and deliver, the following funds, documents and agreements
to Seller:

        (a) the Loan Agreement and the Note provided for therein;

        (b) the Security Agreement;

        (c) the Trademark Security Agreement;

        (d) the Patent Security Agreement;

        (e) the Termination and Mutual Release Agreement;

        (f) an Assumption Agreement in substantially the form of Exhibit B with
respect to the Assumed Liabilities;

        (g) a certificate of an appropriate officer of Buyer, dated the Closing
Date, certifying on behalf of Buyer to the best of his or her knowledge the
fulfillment of the conditions set forth in Sections 7.1 to 7.3; and

        (h) all such other documents and instruments as Seller may reasonably
request or as may be otherwise reasonably necessary or desirable to evidence and
effect the assumption by Buyer of the Assumed Liabilities.



                                      -13-


        6.3 Closing Date. The Closing shall take place at the offices of Mayer,
Brown, Rowe & Maw, located at 1675 Broadway, New York, New York 10019, at 10:00
a.m. on September 30, 2002, or at such other place or time or on such other date
as Seller and Buyer may agree upon in writing (such date and time being referred
to herein as the "Closing Date").

        6.4 Contemporaneous Effectiveness. All acts and deliveries prescribed by
this Article 6, regardless of chronological sequence, shall be deemed to occur
contemporaneously and simultaneously on the occurrence of the last act or
delivery, and none of such acts or deliveries shall be effective until the last
of the same has occurred. The Closing shall be effective as of 11:59 pm, New
York City time, on the Closing Date.

        7. Conditions Precedent to Closing.

        The respective obligations of Buyer and Seller to effect the Closing of
the transactions contemplated hereby are subject to the fulfillment, prior to or
at the Closing, of each of the following conditions:

        7.1 Legal Proceedings. No order of any court or administrative agency
shall be in effect that enjoins, restrains, conditions or prohibits consummation
of this Agreement.

        7.2 Performance. In the case of Buyer, Seller shall have performed in
all material respects all obligations and agreements and complied in all
material respects with all covenants and conditions required by this Agreement
to be performed or complied with by it prior to or at the Closing, including
executing and delivering the agreements and certificates specified in Section
6.1 hereof. In the case of Seller, Buyer shall have performed in all material
respects all obligations and agreements and complied in all material respects
with all covenants and conditions required by this Agreement to be performed or
complied with by it prior to or at the Closing, including executing and
delivering the agreements and certificates specified in Section 6.2 hereof.

        7.3 Government Consents. Seller and Buyer shall have received from any
and all persons, firms and other legal entities, or any public or governmental
authorities, bodies or agencies or judicial authority having jurisdiction over
the transactions contemplated by this Agreement, or any part hereof, such
consents, authorizations and approvals as are necessary for the consummation
thereof, and all notices required to be given to government authorities shall
have been given and all applicable waiting periods shall have expired.

        8. Indemnification.

        The rights and obligations of Buyer and Seller under this Agreement
shall be subject to the following terms and conditions:

        8.1 Survival of Representations and Warranties. The representations and
warranties of Buyer and Seller contained in this Agreement shall survive the
Closing for five (5) years. Neither Seller nor Buyer shall have any liability
whatsoever with respect to any such representations or warranties after such
period.



                                      -14-


        8.2 General Agreement to Indemnify.

        (a) Each party shall indemnify, defend and hold harmless the other party
hereto and any director, officer or Affiliate of the other party (each an
"Indemnified Party") from and against any and all claims, actions, suits,
proceedings, liabilities, obligations, losses, and damages, amounts paid in
settlement, interest, costs and expenses (including reasonable attorney's fees,
court costs and other out-of-pocket expenses incurred in investigating,
preparing or defending the foregoing) (collectively, "Losses") incurred or
suffered by any Indemnified Party to the extent that the Losses arise by reason
of, or result from (i) the failure of any representation or warranty of such
party contained in this Agreement to have been true in all material respects
when made and as of the Closing Date or (ii) the breach by such party of any
covenant or agreement of such party contained in this Agreement to the extent
not expressly waived in writing by the other party.

        (b) Seller further agrees to indemnify and hold harmless Buyer from and
against any Losses incurred by Buyer arising out of, resulting from, or relating
to: (i) the Excluded Liabilities; and (ii) Buyer's waiver of any applicable Bulk
Sales laws.

        (c) Buyer further agrees to indemnify and hold harmless Seller from and
against any Losses incurred by Seller with respect to: (i) any failure of Buyer
to discharge any of the Assumed Liabilities whether known or unknown, accrued or
contingent, or now or subsequently incurred; and (ii) any liability arising out
of the operation of the Business by Buyer after the Closing Date.

        (d) The amount of the Indemnifying Party's liability under this
Agreement shall be reduced by any applicable insurance proceeds or proceeds from
other available indemnity rights actually received by, and other savings,
including tax savings, that reduce the overall impact of the Losses upon, the
Indemnified Party.

        (e) The Indemnifying Party's liability for all claims including those
made under Section 8.2(a) shall be subject to the following limitations: (i) the
Indemnifying Party shall have no liability for such claims until the aggregate
amount of the Losses incurred shall exceed 1% of the Purchase Price, in which
case the Indemnifying Party shall be liable for such excess Losses only and (ii)
the Indemnifying Party's aggregate liability for all such claims shall not
exceed the then outstanding balance owing to Seller pursuant to the Loan
Agreement. The Indemnified Party may not make a claim for indemnification under
Section 8.3(a) for breach by the Indemnifying Party of a particular
representation or warranty after the expiration of the survival period specified
in Section 8.1.

        (f) Except as provided by the next sentence, the rights to
indemnification under Section 8 shall not be subject to set-off for any claim by
the Indemnifying Party against any Indemnified Party, whether or not arising
from the same event giving rise to such Indemnified Party's claim for
indemnification. NOTWITHSTANDING ANY PROVISION HEREIN TO THE CONTRARY, IN THE
EVENT THAT BUYER OR ANY OF ITS DIRECTORS, OFFICERS OR AFFILIATES IS THE
INDEMNIFIED PARTY HEREUNDER, THE SOLE RECOURSE OF SUCH INDEMNIFIED PARTY FOR ANY
CLAIM FOR LOSSES IN



                                      -15-


CONNECTION WITH THIS AGREEMENT, THE OTHER TRANSACTION AGREEMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY SHALL BE TO SET OFF THE AMOUNT OF
SUCH LOSSES AGAINST AMOUNTS OWING TO SELLER PURSUANT TO THE LOAN AGREEMENT.

        8.3 General Procedures for Indemnification.

        (a) The Indemnified Party seeking indemnification under this Agreement
shall promptly notify the party against whom indemnification is sought (the
"Indemnifying Party") of the assertion of any claim, or the commencement of any
action, suit or proceeding by any Third Party, in respect of which indemnity may
be sought hereunder and shall give the Indemnifying Party such information with
respect thereto as the Indemnifying Party may reasonably request, but failure to
give such notice shall not relieve the Indemnifying Party of any liability
hereunder (unless the Indemnifying Party has suffered material prejudice by such
failure). The Indemnifying Party shall have the right, but not the obligation,
exercisable by written notice to the Indemnified Party within 30 days of receipt
of notice from the Indemnified Party of the commencement of or assertion of any
claim, action, suit or proceeding by a Third Party in respect of which indemnity
may be sought hereunder (a "Third-Party Claim"), to assume the defense and
control the settlement of such Third-Party Claim that (i) involves (and
continues to involve) solely money damages or (ii) involves (and continues to
involve) claims for both money damages and equitable relief against the
Indemnified Party that cannot be severed, where the claims for money damages are
the primary claims asserted by the Third Party and the claims for equitable
relief are incidental to the claims for money damages.

        (b) The Indemnifying Party or the Indemnified Party, as the case may be,
shall have the right to participate in (but not control), at its own expense,
the defense of any Third-Party Claim that the other is defending, as provided in
this Agreement.

        (c) The Indemnifying Party, if it has assumed the defense of any
Third-Party Claim as provided in this Agreement, shall not consent to a
settlement of, or the entry of any judgment arising from, any such Third-Party
Claim without the Indemnified Party's prior written consent (which consent shall
not be unreasonably withheld) unless such settlement or judgment relates solely
to monetary damages. The Indemnifying Party shall not, without the Indemnified
Party's prior written consent, enter into any compromise or settlement that (i)
commits the Indemnified Party to take, or to forbear to take, any action or (ii)
does not provide for a complete release by such Third Party of the Indemnified
Party with respect to such Third-Party Claim. The Indemnified Party shall have
the sole and exclusive right to settle any Third-Party Claim, on such terms and
conditions as it deems reasonably appropriate, to the extent such Third-Party
Claim involves equitable or other non-monetary relief against the Indemnified
Party, and shall have the right to settle any Third-Party Claim involving money
damages for which Seller has not assumed the defense pursuant to this Section
8.3 with the prior written consent of the Indemnifying Party, which consent
shall not be unreasonably withheld or delayed.

        (d) In the event an Indemnified Party shall claim a right to payment
pursuant to this Agreement, such Indemnified Party shall send written notice of
such claim to the Indemnifying Party. Such notice shall specify the basis for
such claim with reasonable specificity. As



                                      -16-


promptly as possible after the Indemnified Party has given such notice, and
subject to the limitations set forth herein, the Indemnified Party and the
Indemnifying Party shall establish the merits and amount of such claim by mutual
agreement.

        (e) From and after the Closing, Buyer shall maintain customary property,
casualty, business interruption and other insurance in respect of the Business
in accordance with Buyer's general practices provided that in no event shall
such insurance provide coverage in an amount less than five million dollars
($5,000,000) in the aggregate. Indemnification claims shall be reduced by and to
the extent that an Indemnified Party shall have received or reasonably expects
to receive proceeds under insurance policies, risk sharing pools, or similar
arrangements specifically as a result of, and in compensation for, the subject
matter of an indemnification claim by such indemnitee.

        (f) No Indemnified Party will be entitled to indemnification pursuant to
this Section 8:

                (i) with respect to consequential damages consisting of business
        interruption or lost profits, or with respect to punitive damages; or

                (ii) with respect to any obligation, liability or matter,
        arising under laws, regulations or statutes that arise or are
        promulgated or announced after the Closing Date.

        (g) The Indemnified Party shall utilize all commercially reasonable
efforts, consistent with normal practices and policies and good commercial
practice, to mitigate such Losses.

        (h) Any amounts payable under this Section 8.3 shall, for Tax reporting
purposes, be treated by Buyer and Seller as an adjustment to the Purchase Price
and shall be calculated after giving effect to (i) any proceeds received from
insurance policies covering the damage, loss, liability or expense that is the
subject of the claim for indemnity and (ii) to the extent reasonably
determinable the actual recognized Tax benefit to the indemnitee resulting from
the damage, loss, liability or expense that is the subject of the indemnity. For
purposes of this Section 8.3, an actual recognized Tax benefit is an actual
reduction in Taxes payable or a refund of Taxes previously paid.

        8.4 Indemnification Exclusive Remedy. The sole recourse and exclusive
remedy of Buyer and Seller after the Closing Date for the breach of any
representation, warranty, agreement or covenant contained in this Agreement, any
certificate, agreement or instrument contemplated hereby, any document relating
hereto or thereto contained in any Exhibits to this Agreement, or otherwise
arising from Buyer's acquisition of the Purchased Assets or in connection with
this Agreement, shall be to assert a claim for indemnification under the
indemnification provisions of this Section 8. The only legal action which may be
asserted by any party hereto or any Indemnified Party against any other party
hereto with respect to any matter which is the subject of this Section 8 shall
be a contract action to enforce, or to recover Losses for the breach of, this
Agreement, in accordance with and subject to this Section 8. Without limiting
the generality of the foregoing, no legal action based upon predecessor or
successor liability, contribution, tort or strict liability may be maintained by
any party hereto against any other party hereto with respect



                                      -17-


to any matter that is the subject of this Section 8. In furtherance of the
foregoing, Buyer, on behalf of itself, its Affiliates and Subsidiaries, hereby
releases and discharges any directors, officers, stockholders, employees,
representatives and agents of each party hereto, from any lawsuits, claims or
actions in respect of this Agreement and the agreements, instruments,
transactions contemplated hereby.

        9. Miscellaneous Provisions.

        9.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given upon receipt if (i) mailed
by certified or registered mail, return receipt requested, (ii) sent by Federal
Express or other express carrier, fee prepaid, (iii) sent via facsimile with
receipt confirmed, or (iv) delivered personally, addressed as follows or to such
other address or addresses of which the respective party shall have notified the
other.

        (a)    If to Seller, to:    6140 W. Executive Drive
                                    Mequon, Wisconsin 53092
                                    Attn: General Counsel
                                    Facsimile:  (262) 242-1641

               With a copy to:      Mayer, Brown, Rowe & Maw
                                    1675 Broadway
                                    New York, New York 10019
                                    Attn:  Philip O. Brandes, Esq.
                                    Facsimile:  (212) 262-1910

        (b)    If to Buyer, to:     Nastech Pharmaceutical Company, Inc.
                                    3450 Monte Villa Parkway
                                    Bothell, Washington  98021
                                    Attention:  President
                                    Facsimile Number:  (425) 908-3600

               With a copy to:      Wilson Sonsini Goodrich & Rosati, P.C.
                                    530 Carillon Point
                                    Kirkland, Washington  98033
                                    Attn:  Patrick Schultheis, Esq.
                                    Facsimile:  (425) 576-5899

        9.2 Expenses. Except as otherwise provided in this Agreement, each party
to this Agreement shall bear all the fees, costs and expenses that are incurred
by it in connection with the transactions contemplated hereby, whether or not
such transactions are consummated.

        9.3 Entire Agreement; Modification. The agreement of the parties, which
is comprised of this Agreement, the Exhibits hereto and the documents referred
to herein, sets forth the entire agreement and understanding between the parties
and supersedes any prior agreement or understanding, written or oral, relating
to the subject matter of this Agreement. No



                                      -18-


amendment, supplement, modification or waiver of this Agreement shall be binding
unless executed in writing by the party to be bound thereby.

        9.4 Assignment; Binding Effect; Severability. This Agreement may not be
assigned by either party hereto without the other party's written consent. This
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the successors, legal representatives and permitted assigns of each party
hereto. The provisions of this Agreement are severable, and in the event that
any one or more provisions are deemed illegal or unenforceable the remaining
provisions shall remain in full force and effect unless the deletion of such
provision shall cause this Agreement to become materially adverse to either
party, in which event the parties shall use Best Efforts to arrive at an
accommodation that best preserves for the parties the benefits and obligations
of the offending provision.

        9.5 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED EXCLUSIVELY IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
WITHOUT REGARD TO ITS PRINCIPLES OF CONFLICTS OF LAW.

        9.6 Submission to Jurisdiction. Each party hereby irrevocably submits to
and accepts for itself and its properties, generally and unconditionally, the
non-exclusive jurisdiction of the courts of the State of New York and of the
U.S. District Court for the Southern District of New York, waives any defense of
forum non conveniens and agrees to be bound by any judgment rendered thereby
arising under or in respect of this Agreement, the Transaction Agreements or any
related document or obligation. Each party further irrevocably designates and
appoints the individual identified in Section 9.1 as its agent to receive
service of process pursuant to the notification provisions thereof; provided
that, unless otherwise provided by Applicable Law, any failure to mail such copy
shall not affect the validity of the service of such process. If any agent so
appointed refuses to accept service, the designating party hereby agrees that
service of process sufficient for personal jurisdiction in any action against it
in the applicable jurisdiction may be made by registered or certified mail,
return receipt requested, to its address provided in Section 9.1. Each party
hereby acknowledges that such service shall be effective and binding in every
law or shall limit the right of any party to bring any action or proceeding
against the other party in any other jurisdiction.

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



                                      -19-


        9.8 Execution in Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.

        9.9 Public Announcement. Promptly after the Closing, Nastech shall issue
the press release attached hereto as Exhibit H. Except for such press release,
neither Seller nor Buyer shall, without the approval of the other party, make
any press release or other announcement concerning the existence of this
Agreement or the terms of the transactions contemplated by this Agreement,
except as and to the extent that any such party shall be so obligated by law, in
which case the other party shall be advised and the parties shall use their Best
Efforts to cause a mutually agreeable release or announcement to be issued;
provided, however, that the foregoing shall not preclude communications or
disclosures necessary to comply with accounting and German or U.S. federal
securities law disclosure obligations.

        9.10 No Third-Party Beneficiaries. Nothing in this Agreement, express or
implied, is intended to or shall (a) confer on any Person other than the parties
hereto and their respective successors or assigns any rights (including
Third-Party beneficiary rights), remedies, obligations or liabilities under or
by reason of this Agreement or (b) constitute the parties hereto as partners or
as participants in a joint venture. This Agreement shall not provide Third
Parties with any remedy, claim, liability, reimbursement, cause of action or
other right in excess of those existing without reference to the terms of this
Agreement. No Third Party shall have any right, independent of any right that
exists irrespective of this Agreement, under or granted by this Agreement, to
bring any suit at law or equity for any matter governed by or subject to the
provisions of this Agreement.

        10. Termination and Waiver.

        10.1 Termination. This Agreement may be terminated at any time prior to
the Closing Date by:

        (a) Mutual Consent. The mutual written consent of Buyer and Seller;

        (b) Court or Administrative Order. Buyer or Seller if there shall be in
effect a non-appealable order of a court or government administrative agency of
competent jurisdiction prohibiting the consummation of the transactions
contemplated hereby.

        (c) The Buyer or Seller if the Closing shall not have occurred by
December 31, 2002, 2002, provided that the terminating party is not otherwise in
material default or breach of this Agreement.

        10.2 Effect of Termination. In the event of the termination of this
Agreement, this Agreement shall become void and have no effect.

        10.3 Waiver of Agreement. Any term or condition hereof may be waived at
any time prior to the Closing Date by the party hereto which is entitled to the
benefits thereof; provided, however, that such action shall be evidenced by a
written instrument duly executed on behalf of



                                      -20-


such party. The failure of either party to enforce at any time any provision of
this Agreement shall not be construed to be a waiver of such provision nor shall
it in any way affect the validity of this Agreement or the right of such party
thereafter to enforce each and every such provision. No waiver of any breach of
this Agreement shall be held to constitute a waiver of any other or subsequent
breach.

        10.4 Amendment of Agreement. This Agreement may be amended with respect
to any provision contained herein; provided, however, that such amendment shall
be evidenced by a written instrument duly executed on behalf of each party
hereto.


                             [Signatures Next Page]



                                      -21-


        IN WITNESS WHEREOF, each of Buyer and Seller has caused this Asset
Purchase Agreement to be duly executed on its behalf by its duly authorized
officer as of the date first written above.

                                      SCHWARZ PHARMA, INC.

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


                                      NASTECH PHARMACEUTICAL COMPANY, INC.

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



                                      -22-

EX-10.1

                                                                    EXHIBIT 10.1



                                 LOAN AGREEMENT

                                     Between

                      NASTECH PHARMACEUTICAL COMPANY, INC.

                                  as Borrower,

                                       and

                              SCHWARZ PHARMA, INC.,

                                    as Lender

                            Dated September 30, 2002



                                 LOAN AGREEMENT

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

                              W I T N E S S E T H:

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

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

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

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

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

                                    ARTICLE I

                        DEFINITIONS AND ACCOUNTING TERMS

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

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

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

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



                                       1


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

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

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

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

        "Collateral" is defined in the Security Agreement.

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

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

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

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

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

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

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

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



                                       2


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

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

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

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

        "Hazardous Material" means

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

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

               (c) any petroleum product; or

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

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

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

        "Indebtedness" of any Person means, without duplication:

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

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

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



                                       3


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

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

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

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

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

        "Maturity Date" means September 30, 2006.

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

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

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

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

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

        (c)    returns, credits and allowances.

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

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



                                       4


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

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

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

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

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

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

        "Plan" means any Pension Plan or Welfare Plan.

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

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

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

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

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



                                       5


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

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

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

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



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


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

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

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



                                       6


                                   ARTICLE II

                                  LOAN AND NOTE

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

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

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

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

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

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

              



                                       7


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

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

              

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

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

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

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

               (a) on the Maturity Date;

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

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

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



                                       8


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

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

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

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

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

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

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



                                       9


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

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

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

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

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

                                   ARTICLE III

                             CONDITIONS TO BORROWING

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

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

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

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

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

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



                                       10


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

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

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

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

                                   ARTICLE IV

                         REPRESENTATIONS AND WARRANTIES

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

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

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

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

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



                                       11


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

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

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

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



                                       12


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

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

        SECTION 4.7. Taxes.

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

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

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



                                       13


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

                                   ARTICLE V

                                    COVENANTS

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

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

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

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

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

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



                                       14


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

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

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

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

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

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



                                       15


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

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

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

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

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

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

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

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

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

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

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



                                       16


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

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

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

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

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

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

                                   ARTICLE VI

                                EVENTS OF DEFAULT

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

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

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



                                       17


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

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

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

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

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

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

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

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

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

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

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

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



                                       18


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

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

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

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

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

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

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



                                       19


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

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

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

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

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

                                   ARTICLE VII

                            MISCELLANEOUS PROVISIONS

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

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

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



                                       20


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

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

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

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

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

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

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



                                       21


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

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

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

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

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

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

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



                                       22


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

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

                [REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]



                                       23


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


                                            NASTECH PHARMACEUTICAL COMPANY, INC.

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

                                            Address:    3450 Monte Villa Parkway
                                                        Bothell, WA 98021

                                            Facsimile:  (425) 908-3650
                                            Attention:  President


                                            SCHWARZ PHARMA, INC.

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

                                            Address:    6140 W. Executive Drive
                                                        Mequon, Wisconsin 53092

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


                                                                       EXHIBIT A

                                      NOTE

                                                              September 30, 2002

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

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

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

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

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

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

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

                              [Signature next page]







                                        NASTECH PHARMACEUTICAL
                                        COMPANY, INC.



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



                                TABLE OF CONTENTS




                                                                                         PAGE
                                                                                   
ARTICLE I         DEFINITIONS AND ACCOUNTING TERMS..........................................1

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

               SECTION 5.1.1.       Existence..............................................14




                                      -i-


                                TABLE OF CONTENTS
                                   (continued)




                                                                                         PAGE
                                                                                   
               SECTION 5.1.2.       Insurance..............................................14

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

        SECTION 6.4.         Reinstatement Option..........................................19




                                      -ii-


                                TABLE OF CONTENTS
                                   (continued)




                                                                                         PAGE
                                                                                   
ARTICLE VII       MISCELLANEOUS PROVISIONS.................................................20

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

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

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

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

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

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

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

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

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

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

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

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

        SECTION 7.13.        Waiver of Jury Trial..........................................23




                                     -iii-

EX-10.2

                                                                    EXHIBIT 10.2



                               SECURITY AGREEMENT

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

                              W I T N E S S E T H:

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

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

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

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

                                    ARTICLE I

                                   DEFINITIONS

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

        "Beneficiary" is defined in the preamble.

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

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

        "Collateral" is defined in Section 2.1.

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

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



                                       1


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

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

               (c) all firmware associated therewith;

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

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

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

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

        "Grantor" is defined in the preamble.

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

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

        "Loan Agreement" is defined in the first recital.

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



                                       2


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

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

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

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

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

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

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

        "Security Agreement" is defined in the preamble.

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

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

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



                                       3


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

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

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

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

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

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

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

                                   ARTICLE II

                                SECURITY INTEREST



                                       4


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

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

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

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

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

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

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

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

               (d) all Intellectual Property Collateral of the Grantor;

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



                                       5


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

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

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

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

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

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

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

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

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

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



                                       6


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

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

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

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

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


                                   ARTICLE III

                         REPRESENTATIONS AND WARRANTIES

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

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

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



                                       7


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

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

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

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

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

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

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

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

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

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

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



                                       8


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

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

                                   ARTICLE IV

                                    COVENANTS

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

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

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

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

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

        SECTION 4.1.2.  As to Receivables.

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



                                       9


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

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

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

        SECTION 4.1.3. As to Collateral.

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



                                       10


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

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

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

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

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

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

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

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

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



                                       11


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

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

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

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

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

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



                                       12


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

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

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

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

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

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

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

                                    ARTICLE V

                                 THE BENEFICIARY

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



                                       13


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

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

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

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

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

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

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

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

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

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



                                       14


                                   ARTICLE VI

                                    REMEDIES

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

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

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

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

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



                                       15


        SECTION 6.2. Indemnity and Expenses.

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

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

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

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

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


                                   ARTICLE VII

                            MISCELLANEOUS PROVISIONS

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

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

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



                                       16


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

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

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

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



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                                       17


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



                                         NASTECH PHARMACEUTICAL COMPANY, INC.


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


                                         SCHWARZ PHARMA, INC.


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



                                       18

EX-10.3

                                                                    EXHIBIT 10.3



                    TERMINATION AND MUTUAL RELEASE AGREEMENT


        THIS TERMINATION AND MUTUAL RELEASE AGREEMENT ("Agreement") is made and
entered into this 30th day of September 2002 by and among Nastech Pharmaceutical
Company, Inc., a Delaware corporation (the "Buyer") and Schwarz Pharma, Inc., a
Delaware corporation ("Seller").

                              W I T N E S S E T H:

           WHEREAS, Seller and Buyer entered into that certain License and
Supply Agreement, dated as of July 25, 1997 (as amended on November 24, 2000,
the "Nascobal Agreement"), in respect of the pharmaceutical product Nascobal;
and

           WHEREAS, Seller and Buyer entered into that certain Letter Agreement,
dated as of December 15, 1999 (as amended, the "Scopolamine Agreement"), in
respect of the pharmaceutical product Scopolamine; and

           WHEREAS, there are certain arbitration proceedings pending between
Seller and Buyer; referred to as AAA/ICDR No. 50 T 133 00374 02 (the
"Arbitration Proceedings"), in connection with the Nascobal Agreement; and

           WHEREAS, pursuant to an Asset Purchase Agreement dated as of
September 30, 2002 between Buyer and Seller (the "Purchase Agreement"), Seller
agreed to sell, assign and transfer to Buyer and Buyer agreed to purchase and
assume from Seller the Purchased Assets and the Assumed Liabilities, including
all of Seller's right, title and interest in and to Nascobal arising out of the
Nascobal Agreement; and

           WHEREAS, Buyer and Seller have agreed in the Purchase Agreement to
enter into this Agreement to set forth their agreement concerning the
termination of each of the Nascobal Agreement and the Scopolamine Agreement and
the respective rights and obligations of the parties thereunder, and the
execution and delivery of this Agreement is a material condition of each party's
obligation to consummate the transactions contemplated by the Purchase
Agreement;

           WHEREAS, Buyer and Seller desire and intend to terminate the
Arbitration Proceedings, with prejudice, and to release each other from all
obligations and liabilities stemming from the Scopalamine Agreement, the
Arbitration Proceedings, and any matter related thereto.

           NOW, THEREFORE, for and in consideration of the premises, each
party's execution of the Purchase Agreement and the consummation of the
transactions contemplated therein and for other good and valuable consideration,
the receipt and sufficiency is hereby acknowledged, the parties hereto agree as
follows:

           1. DEFINITIONS. Capitalized terms used but not defined herein shall
have the meanings given in the Purchase Agreement.



           2. DISPOSITION OF AGREEMENTS. Effective the date hereof each of the
Nascobal Agreement and the Scopolamine Agreement shall be and each of them is
terminated and no party to either such agreement shall have any rights or
obligations thereunder.

           3. DISPOSITION OF PROCEEDINGS. Buyer and Seller hereby agree to
terminate the Arbitration Proceedings and to dismiss, with prejudice, all claims
and causes of action against each other, including but not limited to those that
are the subject of the Arbitration Proceedings, and those set forth in the
Demand for Arbitration, dated June 28, 2002. To effectuate this agreement, the
parties agree to take all necessary steps to terminate the Arbitration
Proceedings, including but not limited to: (1) prepare and execute a Stipulation
of Discontinuance with prejudice, and (2) prepare and execute any other
reasonable documentation required by the American Arbitration
Association/International Center for Dispute Resolution to terminate the
Arbitration Proceedings. Each of the Buyer and the Seller shall be responsible
for its own costs and expenses incurred in connection with the Arbitration
Proceedings.

           4. MUTUAL RELEASE. Each party hereto (each as a "Releasing Party")
for itself, its predecessors, successors, assigns, affiliates, officers,
directors, agents and employees, does hereby release, remise and forever
discharge each other party hereto and its respective successors, affiliates,
assigns, officers, directors, agents and employees (collectively with each party
hereto, the "Releasees" of each party hereto), from any and all claims, demands,
rights of action, causes of action, lawsuits, arbitrations, damages,
indebtedness, liabilities, obligations, losses or expenses of any nature
whatsoever and remedies therefor, duty or relationship, acts, omissions,
misfeasance, malfeasance, causes of action, sums of money, accounts,
compensation, contracts, controversies, promises, choices in action, rights of
indemnity or liability of any type, kind, nature, description or character
whatsoever, and irrespective of how, why or by reason of what facts, whether
known or unknown, suspected or unsuspected, whether heretofore now existing or
hereafter arising, which could, might or may be claimed to exist, whether
liquidated or unliquidated, whether existing in law or equity and whether known
or unknown, foreseen or unforeseen, which the Releasing Party has or has had, or
may hereafter claim to have had, against any Releasees relating to, concerning,
or arising from, under or in connection with the Arbitration Proceedings,
Nascobal Agreement or the Scopolamine Agreement or the negotiation thereof or
the relationships created thereunder, and any transactions and documents in
connection therewith, related thereto or contemplated thereby; provided, however
that nothing in this Agreement shall affect the validity or effect the rights,
obligations and liabilities of the parties under this Agreement, the Purchase
Agreement, or the other Transaction Agreements.

           5.     REMEDIES.

                  5.1 In the event of any breach or threatened breach by either
party hereto of any covenant, warranty, agreement, understanding or provision
(the "terms") of this Agreement, each party acknowledges and agrees that the
other parties would be irreparably harmed; and, in the event of any breach of
the terms of this Agreement, each party agrees that each of the other parties
shall be entitled, if it so elects, in addition to any other legal or equitable
remedies available to it, to institute and prosecute any proceeding in any court
of competent jurisdiction, either at law or in equity, and shall be entitled to
such relief as may be available to it, at law or in equity, including, but not
limited to, an injunction or an order for specific performance.



                  5.2 If, for any reason, a part of this Agreement is deemed
unenforceable in any court of law of competent jurisdiction, the remaining
provisions of this Agreement shall be enforced to the greatest extent possible
as if said unenforceable part were omitted. Failure by any party at any time to
require performance by the other party of any provision hereto shall in no way
affect the full right to require such performance at any time thereafter, nor
shall the waiver by either party of the breach of any provision hereof be a
waiver of any succeeding breach of the same or any other provision.

           6.     MISCELLANEOUS.

                  6.1 The parties hereby agree that this Agreement shall be
exclusively governed by and construed in accordance with the laws of the State
of New York, without regard to any conflict of law provisions. The parties
further agree to fully and irrevocably waive any challenge to the applicability
of New York law to any matter arising out of, relating to, or concerning, in any
way whatsoever, this Agreement.

                  6.2 Each party hereto has voluntarily entered into and
executed this Agreement after having had the opportunity to be advised by legal
counsel of its choice of the effects, significance and consequence of this
Agreement.

                  6.3 This Agreement contains the entire agreement between the
parties with respect to the subject matter hereof and cannot be modified or
amended except by an agreement made in writing by all the parties hereto.

                  6.4 Each party hereto acknowledges that it has not relied upon
any representation of any kind made by any other party in making the foregoing
release.

                  6.5 It is hereby further understood and agreed that the
acceptance of delivery of this Agreement by the parties released hereby shall
not be deemed or construed as an admission of liability of any nature whatsoever
arising from or related to the subject of this Agreement.

                  6.6 This Agreement may be signed in any number of
counterparts, all of which together shall constitute one and the same document.

                  6.7 Forum Selection and Consent to Jurisdiction. ANY
LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS
AGREEMENT SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE
OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF
NEW YORK. EACH OF THE PARTIES HERETO HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO
THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE
PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE
BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. EACH
OF PARTIES HERETO FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY
REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE
STATE



OF NEW YORK. BOTH PARTIES HEREBY EXPRESSLY AND IRREVOCABLY WAIVE, TO THE FULLEST
EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH THEY MAY HAVE OR HEREAFTER MAY HAVE
TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED
TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.



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           IN WITNESS WHEREOF, the parties have duly executed this Termination,
Confidentiality and Mutual Release Agreement as of the day and year first above
written.


                                        SELLER:

                                        SCHWARZ PHARMA, INC.

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


                                        BUYER:

                                        NASTECH PHARMACEUTICAL COMPANY, INC.

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

EX-99.1

                                                                    EXHIBIT 99.1



FOR IMMEDIATE RELEASE

Contact:
Matthew D. Haines
Director, Corporate Communications
(212) 297-6198
mhaines@nastech.com

Noonan Russo Presence Euro RSCG
David Walsey, 212-845-4257 (investors)
Robert Stanislaro, 212-845-4268 (media)

  NASTECH REACQUIRES NASCOBAL(R) (CYANOCOBALAMIN, USP) GEL FROM SCHWARZ PHARMA
            AND SIGNS CONTRACT SALES AGREEMENT WITH CARDINAL HEALTH

BOTHELL, WA, October 1, 2002 - Nastech Pharmaceutical Company Inc. (NASDAQ NMS:
NSTK) announced it has reacquired all product, patent, trademark, licensing and
regulatory rights for Nascobal(R) in the United States from Schwarz Pharma.
Under terms of the acquisition agreement, Nastech will pay Schwarz a total of
$8.75 million plus interest in installments over a four-year period, including
an upfront payment of $1.5 million. Under the agreement, Schwarz relinquishes
its rights to receive any consideration from Nastech from a second-generation
dosage form of cyanocobalamin as well as upon the future sale or license of
intranasal scopolamine. This latter agreement eliminates a contingent liability
from Nastech to Schwarz of approximately $4.0 million as of September 30, 2002.

In connection with Nastech's reacquiring all commercialization rights to
Nascobal, Nastech signed a contract sales agreement with Cardinal Health, Inc.,
a leading provider of products and services supporting the health care industry.
Under the terms of the agreement, Cardinal Health will detail Nascobal through a
network of 50 direct sales representatives who will regularly call on more than
6,000 gastroenterologists across the U.S. Nastech will pay Cardinal Health a
monthly fee for these contract sales services. Nastech will also conduct
promotional and marketing campaigns in support of sales of Nascobal, including a
comprehensive medical education campaign that encompasses a diversified mix of
journal ads, trade shows, medical education conferences, direct-to-consumer
advertising and the Internet.

"We are very excited to reacquire the rights to Nascobal(R)," stated Steven C.
Quay, M.D., Ph.D., Chairman, President, and Chief Executive Officer of Nastech.
"Since 94 percent of the 800,000 patients annually given Vitamin B12
prescriptions in the U.S. are for the intramuscular injection, converting these
prescriptions to Nascobal is a significant growth opportunity. In addition, with
approval of the NDA supplement in July 2002, Nascobal becomes the only cobalamin
formulation specifically labeled for treatment of vitamin B12 deficiency in
Crohn's disease and we look forward to working with Cardinal Health to expand
Nascobal's franchise with this patient population. Finally, this transaction
frees Nastech to fully exploit its nasal formulation expertise to enhance and
extend Nascobal's proprietary product lifecycle by developing a second
generation nasal dosage form, which has been under development for some time now
and which is currently in the final stage of clinical testing before FDA
submission."

In July 2002, the FDA approved a labeling supplement to the Nascobal(R) NDA that
states that Nascobal can be used in patients with HIV, AIDS, multiple sclerosis,
and Crohn's disease, conditions which can result in vitamin B12 deficiency, and
for which Nascobal is indicated to maintain hematologic status. Nastech
manufactures Nascobal at its FDA approved, cGMP facility in Hauppauge, New York.

Significant peer-reviewed published clinical research supports the importance of
the maintenance of proper vitamin B12 levels in this diverse group of patients.
For example: In a study of over 300 patients that were sero-positive for the
human immunodeficiency virus, participants with low serum vitamin B12
concentrations (< 120 pmol/L) had significantly shorter AIDS-free time than
those with adequate vitamin B12 concentrations (median AIDS-free time = 4 vs. 8
y, respectively, P = 0.004). With the high cost of therapy and the toxicity
associated with AIDS treatment, any process that extends the time from



sero-positivity to AIDS is significant and may contribute to the overall health
and well being of this patient group.

In one study, over 70 percent of AIDS patients had either frank vitamin B12
deficiency or had an abnormal Schilling test, a test of vitamin B12 oral
absorption. In addition, up to 30 percent of late stage AIDS patients have an
AIDS associated dementia complex, including a myeolopathy, that has recently
been shown to be associated with an abnormality of the vitamin B12-dependent
transmethylation pathway, the pathway by which the body maintains the
myelin-sheath (or insulation) that surrounds nerves.

Literally all Crohn's disease patients who have had a surgical resection have
vitamin B12 deficiency. Deficiency even predates surgery, probably due to the
malabsorption caused by the disease itself. One study found up to 60 percent of
patients with Crohn's disease who had not had surgery had signs of vitamin B12
deficiency.

In one study of over 200 consecutive, multiple sclerosis (MS) patients over 20
percent had abnormally low serum vitamin B12 levels. Cerebral spinal fluid
levels of vitamin B12 are also reduced in patients with MS and some
investigators speculate that vitamin B12 associated transmethylation may be an
important component in the demyelination that is characteristic of MS.

In the U.S. alone there are approximately 500,000 patients with Crohn's disease,
of which approximately 175,000 are candidates for vitamin B12 therapy. Among the
nation's 800,000 HIV and AIDS patients, between 10 and 20 percent, or 80,000 to
160,000 people are vitamin B12 deficient. Finally, over 350,000 people in the
U.S. have multiple sclerosis. Symptoms of vitamin B12 deficiency include
fatigue, weakness, sore tongue, forgetfulness, weight loss, lack of coordination
and difficulty walking. Vitamin B12 deficiency may lead to anemia, intestinal
problems, and irreversible nerve damage.

In addition certain drug therapies for cancer, viral infections (HIV and AIDS),
acid reflux and Gastroesophageal Reflux Disease (GERD) may lead to B12
deficiencies requiring B12 therapy.

Patients or physicians seeking additional information on Nascobal(R) should
contact Nastech's customer service department toll-free at 1-888-627-2579, or
email mailto:gcignarella@nastech.com, or visit our website at
http://www.nastech.com/nascobal.

NASTECH CONFERENCE CALL AND WEBCAST -- TODAY
Management will discuss the Nascobal transactions during a conference call
today, October 1, 2002, at 10:30 a.m. EST. The public is invited to access the
call via a live audio webcast at:
http://www.firstcallevents.com/service/ajwz366101982gf12.html.

A telephone replay of the conference call will also be available from
approximately 1:00 p.m. (EST) today through October 8, 2002. To access the
replay of the conference call, United States and Canadian participants should
call 800-934-2127. International callers should call 402-220-1139. The
Conference ID number is V834.

ABOUT NASTECH
Nastech Pharmaceutical Company Inc., recognized worldwide as a leader in nasal
drug delivery technology, is dedicated to improving patient care by using
"Formulation Science," a systematic approach to drug development using
biophysics, physical chemistry, and pharmacology to improve efficacy and safety,
and to provide new therapeutic options. Additional information on Nastech is
available at http://www.nastech.com/.

NASTECH SAFE HARBOR STATEMENT
This press release contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934 including, without limitation, statements regarding the
following: (a) the growth of the Nascobal market over the next several years;
(b) the Company's expansion of the Nascobal franchise; and (c) the Company's
enhancement and expansion of Nascobal's proprietary lifecycle by the development
of a second generation nasal dosage form. There are a number of important
factors that could cause actual results to differ materially from those
projected or suggested in any



forward-looking statement made by the Company. These factors include, but are
not limited to: (i) the Company's and/or the Company's partner's ability to
successfully complete product research and development, including pre-clinical
and clinical studies and commercialization; (ii) the Company's and/or the
Company's partner's ability to obtain required governmental approvals, including
product and patent approvals; (iii) the Company's ability to attract and/or
maintain manufacturing, sales, distribution and marketing partners; and (iv) the
Company's and/or the Company's partner's ability to develop and commercialize
products before its competitors. In addition, significant fluctuations in
quarterly results may occur as a result of the timing of milestone payments and
the timing of costs and expenses related to the Company's research and
development program. A detailed discussion of additional factors that could
cause actual results to differ materially from those projected or suggested in
any forward-looking statements is contained in the Company's filings with the
Securities and Exchange Commission, including those factors discussed under the
caption "Risk Factors" in the Company's most recent Annual Report on Form 10-K.
Nastech undertakes no obligation to update forward-looking statements to reflect
events or circumstances occurring after the date of this press release.

ABOUT CARDINAL HEALTH, INC.
Cardinal Health, Inc. (www.cardinal.com) is the leading provider of products and
services supporting the health care industry. Cardinal Health companies develop,
manufacture, package and market products for patient care; develop drug-delivery
technologies; distribute pharmaceuticals, medical-surgical and laboratory
supplies; and offer consulting and other services that improve quality and
efficiency in health care. Headquartered in Dublin, Ohio, Cardinal Health
employs more than 49,000 people on five continents and produces annual revenues
of more than $44 billion. Cardinal Health is ranked #23 on the current Fortune
500 list and was named one of the "The World's Best" companies by Forbes
magazine in 2002.

CARDINAL HEALTH SAFE HARBOR STATEMENT
Except for historical information, all other information in this news release
consists of forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected, anticipated or implied. The most significant of
these uncertainties are described in Cardinal Health's Form 10-K, Form 8-K and
Form 10-Q reports and exhibits to those reports, and include (but are not
limited to) the costs, difficulties, and uncertainties related to the
integration of acquired businesses, the loss of one or more key customer or
supplier relationships, changes in the distribution outsourcing patterns for
health-care products and/or services, the costs and other effects of
governmental regulation and legal and administrative proceedings, and general
economic conditions. Cardinal undertakes no obligation to update or revise any
forward-looking statements.

Contact:
Matthew D. Haines
Director, Corporate Communications
(212) 297-6198
mhaines@nastech.com

Noonan Russo Presence Euro RSCG
David Walsey, 212-845-4257 (investors)
Robert Stanislaro, 212-845-4268 (media)