Contract

Exhibit 10.4 AKSYS, LTD. INVESTOR RIGHTS AGREEMENT DATED AS OF JUNE 23, 2006 TABLE OF CONTENTS PAGE1. Definitions 22. Registration of New Registrable Securities 4 2.1 Mandatory Registration 4 2.2 Legal Counsel 5 2.3 Effect of Failure to File and Obtain and Maintain Effectiveness of Registration Statement 6 2.4 Request for Acceleration 73. Registration Obligations With Respect to All Registrable Securities 7 3.1 Maintain Effectiveness of Registration Statements 7 3.2 Review of Registration Statements 8 3.3 Copies of Registration Statements 9 3.4 “Blue Sky” Laws 9 3.5 Notice of Certain Events 9 3.6 Stop Orders and Ineffectiveness of Registration Statement 10 3.7 Ineligibility for Form S-3 10 3.8 Sufficient Number of Shares Registered 11 3.9 Underwriter Status and Related Matters 11 3.10 Disclosure of Information Concerning Investors 12 3.11 Listing of Registrable Securities 12 3.12 Unlegended Certificates 13 3.13 Transfer of Registrable Securities 13 3.14 Governmental Agencies 13 3.15 Delivery of Earnings Statement 13 3.16 Compliance with Laws 14 3.17 Confirmation 14 3.18 Reports Under the 1934 Act 14 3.19 Blackout Period 144. Obligations of the Investors 155. Expenses of Registration 166. Assignment of Registration Rights 167. Company Board of Directors 16 7.1 Board Representation 16 7.2 Executive Committee 17 7.3 Other Committees 17 7.4 Certain Officers 17 7.5 Continuation of Rights 17 7.6 Vacancies 18 7.7 Costs and Expenses 18 7.8 Directors’ Indemnification 18 i PAGE 7.9 Series B Preferred Director 19 7.10 Certificate of Incorporation; By-Laws 19 7.11 Performance 198. Covenants of the Company 19 8.1 Inspection 19 8.2 Delivery of Financing Statements and Other Reports 20 8.3 Right of First Refusal upon Sale of Company 20 8.4 Notice of Litigation 21 8.5 Preservation of Existence, Etc 21 8.6 Payment of Taxes, Etc 22 8.7 Maintenance of Insurance 22 8.8 Keeping of Records and Books of Account 22 8.9 Compliance with Requirements of Governmental Authorities 22 8.10 Maintenance of Properties, Etc 22 8.11 Licenses 23 8.12 Protection of Intellectual Property Rights 23 8.13 Restrictions on Certain Corporate Actions 23 8.14 Termination of Certain Covenants 249. Indemnification 2410. Contribution 2711. No Inconsistent Agreements or Actions 2712. Lockup 2813. Amendment of Registration Rights 2814. Entire Agreement; Termination of Existing Registration Rights Agreement 2815. Miscellaneous 28 ii INVESTOR RIGHTS AGREEMENT This Investor Rights Agreement (this “Agreement”) is entered into as ofJune 23, 2006, by and among AKSYS, LTD., a Delaware corporation (the “Company”),DURUS LIFE SCIENCES MASTER FUND LTD., a Cayman Islands company (“Durus”), andARTAL LONG BIOTECH PORTFOLIO LLC, a Delaware limited liability company(“Artal”). Durus and Artal are collectively referred to herein as the “ExistingInvestors,” and each is individually referred to as an “Existing Investor.” WHEREAS, in connection with the Securities Purchase Agreement by and amongthe Company and Durus of even date herewith (the “Purchase Agreement”), theCompany has agreed, upon the terms and subject to the conditions set forth inthe Purchase Agreement, to issue and sell to Durus at the Initial Closing, asdefined in the Purchase Agreement, (i) 5,000 shares of the Company’s Series BConvertible Preferred Stock (“Initial Preferred Shares”), the terms of which areset forth in the certificate of designation for such series of preferred stockin the form attached as Exhibit A to the Purchase Agreement (the “Certificate ofDesignation”), and which Initial Preferred Shares shall be convertible intoshares of the Company’s common stock (the “Common Stock”) pursuant to the termsof the Certificate of Designation (such shares of Common Stock to be receivedupon the conversion of the Initial Preferred Shares are referred to herein asthe “Initial Conversion Shares”), and (ii) warrants (the “Initial Warrants”) topurchase 5,000,000 shares of Common Stock at an initial exercise price of $1.10per share (the “Initial Warrant Shares” and, together with the InitialConversion Shares and the Initial Warrants, the “Initial Securities”); WHEREAS, the Purchase Agreement provides that after the Initial Closing,Durus will have the option, in its sole discretion, to purchase up to anadditional $15,000,000 of the Company’s Series B Convertible Preferred Stock(the “Additional Preferred Shares”) convertible into Common Stock (the”Additional Conversion Shares”) and warrants (the “Additional Warrants”) topurchase shares of Common Stock (the “Additional Warrant Shares” and, togetherwith the Additional Conversion Shares and the Additional Warrants, the”Additional Registrable Securities”) from the Company at one or more SubsequentClosings, as defined in the Purchase Agreement; WHEREAS, contemporaneously with the execution and delivery of the PurchaseAgreement, Durus and the Company also are executing and delivering a loanagreement, substantially in the form attached as Exhibit D to the PurchaseAgreement (the “Loan Agreement”), pursuant to which the Company will be issuingcertain notes to Durus (the “Notes”); WHEREAS, Durus also currently holds 21,377,274 shares of Common Stock (the”Durus Shares”) and a warrant (the “Durus Warrant”) to purchase 281,454 sharesof Common Stock at an exercise price of $3.25 per share subject to adjustmentpursuant to the terms of the Durus Warrant (the “Durus Warrant Shares” and,together with the Durus Shares and the Durus Warrants, the “Durus Securities”); WHEREAS, Artal currently holds 501,870 shares of Common Stock (the “ArtalShares”) and an unsecured subordinated promissory note in the principal amountof $322,000 (the “ArtalNote”) issued by the Company to Artal pursuant to that certain Note PurchaseAgreement, dated as of February 23, 2004, by and among the Company and Artal,and pursuant to the Artal Note the Company has the right to elect, in lieu ofrepayment in cash of all or any portion of the principal due under the ArtalNote, to repay such amount of principal in Common Stock of the Company (the”Note Shares”), subject to the terms and conditions of the Artal Note. WHEREAS, the Company has previously registered certain Durus Securities andthe Artal Shares on a registration statement on Form S-3, Registration No.333-114396, filed by the Company with the Securities and Exchange Commission(the “SEC”) on May 13, 2004 (the “Existing Registration Statement”); and WHEREAS, in connection with the execution and delivery of the PurchaseAgreement and the other Transaction Documents (as defined in the PurchaseAgreement), the Company has agreed to provide rights to the Existing Investorsas provided herein. NOW, THEREFORE, in consideration of the premises and the mutual covenantscontained herein and other good and valuable consideration, the receipt andsufficiency of which are hereby acknowledged, the Company and the ExistingInvestors hereby agree as follows:1. DEFINITIONS. Capitalized terms used herein and not otherwise defined herein shall havethe respective meanings set forth in the Purchase Agreement. As used in thisAgreement, the following terms shall have the following meanings: (A) “Additional Registrable Securities” means the (i) AdditionalRegistrable Securities and (ii) any shares of capital stock issued or issuablefrom time to time (with any adjustments) in exchange for or otherwise withrespect to the Additional Conversion Shares or the Additional Warrant Shares,including as a result of any share split, share dividend, recapitalization,exchange or similar event or otherwise, without regard to any limitations onconversions of the Additional Preferred Shares or exercise of the AdditionalWarrants. (B) “Affiliate” means, with respect to any Person, any other Persondirectly, or indirectly through one or more intermediaries, controlling,controlled by or under common control with such Person. For purposes of thisdefinition, the term “control” (and correlative terms) means the power, whetherby contract, equity ownership or otherwise, to direct the policies or managementof a Person. (C) “Beneficial Owner” and “Beneficially Own” mean, with respect to anyPerson, any securities (i) which such Person or any of such Person’s Affiliatesbeneficially owns, directly or indirectly; (ii) which such Person or any of suchPerson’s Affiliates, directly or indirectly, has (A) the right to acquire(whether such right is exercisable immediately or only after the passage oftime) pursuant to any agreement, arrangement or understanding (whether or not inwriting), or upon the exercise of conversion rights, exchange rights, rights,warrants or options, or otherwise, or (B) the right to vote pursuant to anyagreement, arrangement or understanding (whether or not in writing); or (iii)which are beneficially owned, directly or indirectly, by any other Person (orany Affiliate thereof) with which such Person (or any of such Person’sAffiliates) has any 2agreement, arrangement or understanding (whether or not in writing) for thepurpose of acquiring, holding, voting or disposing of any voting securities ofthe same issuer. (D) “Business Day” means any day other than Saturday, Sunday or any otherday on which commercial banks in The City of New York are authorized or requiredby law to remain closed. (E) “Effective Date” means the date that the Registration Statement (asdefined below) has been declared effective by the SEC. (F) “Effectiveness Deadline” means (i) with respect to the RegistrationStatement to be filed hereunder covering the New Registrable Securities (asdefined below), the date which is 60 days after the Initial Closing, or if thereis any review of such Registration Statement by the SEC, 120 days after theInitial Closing, (ii) with respect to the Registration Statement or RegistrationStatements to be filed hereunder covering the Additional Registrable Securities,the date which is 60 days after the Subsequent Closing relating to AdditionalRegistrable Securities, or if there is any review of such Registration Statementby the SEC, 120 days after such Subsequent Closing and (iii) with respect to theRegistration Statement to be filed hereunder covering the Note Shares, the datewhich is 60 days after the issuance of such Note Shares, or if there is anyreview of such Registration Statement by the SEC, 120 days after the issuance ofsuch Note Shares. (G) “Existing Registrable Securities” means the Durus Securities registeredon the Existing Registration Statement and the Artal Shares and any shares ofcapital stock issued or issuable from time to time (with any adjustments) inexchange for or otherwise with respect to such Durus Shares, the Artal Shares orthe Durus Warrant Shares, including as a result of any share split, sharedividend, recapitalization, exchange or similar event or otherwise, withoutregard to any limitations on conversions of the Durus Warrants. (H) “Filing Deadline” means (i) with respect to the Registration Statementto be filed hereunder covering the New Registrable Securities, thirty (30)Business Days following the Initial Closing, (ii) with respect to theRegistration Statement or Registration Statements to be filed hereunder coveringthe Additional Registrable Securities, within thirty (30) Business Daysfollowing the Subsequent Closing relating to such Additional RegistrableSecurities and (iii) with respect to the Registration Statement to be filedhereunder covering the Note Shares, thirty (30) Business Days following theissuance of the Note Shares. (I) “Investors” mean the Existing Investors and any of their transferees orassignees who receive or acquire Registrable Securities and who are entitled tothe benefit of this Agreement as provided in Section 6 hereof. (J) “New Registrable Securities” means (i) the Initial Securities and (ii)any shares of capital stock issued or issuable from time to time (with anyadjustments) in exchange for or otherwise with respect to the Initial ConversionShares or the Initial Warrant Shares, including as a result of any share split,share dividend, recapitalization, exchange or similar event or otherwise,without regard to any limitations on conversions of the Initial Preferred Sharesor exercise of the Initial Warrants. 3 (K) “1933 Act” means the Securities Act of 1933, as amended, and the rulesand regulations promulgated by the SEC thereunder. (L) “1934 Act” means the Securities Exchange Act of 1934, as amended, andthe rules and regulations promulgated by the SEC thereunder. (M) “Person” means an individual, a limited liability company, apartnership, a joint venture, a corporation, a trust, an unincorporatedorganization and a government or any department or agency thereof. (N) “register,” “registered,” and “registration” refer to a registrationeffected by preparing and filing one or more Registration Statements (as definedbelow) in compliance with the 1933 Act and pursuant to Rule 415 and thedeclaration of effectiveness of such Registration Statement(s) by the SEC. (O) “Registrable Securities” means the New Registrable Securities, theAdditional Registrable Securities, the Existing Registrable Securities and theNote Shares. (P) “Registration Statement” means a registration statement or registrationstatements of the Company filed under the 1933 Act covering the RegistrableSecurities. (Q) “Rule 415” means Rule 415 under the 1933 Act or any successor ruleproviding for the offering of securities on a continuous or delayed basis. (R) “Warrant Shares” means the Initial Warrant Shares, the AdditionalWarrant Shares and the Durus Warrant Shares.2. REGISTRATION OF NEW REGISTRABLE SECURITIES. 2.1 MANDATORY REGISTRATION. (A) The Company shall use its best efforts to prepare, and, as soon aspracticable, but in no event later than the applicable Filing Deadline, filewith the SEC a Registration Statement on Form S-3 covering the resale of all ofthe New Registrable Securities and the issuance of the Initial Warrant Shares tobe acquired upon exercise of the Initial Warrants. In the event that Form S-3 isunavailable for such a registration, the Company shall use such other form as isavailable for such a registration that is reasonably acceptable to Durus. TheRegistration Statement prepared pursuant hereto shall register for resale10,000,000 shares of Common Stock and all of the Initial Warrants, and shallregister the issuance of 5,000,000 shares of Common Stock upon exercise of theInitial Warrants. The Registration Statement, to the extent allowable under the1933 Act and the rules and regulations promulgated thereunder (including Rule416), shall state that such Registration Statement also covers suchindeterminate number of additional shares of Common Stock as may become issuableupon conversion of or otherwise pursuant to the Initial Preferred Shares andexercise of the Initial Warrants to prevent dilution resulting from stocksplits, stock dividends or similar transactions. The Company shall use itsreasonable best efforts to have the Registration Statement declared effective bythe SEC as soon as practicable, but in no event later than the respectiveEffectiveness Deadline. 4 (B) In the event of any Subsequent Closings, the Company shall use itsbest efforts to prepare, and, as soon as practicable thereafter, but in no eventlater than the applicable Filing Deadline, file with the SEC a RegistrationStatement on Form S-3 covering the resale of all the Additional RegistrableSecurities relating to each such Subsequent Closing and the issuance of theAdditional Warrant Shares to be acquired upon exercise of the AdditionalWarrants issued at each such Subsequent Closing. In the event that Form S-3 isunavailable for such a registration, the Company shall use such other form as isavailable for such a registration that is reasonably acceptable to Durus. TheRegistration Statement, to the extent allowable under the 1933 Act and the rulesand regulations promulgated thereunder (including Rule 416), shall state thatsuch Registration Statement also covers such indeterminate number of additionalshares of Common Stock as may become issuable upon conversion of or otherwisepursuant to the Additional Preferred Shares and exercise of the AdditionalWarrants to prevent dilution resulting from stock splits, stock dividends orsimilar transactions. The Company shall use its reasonable best efforts to haveeach such Registration Statement declared effective by the SEC as soon aspracticable after each such Subsequent Closing, but in no event later than theapplicable Effectiveness Deadline. (C) In the event of the issuance of Note Shares, the Company shall useits best efforts to prepare, and, as soon as practicable thereafter, but in noevent later than the applicable Filing Deadline, file with the SEC aRegistration Statement on Form S-3 covering the resale of all of the NoteShares. In the event that Form S-3 is unavailable for such a registration, theCompany shall use such other form as is available for such a registration thatis reasonably acceptable to holders of a majority in interest of the NoteShares. The Registration Statement prepared pursuant hereto shall register forresale all of the Note Shares. The Company shall use its reasonable best effortsto have such Registration Statement declared effective by the SEC as soon aspracticable after the issuance of the Note Shares, but in no event later thanthe applicable Effectiveness Deadline. (D) In the event that Durus distributes or otherwise transfers any ofits Registrable Securities to its investors or members, the Company shall useits best efforts to prepare, and, as soon as practicable, file with the SEC aRegistration Statement on Form S-3 covering the resale of all of suchRegistrable Securities by such investors or members upon the written request ofDurus. In the event that Form S-3 is unavailable for such a registration, theCompany shall use such other form as is available for such a registration thatis reasonably acceptable to a majority of such investors or members. The Companyshall not be required to effect a registration pursuant to this Section 2.1(d)if (i) the Company has previously effected two (2) registrations pursuant tothis Section 2.1(d), and such registrations have been declared or orderedeffective, or (ii) the Company receives such written request from Durus morethan five (5) years after the date hereof. 2.2 LEGAL COUNSEL. (A) Subject to Section 5 hereof, Durus shall have the right to selectone legal counsel to review and oversee any registration pursuant to Sections2.1(a) or 2.1(b), which shall be designated in writing by Durus (“Durus LegalCounsel”). 5 (B) Subject to Section 5 hereof, holders of a majority in interest ofthe Artal Shares shall have the right to select one legal counsel to review andoversee any registration pursuant to Section 2.1(c), which shall be designatedin writing by such holders (“Artal Legal Counsel” and, together with Durus LegalCounsel, “Legal Counsel”). (C) The Company and Legal Counsel shall reasonably cooperate with eachother in regards to the performance of the Company’s obligations under thisAgreement. 2.3 EFFECT OF FAILURE TO FILE AND OBTAIN AND MAINTAIN EFFECTIVENESS OFREGISTRATION STATEMENT. If (i) a Registration Statement covering the New Registrable Securities orthe Additional Registrable Securities required to be covered thereby andrequired to be filed by the Company pursuant to this Section 2 is (A) not filedwith the SEC on or before the applicable Filing Deadline (a “Filing Failure”) or(B) filed with the SEC but not declared effective by the SEC on or before theapplicable Effectiveness Deadline (an “Effectiveness Failure”) or (ii) on anyday after the Effective Date sales of all of such Registrable Securitiesrequired to be included on such Registration Statement cannot be made (otherthan during an Allowable Grace Period (as defined in Section 3.19)) pursuant tosuch Registration Statement (including, without limitation, because of a failureto keep such Registration Statement effective, to disclose such information asis necessary for sales to be made pursuant to such Registration Statement, asuspension or delisting of the Common Stock on its principal trading market orexchange, or to register a sufficient number of shares of Common Stock) (a”Maintenance Failure”) then, as partial relief for the damages to any holder byreason of any such delay in or reduction of its ability to sell the underlyingshares of Common Stock (which remedy shall not be exclusive of any otherremedies available at law or in equity), the Company shall pay to each holder ofNew Registrable Securities or Additional Registrable Securities, as applicable,relating to such Registration Statement an amount in cash equal to one percent(1%) of the aggregate purchase price of such Investor’s Initial Preferred Sharesand Initial Warrants or Additional Preferred Shares and Additional Warrants,respectively, on each of the following dates: (i) on every thirtieth day (prorated for periods totaling less than thirty days) after a Filing Failure untilsuch Filing Failure is cured; (ii) on every thirtieth day (pro rated for periodstotaling less than thirty days) after an Effectiveness Failure until suchEffectiveness Failure is cured; and (iii) on every thirtieth day (pro rated forperiods totaling less than thirty days) after a Maintenance Failure until suchMaintenance Failure is cured; provided, that the maximum amount payable by theCompany pursuant to this Section 2.3 with respect to such Registration Statementshall not exceed 10% of the aggregate purchase price of such Investor’sRegistrable Securities included in such Registration Statement. The payments towhich a holder shall be entitled pursuant to this Section 2.3 are referred toherein as “Registration Delay Payments.” Registration Delay Payments shall bepaid on the earlier of (I) the last day of each calendar month during which suchRegistration Delay Payments are incurred and (II) the third Business Day afterthe event or failure giving rise to the Registration Delay Payments is cured. Inthe event the Company fails to make Registration Delay Payments in a timelymanner, such Registration Delay Payments shall bear interest, from the date theRegistration Delay Payment was due until the date such Registration DelayPayment is paid in full, at the rate of ten percent (10%) per annum.Notwithstanding anything to the contrary herein, the Company shall not berequired to pay any Registration Delay Payments to the extent that suchregistration is required to be made pursuant 6to a Registration Statement on Form S-1 for the sole reason that Form S-3 isunavailable to such registration. 2.4 REQUEST FOR ACCELERATION. The Company shall submit to the SEC, within two (2) Business Days after thelater of the date that (i) the Company learns that no review of the RegistrationStatement will be made by the staff of the SEC or that the staff has no furthercomments on the Registration Statement, as the case may be, and (ii) theapproval of Legal Counsel in accordance with Section 3.2 (which approval shallbe immediately sought), a request for acceleration of effectiveness of suchRegistration Statement to a time and date not later than 48 hours after thesubmission of such request.3. REGISTRATION OBLIGATIONS WITH RESPECT TO ALL REGISTRABLE SECURITIES. The Company shall have the following obligations with respect to theregistration of the Registrable Securities: 3.1 MAINTAIN EFFECTIVENESS OF REGISTRATION STATEMENTS. (A) The Company shall keep the Registration Statements covering theRegistrable Securities, including the Existing Registration Statement, effectivepursuant to Rule 415 at all times until the earlier of (i) the date as of whichall of the Investors may sell all of the Registrable Securities covered by allof the Registration Statements in any period of three months pursuant to Rule144 (or any successor thereto) promulgated under the 1933 Act and (ii) the dateon which the Investors shall have sold all of the Registrable Securities coveredby all Registration Statements (or, in the case of the Warrants, the date onwhich each such Warrant shall have otherwise terminated pursuant to its terms)(the “Registration Period”); provided, however, that the Registration Periodwith respect to any Registration Statement filed pursuant to Section 2.1(d)shall be until the earlier of (i) the date as of which all investors and membersof Durus that own Registrable Securities covered by such Registration Statementmay sell all of the Registrable Securities covered by such RegistrationStatement in any period of three months pursuant to Rule 144 (or any successorthereto) promulgated under the 1933 Act and (ii) the date on which all investorsand members of Durus that own Registrable Securities covered by suchRegistration Statement shall have sold all of the Registrable Securities coveredby such Registration Statement. The Company shall ensure that each RegistrationStatement (including any amendments or supplements thereto and prospectusescontained therein) shall not contain any untrue statement of a material fact oromit to state a material fact required to be stated therein, or necessary tomake the statements therein (in the case of prospectuses, in the light of thecircumstances in which they were made) not misleading. (B) Subject to Section 3.19 of this Agreement, the Company shallprepare and file with the SEC such amendments (including post-effectiveamendments) and supplements to a Registration Statement and the prospectus usedin connection with such Registration Statement, which prospectus is to be filedpursuant to Rule 424 promulgated under the 1933 Act, or prepare and file withthe SEC a new Registration Statement, as may be necessary to effect theprovisions of Section 3.1 and to otherwise keep such Registration Statementeffective at all times during the 7Registration Period, and, during such period, comply with the provisions of the1933 Act with respect to the disposition of all Registrable Securities of theCompany covered by such Registration Statement until such time as all of suchRegistrable Securities shall have been disposed of in accordance with theintended methods of disposition by the seller or sellers thereof as set forth insuch Registration Statement. The Company shall use its best efforts to prepareand file with the SEC a prospectus supplement or, if required, a post-effectiveamendment to the Existing Registration Statement as soon as practicablefollowing the Initial Closing to effect the provisions of Section 3.1. In thecase of amendments and supplements to a Registration Statement which arerequired to be filed pursuant to this Agreement (including pursuant to thisSection 3.1(b)) by reason of the Company filing a report on Form 10-Q, Form 10-Kor any analogous report under the 1934 Act, the Company shall have incorporatedsuch report by reference into such Registration Statement, if applicable, orshall file such amendments or supplements with the SEC within two Business Daysof the day on which the 1934 Act report is filed which created the requirementfor the Company to amend or supplement such Registration Statement. 3.2 REVIEW OF REGISTRATION STATEMENTS. (A) To the extent applicable, the Company shall (A) permit Durus LegalCounsel to review and comment upon (i) Registration Statements covering the NewRegistrable Securities, the Additional Registrable Securities or the ExistingRegistrable Securities at least five (5) Business Days prior to its filing withthe SEC (and for at least two (2) Business Days after any final, materialchanges are made to any draft thereof) (provided that the Filing Deadline shallbe extended by the time taken by Durus Legal Counsel beyond such specifiedperiods in exercising its right to review such Registration Statements pursuantto this Section 3) and (ii) all amendments and supplements to such RegistrationStatements within a reasonable number of days prior to their filing with theSEC, and (B) not file any such Registration Statement or amendment or supplementthereto in a form to which such Durus Legal Counsel reasonably objects. TheCompany shall not submit a request for acceleration of the effectiveness of anysuch Registration Statement or any amendment or supplement thereto without theprior approval of Durus Legal Counsel, which consent shall not be unreasonablywithheld. The Company shall furnish to Durus Legal Counsel, without charge, (i)copies of any correspondence from the SEC or the staff of the SEC to the Companyor its representatives relating to any such Registration Statement, (ii)promptly after the same is prepared and filed with the SEC, one copy of any suchRegistration Statement and any amendment(s) thereto, including financialstatements and schedules, all documents incorporated therein by reference, ifrequested by an Investor, and all exhibits and (iii) upon the effectiveness ofany such Registration Statement, one copy of the prospectus included in suchRegistration Statement and all amendments and supplements thereto. The Companyshall reasonably cooperate with Durus Legal Counsel in performing the Company’sobligations pursuant to this Section 3. (B) To the extent applicable, the Company shall (A) permit Artal LegalCounsel to review and comment upon (i) a Registration Statement cover the ArtalShares at least five (5) Business Days prior to its filing with the SEC (and forat least two (2) Business Days after any final, material changes are made to anydraft thereof) (provided that the Filing Deadline shall be extended by the timetaken by Artal Legal Counsel beyond such specified periods in exercising itsright to review such Registration Statement pursuant to this Section 3) and (ii)all 8amendments and supplements to such Registration Statement within a reasonablenumber of days prior to their filing with the SEC, and (B) not file any suchRegistration Statement or amendment or supplement thereto in a form to whichArtal Legal Counsel reasonably objects. The Company shall not submit a requestfor acceleration of the effectiveness of such Registration Statement or anyamendment or supplement thereto without the prior approval of Artal LegalCounsel, which consent shall not be unreasonably withheld. The Company shallfurnish to Artal Legal Counsel, without charge, (i) copies of any correspondencefrom the SEC or the staff of the SEC to the Company or its representativesrelating to any such Registration Statement, (ii) promptly after the same isprepared and filed with the SEC, one copy of any such Registration Statement andany amendment(s) thereto, including financial statements and schedules, alldocuments incorporated therein by reference, if requested by an Investor, andall exhibits and (iii) upon the effectiveness of any such RegistrationStatement, one copy of the prospectus included in such Registration Statementand all amendments and supplements thereto. The Company shall reasonablycooperate with Artal Legal Counsel in performing the Company’s obligationspursuant to this Section 3. 3.3 COPIES OF REGISTRATION STATEMENTS. To the extent applicable, the Company shall furnish to each Investor whoseRegistrable Securities are included in any Registration Statement, withoutcharge, (i) promptly after the same is prepared and filed with the SEC, at leastone copy of any Registration Statement and any amendment(s) thereto, includingfinancial statements and schedules, all documents incorporated therein byreference, if requested by the Investor, all exhibits and each preliminaryprospectus, (ii) upon the effectiveness of any Registration Statement, one (1)copy of the prospectus included in such Registration Statement and allamendments and supplements thereto (or such other number of copies as suchInvestor may reasonably request) and (iii) such other documents, includingcopies of any preliminary or final prospectus, as such Investor may reasonablyrequest from time to time in order to facilitate the disposition of theRegistrable Securities owned by such Investor. 3.4 “BLUE SKY” LAWS. The Company shall use its reasonable best efforts to (i) register andqualify, unless an exemption from registration and qualification applies, theresale by Investors of the Registrable Securities covered by a RegistrationStatement and the issuance of the Warrant Shares upon exercise of the Warrantsunder such other securities or “blue sky” laws of all applicable jurisdictionsin the United States, (ii) prepare and file in those jurisdictions, suchamendments (including post-effective amendments) and supplements to suchregistrations and qualifications as may be necessary to maintain theeffectiveness thereof during the Registration Period, (iii) take such otheractions, including preparing and filing new registrations and qualifications inapplicable jurisdictions, as may be necessary to maintain such registrations andqualifications in effect at all times during the Registration Period, and (iv)take all other actions reasonably necessary or advisable to qualify theRegistrable Securities for sale in such jurisdictions; provided, however, thatthe Company shall not be required in connection therewith or as a conditionthereto to (x) qualify to do business in any jurisdiction where it would nototherwise be required to qualify but for this Section 3.4, (y) subject itself togeneral taxation in any such jurisdiction, or (z) file a general consent toservice of process in any such jurisdiction. The 9Company shall promptly notify each Investor who holds Registrable Securities andthe Legal Counsel for such Investor pursuant to Section 2.2 of the receipt bythe Company of any notification with respect to the suspension of theregistration or qualification of such Registrable Securities for sale under thesecurities or “blue sky” laws of any jurisdiction in the United States or itsreceipt of actual notice of the initiation or threatening of any proceeding forsuch purpose. 3.5 NOTICE OF CERTAIN EVENTS. The Company shall notify each Investor (and such Investor’s Legal Counselpursuant to Section 2.2) in writing of the happening of any event, as promptlyas practicable after becoming aware of such event, as a result of which (i) theprospectus included in a Registration Statement covering such Investor’sRegistrable Securities includes an untrue statement of a material fact oromission to state a material fact required to be stated therein or necessary tomake the statements therein, in the light of the circumstances under which theywere made, not misleading (provided that in no event shall such notice containany material, nonpublic information), or (ii) the representations and warrantiesmade by the Company herein or in connection with a Registration Statement ceaseto be true and correct in all material respects, and in each such case, subjectto Section 3.19, promptly prepare a supplement or amendment to such RegistrationStatement to correct such untrue statement or omission and deliver one (1) copyof such supplement or amendment to such Legal Counsel and each Investor (or suchother number of copies as such Legal Counsel or such Investor may reasonablyrequest). The Company shall also promptly notify such Legal Counsel and eachInvestor in writing (i) when a prospectus or any prospectus supplement orpost-effective amendment has been filed, and when a Registration Statement orany post-effective amendment has become effective (notification of sucheffectiveness shall be delivered to such Legal Counsel and each Investor byfacsimile or e-mail on the same day of such effectiveness and by overnightmail), (ii) of any request by the SEC for amendments or supplements to aRegistration Statement or related prospectus or related information, and (iii)of the Company’s reasonable determination that a post-effective amendment to aRegistration Statement would be appropriate. 3.6 STOP ORDERS AND INEFFECTIVENESS OF REGISTRATION STATEMENT (A) The Company shall use its best efforts to prevent the issuance ofany stop order or other suspension of effectiveness of a Registration Statement,or the suspension of the qualification of any of the Registrable Securities forsale in any jurisdiction and, if such an order or suspension is issued, toobtain the withdrawal of such order or suspension at the earliest possiblemoment and to notify each Investor who holds Registrable Securities being soldpursuant to such Registration Statement and such Investor’s Legal Counselpursuant to Section 2.2 of the issuance of such order and the resolution thereofor its receipt of actual notice of the initiation or threat of any proceedingfor such purpose. (B) If a Registration Statement ceases to be effective for more than30 days for any reason at any time during the Registration Period, the Companyshall file with the SEC an additional Registration Statement (the “SubsequentRegistration Statement”) covering all of the Registrable Securities not soldunder the Registration Statement that has ceased to be effective (the “InitialRegistration Statement”). If a Subsequent Registration Statement is filed withthe SEC, the Company shall use reasonable best efforts to cause the SubsequentRegistration 10Statement to be declared effective by the SEC as soon as practicable after suchfiling and to keep such Subsequent Registration Statement continuously effectivefor the duration of the Registration Period in accordance with the terms of thisAgreement. 3.7 INELIGIBILITY FOR FORM S-3. In the event that Form S-3 is not available for the continued registrationof the resale of Registrable Securities hereunder or the issuance of the WarrantShares upon exercise of the Warrants, the Company shall (i) register the resaleof the Registrable Securities and the issuance of the Warrant Shares on anotherappropriate form reasonably acceptable to holders of a majority in interest ofthe Registrable Securities prior to the time at which such Form S-3 will nolonger be available for such continued registration or, if later, as soon aspracticable following the determination by the Company’s outside legal counselthat such Form S-3 is no longer available for such continued registration, and(ii) undertake to register such Registrable Securities and Warrant Shares onForm S-3 as soon as such form is available, provided that the Company shallmaintain the effectiveness of the Registration Statement then in effect untilsuch time as a Registration Statement on Form S-3 covering the RegistrableSecurities has been declared effective by the SEC. Notwithstanding theforegoing, the Company shall use its best efforts to take any actions reasonablynecessary to maintain its eligibility to use Form S-3 to permit the resale ofthe Registrable Securities and the issuance of the Warrant Shares. 3.8 SUFFICIENT NUMBER OF SHARES REGISTERED. In the event the number of shares available under a Registration Statementis insufficient to cover all of the Registrable Securities required to becovered by such Registration Statement, the Company shall amend the applicableRegistration Statement, or file a new Registration Statement (on the short formavailable therefor, if applicable), or both, so as to cover all of suchRegistrable Securities as of the trading day immediately preceding the date ofthe filing of such amendment or new Registration Statement. Such amendment ornew Registration Statement shall be filed as soon as practicable, but in anyevent not later than fifteen (15) days after the necessity therefor arises. TheCompany shall use its reasonable best efforts to cause such amendment and/or newRegistration Statement to become effective as soon as practicable following thefiling thereof. The calculation set forth above in this Section 3.8 shall bemade without regard to any limitations on the conversion of the InitialPreferred Shares or Additional Preferred Shares or the exercise of the Warrants,and such calculation shall assume that the Initial Preferred Shares and theAdditional Preferred Shares are then convertible into shares of Common Stock atthe then prevailing conversion rate of such shares and that the Warrants arethen exercisable for shares of Common Stock at the then prevailing exerciseprice therein. 3.9 UNDERWRITER STATUS AND RELATED MATTERS. (A) At the reasonable request of any Existing Investor, or at thereasonable request of any other Investor that may be required under applicablesecurities laws to be described in the Registration Statement as an underwriter,the Company shall furnish to such Investor, on the date of the effectiveness ofthe Registration Statement and thereafter from time to time on such dates as anInvestor may reasonably request (i) a letter, dated such date, from theCompany’s independent certified public accountants in form and substance as iscustomarily 11given by independent certified public accountants to underwriters in anunderwritten public offering, addressed to the Investor, and (ii) an opinion,dated as of such date, of counsel representing the Company for purposes of suchRegistration Statement, in customary form, scope and substance for similarofferings, addressed to the Investors. (B) At the reasonable request of any Existing Investor, or at thereasonable request of any other Investor that may be required under applicablesecurities laws to be described in the Registration Statement as an underwriter,the Company shall make available for inspection by (i) such Investor, (ii) suchInvestor’s Legal Counsel pursuant to Section 2.2 and (iii) one firm ofaccountants or other agents retained by the Investors (collectively, the”Inspectors”), all pertinent financial and other records, and pertinentcorporate documents and properties of the Company (collectively, the “Records”),as shall be reasonably deemed necessary by each Inspector, and cause theCompany’s officers, directors and employees to supply all information which anyInspector may reasonably request; provided, however, that each Inspector shallagree in writing to hold in strict confidence and not to make any disclosure(except to such Investor) or use of any Record or other information which theCompany determines in good faith to be confidential, and of which determinationthe Inspectors are so notified, unless (a) the disclosure of such Records isnecessary to avoid or correct a misstatement or omission in any RegistrationStatement or is otherwise required under the 1933 Act, (b) the release of suchRecords is ordered pursuant to a final, non-appealable subpoena or order from acourt or government body of competent jurisdiction, or (c) the information insuch Records has been made generally available to the public other than bydisclosure in violation of this or any other agreement of which the Inspectorhas knowledge. Each Investor agrees that it shall, upon learning that disclosureof such Records is sought in or by a court or governmental body of competentjurisdiction or through other means, give prompt notice to the Company and allowthe Company, at its expense, to undertake appropriate action to preventdisclosure of, or to obtain a protective order for, the Records deemedconfidential. Nothing herein (or in any other confidentiality agreement betweenthe Company and any Investor) shall be deemed to limit the Investors’ ability tosell Registrable Securities in a manner which is otherwise consistent withapplicable laws and regulations. (C) Any underwriters and broker-dealers entering into underwriting ordistribution agreements with the Existing Investors in connection with anyRegistration Statement or sale, transfer or other distribution in connectiontherewith may be selected only by the Existing Investors, subject to approval bythe Company, which shall not be unreasonably withheld. The Company agrees thatit shall enter into such underwriting or distribution agreement, provided theterms of such agreement are commercially reasonable. 3.10 DISCLOSURE OF INFORMATION CONCERNING INVESTORS. The Company shall hold in confidence and not make any disclosure ofinformation concerning an Investor provided to the Company unless (i) disclosureof such information is necessary to comply with federal or state securitieslaws, (ii) the disclosure of such information is necessary to avoid or correct amisstatement or omission in any Registration Statement, (iii) the release ofsuch information is ordered pursuant to a subpoena or other final,non-appealable order from a court or governmental body of competentjurisdiction, or (iv) such information has been made generally available to thepublic other than by disclosure in violation 12of this Agreement or any other agreement. The Company agrees that it shall, uponlearning that disclosure of such information concerning an Investor is sought inor by a court or governmental body of competent jurisdiction or through othermeans, give prompt written notice to such Investor and allow such Investor, atthe Investor’s expense, to undertake appropriate action to prevent disclosureof, or to obtain a protective order for, such information. 3.11 LISTING OF REGISTRABLE SECURITIES. The Company shall use its best efforts either to (i) cause all of theRegistrable Securities covered by a Registration Statement to be listed on eachsecurities exchange on which securities of the same class or series issued bythe Company are then listed, if any, if the listing of such RegistrableSecurities is then permitted under the rules of such exchange, or (ii) securedesignation and quotation of all of the Registrable Securities covered by aRegistration Statement on the NASDAQ National Market or NASDAQ Capital Market,or (iii) if, despite the Company’s best efforts to satisfy the preceding clause(i) or (ii) the Company is unsuccessful in satisfying the preceding clause (i)or (ii), to secure the inclusion for quotation on the OTC Bulletin Board forsuch Registrable Securities and, without limiting the generality of theforegoing, to use its best efforts to arrange for at least two market makers toregister with the National Association of Securities Dealers, Inc. (“NASD”) assuch with respect to such Registrable Securities. The Company shall pay all feesand expenses in connection with satisfying its obligation under this Section3.11. 3.12 UNLEGENDED CERTIFICATES. To the extent applicable, the Company shall cooperate with the Investorswho hold Registrable Securities being offered and, to the extent applicable,facilitate the timely preparation and delivery of certificates (not bearing anyrestrictive legend) representing the Registrable Securities to be offeredpursuant to a Registration Statement and enable such certificates to be in suchdenominations or amounts, as the case may be, as the Investors may reasonablyrequest and registered in such names as the Investors may request. 3.13 TRANSFER OF REGISTRABLE SECURITIES. If requested by an Investor, the Company shall as soon as practicable afterreceipt of notice from such Investor and subject to Section 3.19 hereof, (i)incorporate in a prospectus supplement or post-effective amendment suchinformation as an Investor reasonably requests to be included therein relatingto the sale and distribution of Registrable Securities, including, withoutlimitation, information with respect to the number of Registrable Securitiesbeing offered or sold, the purchase price being paid therefor and any otherterms of the offering of the Registrable Securities to be sold in such offering;(ii) make all required filings of such prospectus supplement or post-effectiveamendment after being notified of the matters to be incorporated in suchprospectus supplement or post-effective amendment; and (iii) supplement or makeamendments to any Registration Statement if reasonably requested by an Investorholding any Registrable Securities. 13 3.14 GOVERNMENTAL AGENCIES. The Company shall use its best efforts to cause the Registrable Securitiescovered by a Registration Statement to be registered with or approved by suchother governmental agencies or authorities as may be necessary to consummate thedisposition of such Registrable Securities. 3.15 DELIVERY OF EARNINGS STATEMENT. The Company shall make generally available to its security holders as soonas practical, but not later than ninety (90) days after the close of the periodcovered thereby, an earnings statement (in form complying with, and in themanner provided by, the provisions of Rule 158 under the 1933 Act) covering atwelve-month period beginning not later than the first day of the Company’sfiscal quarter next following the effective date of the Registration Statement. 3.16 COMPLIANCE WITH LAWS. The Company shall otherwise use its best efforts to comply with allapplicable rules and regulations of the SEC in connection with any registrationhereunder. 3.17 CONFIRMATION. To the extent applicable, within two (2) Business Days after a RegistrationStatement which covers Registrable Securities is ordered effective by the SEC,the Company shall deliver, and shall cause legal counsel for the Company todeliver, to the transfer agent for such Registrable Securities (with copies tothe Investors whose Registrable Securities are included in such RegistrationStatement) confirmation that such Registration Statement has been declaredeffective by the SEC. 3.18 REPORTS UNDER THE 1934 ACT. With a view to making available to the Investors the benefits of Rule 144promulgated under the 1933 Act or any other similar rule or regulation of theSEC that may at any time permit the Investors to sell securities of the Companyto the public without registration (“Rule 144”), the Company agrees to: (A) make and keep public information available, as those terms areunderstood and defined in Rule 144; (B) file with the SEC in a timely manner all reports and otherdocuments required of the Company under the 1933 Act and the 1934 Act so long asthe Company remains subject to such requirements (it being understood thatnothing herein shall limit the Company’s obligations under Section 4.2 of thePurchase Agreement) and the filing of such reports and other documents isrequired for the applicable provisions of Rule 144; and (C) furnish to each Investor so long as such Investor owns RegistrableSecurities, promptly upon request, (i) a written statement by the Company, iftrue, that it has complied with the reporting requirements of Rule 144, the 1933Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly reportof the Company and such other reports and 14documents so filed by the Company, and (iii) such other information as may bereasonably requested to permit the Investors to sell such securities pursuant toRule 144 without registration. 3.19 BLACKOUT PERIOD. Notwithstanding anything to the contrary herein, at any time after aRegistration Statement has been declared effective by the SEC, the Company maydelay the disclosure of material, non-public information concerning the Companythe disclosure of which at the time is not, in the good faith opinion of theBoard (as defined in Section 7.1), in the best interest of the Company and, inthe opinion of counsel to the Company, otherwise required (a “Grace Period”);provided, that the Company shall promptly (i) notify the Investors in writing ofthe existence of material, non-public information giving rise to a Grace Period(provided that in each notice the Company will not disclose the content of suchmaterial, non-public information to the Investors) and the date on which theGrace Period will begin, and (ii) notify the Investors in writing of the date onwhich the Grace Period ends; and, provided further, that no Grace Period shallexceed thirty (30) consecutive days and during any three hundred sixty five(365) day period such Grace Periods shall not exceed an aggregate ofseventy-five (75) days and the first day of any Grace Period must be at leastfive (5) trading days after the last day of any prior Grace Period (each, an”Allowable Grace Period”). For purposes of determining the length of a GracePeriod above, the Grace Period shall begin on and include the date the Investorsreceive the notice referred to in clause (i) and shall end on and include thelater of the date the Investors receive the notice referred to in clause (ii)and the date referred to in such notice. The provisions of Section 3.6(a) hereofshall not be applicable during the period of any Allowable Grace Period. Uponexpiration of the Grace Period, the Company shall again be bound by the firstsentence of Section 3.5 with respect to the information giving rise theretounless such material, non-public information is no longer applicable.4. OBLIGATIONS OF THE INVESTORS. (A) At least seven (7) Business Days prior to the first anticipatedfiling date of a Registration Statement, the Company shall notify each Investorin writing of the information the Company requires from each such Investor ifsuch Investor elects to have any of such Investor’s Registrable Securitiesincluded in such Registration Statement. It shall be a condition precedent tothe obligations of the Company to complete the registration pursuant to thisAgreement with respect to the Registrable Securities of a particular Investorthat such Investor shall furnish to the Company such information regardingitself, the Registrable Securities held by it and the intended method ofdisposition of the Registrable Securities held by it, as shall be reasonablyrequired to effect and maintain the effectiveness of the registration of suchRegistrable Securities and shall execute such documents in connection with suchregistration as the Company may reasonably request. (B) Each Investor, by such Investor’s acceptance of the RegistrableSecurities, agrees to cooperate with the Company as reasonably requested by theCompany in connection with the preparation and filing of any RegistrationStatement hereunder, unless such Investor has notified the Company in writing ofsuch Investor’s election to exclude all of such Investor’s RegistrableSecurities from such Registration Statement. 15 (C) Each Investor agrees that, upon receipt of any notice from theCompany of the happening of any event of the kind described in Sections 3.6(a)or 3.19 or the first sentence of Section 3.5, such Investor will immediatelydiscontinue disposition of Registrable Securities pursuant to any RegistrationStatement(s) covering such Registrable Securities until such Investor’s receiptof the copies of the supplemented or amended prospectus contemplated by Section3.6(a) or the first sentence of Section 3.5 or receipt of notice that nosupplement or amendment is required. Notwithstanding anything to the contrary,the Company shall cause its transfer agent to deliver unlegended shares ofCommon Stock to a transferee of an Investor in accordance with the terms of thePurchase Agreement in connection with any sale of Registrable Securities withrespect to which an Investor has entered into a contract for sale prior to theInvestor’s receipt of a notice from the Company of the happening of any event ofthe kind described in Section 3.6(a) or the first sentence of Section 3.5 andfor which the Investor has not yet settled.5. EXPENSES OF REGISTRATION. All reasonable expenses, other than underwriting discounts and commissions,incurred in connection with registrations, filings or qualifications pursuant toSections 2 and 3, including, without limitation, all registration, listing andqualifications fees, printers and accounting fees, and fees and disbursements ofcounsel for the Company shall be paid by the Company. The Company shall alsoreimburse the Existing Investors for the fees and disbursements of Legal Counselin connection with registration, filing or qualification pursuant to Sections 2and 3 of this Agreement. In addition, the Company shall pay the ExistingInvestors’ reasonable costs (include legal fees) incurred in connection with thesuccessful enforcement of the Existing Investors’ rights hereunder.6. ASSIGNMENT OF REGISTRATION RIGHTS. The rights under this Agreement to cause the Company to registerRegistrable Securities pursuant to Sections 1 through 4 of this Agreement shallbe automatically assignable by any Investor to any transferee of all or anyportion of such Investor’s Registrable Securities if: (i) such Investor agreesin writing with the transferee or assignee to assign such rights, and a copy ofsuch agreement is furnished to the Company; (ii) the Company is furnished withwritten notice of (a) the name and address of such transferee or assignee, and(b) the securities with respect to which such registration rights are beingtransferred or assigned; (iii) the transferee or assignee agrees in writing withthe Company to be bound by the provisions contained herein to the same extent assuch Investor; and (iv) such transfer shall have been conducted in accordancewith all applicable federal and state securities laws.7. COMPANY BOARD OF DIRECTORS 7.1 BOARD REPRESENTATION. The Company shall take all corporate action necessary to appoint to theBoard of Directors of the Company (the “Board”), promptly upon the InitialClosing of the sale of the Initial Securities to Durus pursuant to the PurchaseAgreement, four individuals designated by Durus (each, an “Investor Designee”),one of which shall also be designated to serve as the 16Chairman of the Board. Subject to Section 7.5 hereof, from and after the InitialClosing, Durus shall have the continuing right to designate such number ofInvestor Designees as necessary to constitute a majority of the members of theBoard and to designate the Chairman of the Board. Each Investor Designee shallserve until the annual meeting of the Company’s stockholders at which the termof the class to which such Investor Designee has been appointed expires, anduntil his or her respective successor is elected and qualified or until his orher earlier death, resignation or removal from office. Unless Durus advises theBoard in writing of one or more replacement Investor Designees for the Company’snext annual or special meeting of stockholders at which directors are electedand the term of one or more of the Investor Designees expires, then the InvestorDesignee(s) for any such meeting shall be deemed to be the incumbent InvestorDesignee(s). Such written notice by Durus shall be provided to the Board atleast seven (7) days prior to the date of the filing with the SEC of the proxystatement relating to such meeting. The Company shall provide to Durus inwriting the filing date of such proxy statement at least thirty (30) days priorto such filing date. 7.2 EXECUTIVE COMMITTEE. At the Initial Closing, an executive committee of the Board (the “ExecutiveCommittee”) comprised of three directors shall be created and the Company shalltake all actions so that three Investor Designees are appointed to serve on theExecutive Committee. The Chief Executive Officer of the Company shall serve asan advisory member of the Executive Committee. The Executive Committee shallhave and may exercise all the powers and authority of the Board in themanagement of the business and affairs of the Company when (a) the ExecutiveCommittee reasonably determines that action on a particular matter requiresimmediate attention and that a meeting of the whole Board could not be arrangedwithin the period of time required to fully address such matter or (b) theExecutive Committee is otherwise prescribed such power with respect to one ormore matters by resolution of the whole Board; provided, however, that theExecutive Committee shall not have any power or authority over matters which bylaw need whole Board approval or approval of the Audit Committee, CompensationCommittee or Nominating Committee of the Board. The affirmative vote of amajority of the members of the Executive Committee must approve a particularmatter for it to be the act of the Executive Committee. If the affirmative voteof a majority of the members of the Executive Committee on a particular mattersubmitted to the Executive Committee for approval cannot be obtained, suchmatter shall be submitted to the whole Board for approval. Notwithstanding theforegoing, whole Board approval shall be required to approve (i) any operatingor capital expenditure or series of related expenditures exceeding $1,000,000,unless such expenditure or expenditures were specifically approved by the Boardas a part of the Company’s annual budget, (ii) the nomination of members forelection to the Board upon the recommendation of the Nominating Committee, and(iii) transactions between the Company, on the one hand, and Durus or anyAffiliate of Durus, on the other hand. Written or printed notice stating theplace, day and hour of any meeting of the Executive Committee and the purpose orpurposes for which the meeting is called shall be delivered to each member ofthe Executive Committee so that it is received by such member not less than oneday before the date of the meeting. Any action required or permitted to be takenat a meeting of the Executive Committee may be taken without a meeting if aconsent in writing, setting forth the action so taken, is signed by all themembers of the Executive Committee. 17 7.3 OTHER COMMITTEES. At the Initial Closing, the Company shall take all necessary action so thatthe Investor Designees selected by Durus are appointed to serve as membersconstituting at least a majority of each other committee of the Board, includingthe Audit Committee, the Compensation Committee and the Nominating Committee,subject to applicable law and NASDAQ requirements. 7.4 CERTAIN OFFICERS. Subject to Section 7.5 hereof, at and after the Initial Closing, theCompany shall not, without the approval of Durus, make any nominations ofindividuals for election to the offices of Chief Executive Officer and ChiefFinancial Officer of the Company. 7.5 CONTINUATION OF RIGHTS. (A) So long as Durus Beneficially Owns at least fifty percent (50%) ormore of the Company’s outstanding shares of Common Stock (including shares ownedby Durus prior to the Initial Closing), (A) Durus shall be entitled to, inaccordance with the provisions hereof, (i) designate such number of InvestorDesignees as necessary to constitute a majority of the members of the Board,(ii) designate three Investor Designees to serve on the Executive Committee, and(iii) designate Investor Designees to serve as members constituting a majorityof the members of each other committee of the Board, and (B) the Company shallnot, without Durus’ approval, (i) appoint or designate a person to serve as theChairman of the Board or (ii) nominate the Chief Executive Officer and the ChiefFinancial Officer. (B) As long as Durus is entitled to designate Investor Designees inaccordance with this Section 7, the Company agrees to continue to cause suchInvestor Designees (or their respective successors designated by Durus) to benominated for election to the Board at each annual or special meeting ofstockholders at which directors are elected after the Initial Closing when theterm of office of any Investor Designee expires. To the extent the Company’sproxy statement for any meeting of stockholders includes a recommendationregarding the election of any other nominees to the Board, the Company agrees toinclude a recommendation that the stockholders also vote in favor of theInvestor Designee(s) that are nominated for election to the Board in accordancewith this Section 7. 7.6 VACANCIES. If, following an election or appointment to the Board or committee thereofpursuant to this Section 7, any Investor Designee shall resign or be removed orbe unable to serve for any reason prior to the expiration of his or her term asa director of the Company, a member of the Executive Committee and any otherapplicable committee, then Durus shall have the right to fill such vacancy witha replacement Investor Designee, and the Company shall cause such replacementInvestor Designee to be appointed to the Board and the Executive Committee andany other applicable committee to fill the unexpired term of the InvestorDesignee who such new Investor Designee is replacing. 18 7.7 COSTS AND EXPENSES. The Investor Designees shall be entitled to receive the same compensationand reimbursement of expenses, and to participate in the same benefit andincentive plans, as the Company provides members of the Board generally and, tothe extent applicable to such Investor Designee, non-employee members of theBoard generally. In addition, the Company will pay all reasonable out-of-pocketexpenses incurred by Investor Designees in connection with their participationin meetings of the Board (and committees thereof) and the Boards of Directors(and committees thereof) of the subsidiaries of the Company. 7.8 DIRECTORS’ INDEMNIFICATION. (A) The Corporation shall obtain and cause to be maintained in effect,with financially sound insurers, a policy of directors and officers’ liabilityinsurance in such amount and upon such terms as are reasonably acceptable toDurus until at least six years following the date on which (i) Durus is nolonger entitled to nominate a director pursuant to Section 7.5 and (ii) noInvestor Designees serve as directors of the Company. (B) The Company’s Restated Certificate of Incorporation (“Certificateof Incorporation”) or Amended and Restated By-Laws (“By-Laws”), or both, shallto the fullest extent permitted by law provide for indemnification of, andadvancement of expenses to, and limitation of the personal liability of, (i)Durus and the Investor Designees for, in each case, the actions of suchInvestors Designees as directors of the Company, and (ii) the other directors ofthe Company for their actions as directors of the Company, which provisionsshall not be amended, repealed or otherwise modified in any manner adverse tothe directors until at least six years following the date on which (i) Durus isno longer entitled to nominate a director pursuant to Section 7.5 and (ii) noInvestor Designees serve as directors of the Company. 7.9 SERIES B PREFERRED DIRECTOR. Notwithstanding anything herein to the contrary, the Company and the Boardshall approve of and shall take all actions as may be necessary to elect thedirector that the holders of the Series B Preferred Stock of the Company areentitled to cause the nomination and election of pursuant to Article III.5(b) ofthe Certificate of Designation. In addition, for so long as Durus or itsAffiliates own at least fifty percent (50%) of the outstanding shares of SeriesB Preferred Stock and the holders of Series B Preferred Stock of the Company areentitled to elect a director pursuant to Article III.5(b) of the Certificate ofDesignation, (i) one of the Investor Designees shall be the director elected bythe holders of the Series B Preferred Stock pursuant to Article III.5(b) of theCertificate of Designation, and (ii) Durus or its Affiliates, as the case maybe, shall have the right to designate such Investor Designee elected by theholders of the Series B Preferred Stock as a member of any or all committees ofthe Board, subject to applicable law and NASDAQ requirements. 7.10 CERTIFICATE OF INCORPORATION; BY-LAWS. To the fullest extent permitted by law, the Company shall ensure that theCompany’s Certificate of Incorporation and By-Laws as in effect immediatelyfollowing the Initial Closing do not, at any time thereafter, conflict in anyrespect with the provisions of this Agreement. In 19addition, the Company agrees that it will not amend its By-Laws or adopt aresolution in accordance with its By-Laws to change the size of the Board to asize other than seven members without the approval of a majority of the InvestorDesignees. 7.11 PERFORMANCE Notwithstanding anything to the contrary set forth in this Section 7, theBoard shall be entitled to act in accordance with its fiduciary obligations tothe Company under applicable law, and shall be entitled to take such actions asare necessary to comply with applicable law, with respect to the performance ofthe Company’s obligations under this Agreement8. COVENANTS OF THE COMPANY 8.1 INSPECTION. (A) The Company shall permit each Existing Investor holding any sharesof Registrable Securities, at such Existing Investor’s expense, to visit andinspect the Company’s properties, to examine its books of account and recordsand to discuss the Company’s affairs, finances and accounts with its officers,all at such reasonable times as may be reasonably requested by the ExistingInvestor; provided, however, that the Company shall not be obligated pursuant tothis Section 8.1 to provide access to any information that it reasonablyconsiders to be a trade secret or similar confidential information, unless suchExisting Investor executes a confidentiality and nondisclosure agreement priorto any such visit and inspection. (B) The Company shall provide Durus at least five (5) Business Days’notice of any regular meeting of the Board and, if requested by Durus, theagenda items for such meeting. 8.2 DELIVERY OF FINANCING STATEMENTS AND OTHER REPORTS. The Company shall deliver to Durus the following: (A) Unless filed with the SEC through the EDGAR system and availableto the public through the EDGAR system, within one (1) Business Day after thefiling thereof with the SEC, a copy of its Annual Reports and Quarterly Reportson Form 10-K, 10-KSB, 10-Q or 10-QSB, any interim reports or any consolidatedbalance sheets, income statements, shareholders’ equity statements and/or cashflow statements for any period, any Current Reports on Form 8-K and anyregistration statements (other than on Form S-8) or amendments filed pursuant tothe Securities Act, which Annual Reports shall be accompanied by a report andopinion thereon of a firm of independent certified public accountants ofrecognized national standing; (B) As soon as available and in any event not later than 30 days priorto the end of each fiscal year of the Company, a budget approved by the Board,prepared on a monthly and quarterly basis, such budget to be prepared inaccordance with U.S. generally accepted accounting principles, consistentlyapplied (“GAAP”), and on a fair and reasonable basis and in good faith, and tobe based on estimates and assumptions believed by the Company to be fair andreasonable as of the time made and from the best information then available tothe Company in the light of the current and reasonably foreseeable businessconditions; and 20 (C) Promptly from time to time, such other information relating to thefinancial condition, business, prospects or corporate affairs of the Company asDurus may from time to time reasonably request, or promptly after transmissionor occurrence (but in any event within 10 days) other reports, press releasesand non-routine communications with stockholders or the financial communitygenerally, any reports filed by the Company or its officers, directors andrepresentatives with any securities exchange or the SEC and notice of any eventwhich would have a material adverse effect on the Company’s results ofoperations, business, prospects or financial condition or on Durus’ investment,provided, however, that the Company shall not be obligated under this Section8.2(c) to provide information that it deems in good faith to be a trade secretor similar confidential information, and provided, further, that the Company mayrequire Durus to execute a confidentiality and nondisclosure agreement prior todisclosure of any information. 8.3 RIGHT OF FIRST REFUSAL UPON SALE OF COMPANY. (A) Before the Company proposes to sell the Company or greater thanthirty percent (30%) of the fully diluted capital stock of the Company (the”Offered Shares”) to a third party (a “Proposed Acquirer”) or the Companyotherwise accepts a bona fide offer from a Proposed Acquirer to acquire theCompany or the Offered Shares, whether such sale or acquisition is by sale ofstock, merger, sale of substantially all of the Company’s assets or otherwise,the Company shall transmit such proposal or offer (the “Offer Notice”) to Duruswho shall have the right, as described herein, to acquire the Company or theOffered Shares on terms and conditions, including price, at least as favorableto Durus as the terms and conditions applying to the Proposed Acquirer. TheOffer Notice shall disclose the identity of the Proposed Acquirer, the terms andconditions, including price, of the proposed sale, and any other material factsrelating to the proposed sale. If the consideration is readily marketable, thefair market value thereof shall be determined on the date of the Offer.Otherwise, the value shall be determined by mutual agreement of the Company andDurus, and, if no agreement is reached, then the value shall be determined by athird party mutually agreeable to the Company and Durus. Notwithstanding theforegoing, the rights described in this Section 8.3(a) shall not apply to anytransaction in which the Company will acquire another business entity, by mergeror otherwise, and in which the stockholders of the Company immediately prior tothe acquisition will hold a majority of the voting securities of the resultingentity immediately after the acquisition. (B) If Durus elects to purchase the Offered Shares, Durus shallcommunicate such election in writing (“Written Election”) to the Company withinthirty (30) days of the date that Durus received the Offer Notice. The WrittenElection shall, when taken in conjunction with the Offer Notice, be deemed toconstitute a valid, legally binding and enforceable agreement for the sale andpurchase of such Offered Shares. The closing of the sale of the Offered Sharesto Durus pursuant to this Section 8.3 shall be made at the offices of theCompany on the thirtieth (30th) day following receipt by the Company of theWritten Election (or if such 30th day is not a Business Day, then on the nextsucceeding Business Day). (C) If the Company has not received a Written Election from Duruswithin thirty (30) days of the date that Durus receives the Offer Notice, or ifat any time during that period Durus indicates in writing its decision not topurchase the Offered Shares, the Company 21may accept the offer of the Proposed Acquirer. Any such sale shall be to theProposed Acquirer at not less than the price, and upon other terms andconditions, if any, not more favorable to the Proposed Acquirer than thosespecified in the Offer Notice. In the event the Company has not sold the OfferedShares within ninety (90) days of the date of the Offer Notice, the Companyshall not thereafter sell the Offered Shares without first offering such OfferedShares to Durus in the manner provided in this Section 8.3. 8.4 NOTICE OF LITIGATION The Company will provide notice to each Existing Investor upon the filingof any material action, suit or proceeding by or against the Company. 8.5 PRESERVATION OF EXISTENCE, ETC. The Company will, and will cause each of its subsidiaries to, maintain andpreserve its legal existence, its rights to transact business and all otherrights, franchises and privileges necessary or desirable in the normal course ofits business and operations and the ownership of its properties, and become orremain, and cause each of its subsidiaries to become or remain, duly qualifiedand in good standing in the jurisdiction of its formation and in eachjurisdiction in which the character of the properties owned or leased by it orin which the transaction of its business makes such qualification necessary. 8.6 PAYMENT OF TAXES, ETC. The Company will promptly pay and discharge, or cause to be paid anddischarged, when due and payable, all lawful taxes, assessments and governmentalcharges or levies imposed upon the income, profits, property or business of theCompany or any subsidiary; provided, however, that any such tax, assessment,charge or levy need not be paid if the validity thereof shall currently becontested in good faith by appropriate proceedings and if the Company shall haveset aside on its books adequate reserves with respect thereto, and provided,further, that the Company will pay all such taxes, assessments, charges orlevies forthwith upon the commencement of proceedings to foreclose to be paidwhen due, or in conformance with customary trade terms or otherwise inaccordance with policies related thereto adopted by the Board. 8.7 MAINTENANCE OF INSURANCE. The Company will, and will cause each of its subsidiaries to, carry andmaintain in full force and effect, at its own expense and with financially soundand reputable insurance companies, insurance in such amounts, with suchdeductibles and covering such risks as is customarily carried in accordance withsound business practice by companies engaged in the same or similar businessesand owning similar properties in the localities where the Company or suchsubsidiary operates, and in any event in amount, adequacy and scope satisfactoryto the Board. 22 8.8 KEEPING OF RECORDS AND BOOKS OF ACCOUNT. The Company will, and will cause each of its subsidiaries to, keep adequaterecords and books of account, in which complete entries will be made inaccordance with GAAP reflecting all financial transactions of the Company andits subsidiaries. 8.9 COMPLIANCE WITH REQUIREMENTS OF GOVERNMENTAL AUTHORITIES. The Company will, and will cause each of its subsidiaries to, comply withthe requirements of all applicable laws, rules, regulations and orders of anygovernmental agency or authority. 8.10 MAINTENANCE OF PROPERTIES, ETC. The Company will, and will cause each of its subsidiaries to, maintain andpreserve all of its properties necessary or useful in the proper conduct of itsbusiness in good working order and condition and otherwise in accordance withthe general practice of other Persons of similar character and size, ordinarywear and tear excepted. 8.11 LICENSES. The Company will, and will cause each of its subsidiaries to, obtain andmaintain, and to take all action necessary to timely renew, all licenses,permits, authorizations, consents, filings, exemptions, registrations and othergovernmental approvals of any governmental agency or authority necessary inconnection the operation and proper conduct of its business and ownership of itsproperties. 8.12 PROTECTION OF INTELLECTUAL PROPERTY RIGHTS. The Company will, and will cause each of its subsidiaries to, protect,defend and maintain the validity and enforceability of its intellectualproperty. The Company shall require all employees and consultants to enter intothe Company’s standard form of proprietary information and inventions agreement. 8.13 RESTRICTIONS ON CERTAIN CORPORATE ACTIONS. The Company shall not, and shall not permit any of its subsidiaries to,directly or indirectly, take any of the following actions without the approvalof the Board, including a majority of the Investor Designees: (A) change the size of the Board to a number of directors other thanseven (7) or otherwise alter or change the Company’s By-Laws; (B) declare or pay dividends or make other distributions on thecapital stock of the Company; (C) redeem, purchase or otherwise acquire (or pay into or set asidefor a sinking fund for such purpose) any share or shares of Common Stock or anyseries of Preferred 23Stock; provided, however, that this restriction does not apply to the repurchaseof shares of Common Stock from employees, officers, directors, consultants orother persons performing services for the Company or any subsidiary pursuant toagreements under which the Company has the option to repurchase such shares atcost upon the occurrence of certain events, such as the termination ofemployment or other provision of services to the Company; (D) approve any material change in the Company’s principal line ofbusiness or business plan; (E) approve or enter into any agreement to which any officer,director, employee or stockholder of the Company is directly or indirectly aparty or beneficiary (other than the payment of salary or related compensationin the ordinary course of business or any compensation approved by theCompensation Committee of the Board), including any employee benefit, bonus orstock plan if such will provide more benefits than are then provided to suchperson; (F) grant any individual options in excess of 1% of the issued andoutstanding shares of Common Stock of the Company or change the Company’s stockoption plan to increase the number of options thereunder to an amount greaterthan 10% of the outstanding shares of Common Stock; (G) terminate or approve the hiring or termination of the Company’sChief Executive Officer or the Chief Financial Officer or any other officer ofequivalent or senior status; (H) approve the Company’s annual and periodic budgets and businessplans; (I) incur any indebtedness in excess of $500,000 individually or$2,000,000 in the aggregate (J) enter into any agreement, contract or other financial commitmentin excess of $1,000,000 individually or in the aggregate; (K) permit to exist any mortgage, deed of trust, pledge, securityinterest, assignment, charge, encumbrance, lien or other type of preferentialarrangement on any property of the Company with a value in excess of $1,000,000; (L) effect any transaction described in Section 2(b) of the Company’sCertificate of Designation, or effect any reclassification or recapitalizationof the outstanding capital stock of the Company; and (M) issue any press releases or marketing materials or make any otherwritten public announcement or disclosure concerning the Company, except wherenot practicable if immediate disclosure is required under applicable law. 24 8.14 TERMINATION OF CERTAIN COVENANTS. Sections 8.3 through 8.14 of this Agreement shall terminate and be of nofurther force or effect at such time at which Durus Beneficially Owns less thanfifty percent (50%) or more of the Company’s outstanding shares of Common Stock.9. INDEMNIFICATION. In the event any Registrable Securities are included in a RegistrationStatement under this Agreement: (A) To the fullest extent permitted by law, the Company will, andhereby does, indemnify, hold harmless and defend each Investor, the directors,officers, stockholders, members, partners, managers, employees, agents,representatives of, and each Person, if any, who controls any Investor withinthe meaning of the 1933 Act or the 1934 Act (each, an “Indemnified Person”),against any losses, claims, damages, liabilities, judgments, fines, penalties,charges, costs, reasonable attorneys’ fees, amounts paid in settlement orexpenses, joint or several, (collectively, “Claims”) incurred in investigating,preparing or defending any action, claim, suit, inquiry, proceeding,investigation or appeal taken from the foregoing by or before any court orgovernmental, administrative or other regulatory agency, body or the SEC,whether pending or threatened, whether or not an indemnified party is or may bea party thereto (“Indemnified Damages”), to which any of them may become subjectinsofar as such Claims (or actions or proceedings, whether commenced orthreatened, in respect thereof) arise out of or are based upon: (i) any untruestatement or alleged untrue statement of a material fact in a RegistrationStatement or any post-effective amendment thereto or in any filing made inconnection with the qualification of the offering under the securities or other”blue sky” laws of any jurisdiction in which Registrable Securities are offered(“Blue Sky Filing”), or the omission or alleged omission to state a materialfact required to be stated therein or necessary to make the statements thereinnot misleading, (ii) any untrue statement or alleged untrue statement of amaterial fact contained in any preliminary prospectus if used prior to theeffective date of such Registration Statement, or contained in the finalprospectus (as amended or supplemented, if the Company files any amendmentthereof or supplement thereto with the SEC) or the omission or alleged omissionto state therein any material fact necessary to make the statements madetherein, in light of the circumstances under which the statements therein weremade, not misleading, (iii) any violation or alleged violation by the Company ofthe 1933 Act, the 1934 Act, any other law, including, without limitation, anystate securities law, or any rule or regulation thereunder relating to the offeror sale of the Registrable Securities pursuant to a Registration Statement or(iv) any violation of this Agreement (the matters in the foregoing clauses (i)through (iv) being, collectively, “Violations”). Subject to Section 9(c), theCompany shall reimburse the Indemnified Persons, promptly as such expenses areincurred and are due and payable, for any legal fees or other reasonableexpenses incurred by them in connection with investigating or defending any suchClaim. Notwithstanding anything to the contrary contained herein, theindemnification agreement contained in this Section 9(a): (i) shall not apply toa Claim by an Indemnified Person arising out of or based upon a Violation whichoccurs in reliance upon and in conformity with information furnished in writingto the Company by such Indemnified Person for such Indemnified Person expresslyfor use in connection with the preparation of the Registration Statement or anysuch amendment thereof or supplement thereto; 25(ii) shall not be available to the extent such Claim is based on a failure ofthe Investor to deliver or to cause to be delivered the prospectus madeavailable by the Company, including a corrected prospectus, if such prospectusor corrected prospectus was timely made available by the Company pursuant toSection 3.3; and (iii) shall not apply to amounts paid in settlement of anyClaim if such settlement is effected without the prior written consent of theCompany, which consent shall not be unreasonably withheld or delayed. Suchindemnity shall remain in full force and effect regardless of any investigationmade by or on behalf of the Indemnified Person and shall survive the transfer ofthe Registrable Securities by the Investors pursuant to Section 6. (B) In connection with any Registration Statement in which an Investoris participating, each such Investor agrees to severally and not jointlyindemnify, hold harmless and defend, to the same extent and in the same manneras is set forth in Section 9(a), the Company, each of its directors, each of itsofficers who signs the Registration Statement and each Person, if any, whocontrols the Company within the meaning of the 1933 Act or the 1934 Act (each,an “Indemnified Party”), against any Claim or Indemnified Damages to which anyof them may become subject, under the 1933 Act, the 1934 Act or otherwise,insofar as such Claim or Indemnified Damages arise out of or are based upon anyViolation, in each case to the extent, and only to the extent, that suchViolation occurs in reliance upon and in conformity with written informationfurnished to the Company by such Investor expressly for use in connection withsuch Registration Statement; and, subject to Section 9(c), such Investor willreimburse any legal or other expenses reasonably incurred by an IndemnifiedParty in connection with investigating or defending any such Claim; provided,however, that the indemnity agreement contained in this Section 9(b) and theagreement with respect to contribution contained in Section 10 shall not applyto amounts paid in settlement of any Claim if such settlement is effectedwithout the prior written consent of such Investor, which consent shall not beunreasonably withheld or delayed; provided further, however, that the Investorshall be liable under this Section 9(b) for only that amount of a Claim orIndemnified Damages as does not exceed the net proceeds to such Investor as aresult of the sale of Registrable Securities pursuant to such RegistrationStatement. Such indemnity shall remain in full force and effect regardless ofany investigation made by or on behalf of such Indemnified Party and shallsurvive the transfer of the Registrable Securities by the Investors pursuant toSection 6. Notwithstanding anything to the contrary contained herein, theindemnification agreement contained in this Section 9(b) with respect to anypreliminary prospectus shall not inure to the benefit of any Indemnified Partyif the untrue statement or omission of material fact contained in thepreliminary prospectus was corrected on a timely basis in the prospectus, asthen amended or supplemented. (C) Promptly after receipt by an Indemnified Person or IndemnifiedParty under this Section 9 of notice of the commencement of any action orproceeding (including any governmental action or proceeding) involving a Claim,such Indemnified Person or Indemnified Party shall, if a Claim in respectthereof is to be made against any indemnifying party under this Section 9,deliver to the indemnifying party a written notice of the commencement thereof,and the indemnifying party shall have the right to participate in, and, to theextent the indemnifying party so desires, jointly with any other indemnifyingparty similarly noticed, to assume control of the defense thereof with counselmutually satisfactory to the indemnifying party and the Indemnified Person orthe Indemnified Party, as the case may be; provided, however, that anIndemnified Person or Indemnified Party shall have the right to retain its owncounsel with the fees and expenses of not more than one counsel for all suchIndemnified Person or Indemnified 26Party to be paid by the indemnifying party, if (i) in the reasonable opinion ofcounsel retained by the indemnifying party, the representation by such counselof the Indemnified Person or Indemnified Party and the indemnifying party wouldbe inappropriate due to actual or potential differing interests between suchIndemnified Person or Indemnified Party and any other party represented by suchcounsel in such proceeding or (ii) the indemnifying party shall have failedpromptly to assume the defense of such proceeding or shall have failed to employcounsel reasonably satisfactory to such Indemnified Person or Indemnified Party;provided further, that the indemnifying party shall not be responsible for thereasonable fees and expenses of more than one (1) separate legal counsel for allsuch Indemnified Persons or Indemnified Parties, respectively. In the case of anIndemnified Person, legal counsel referred to in the immediately precedingsentence shall be selected by the Investors holding at least a majority ininterest of the Registrable Securities included in the Registration Statement towhich the Claim relates. The Indemnified Party or Indemnified Person shallcooperate reasonably with the indemnifying party in connection with anynegotiation or defense of any such action or Claim by the indemnifying party andshall furnish to the indemnifying party all information reasonably available tothe Indemnified Party or Indemnified Person which relates to such action orClaim. The indemnifying party shall keep the Indemnified Party or IndemnifiedPerson fully apprised at all times as to the status of the defense or anysettlement negotiations with respect thereto. No indemnifying party shall beliable for any settlement of any action, claim or proceeding effected withoutits prior written consent, provided, however, that the indemnifying party shallnot unreasonably withhold, delay or condition its consent. No indemnifying partyshall, without the prior written consent of the Indemnified Party or IndemnifiedPerson, consent to entry of any judgment or enter into any settlement or othercompromise which does not include as an unconditional term thereof the giving bythe claimant or plaintiff to such Indemnified Party or Indemnified Person of arelease from all liability in respect to such Claim or litigation. Followingindemnification as provided for hereunder, the indemnifying party shall besubrogated to all rights of the Indemnified Party or Indemnified Person withrespect to all third parties, firms or corporations relating to the matter forwhich indemnification has been made. The failure to deliver written notice tothe indemnifying party within a reasonable time of the commencement of any suchaction shall not relieve such indemnifying party of any liability to theIndemnified Person or Indemnified Party under this Section 9, except to theextent that the indemnifying party is prejudiced in its ability to defend suchaction. (D) No Person involved in the sale of Registrable Securities who isguilty of fraudulent misrepresentation (within the meaning of Section 11(f) ofthe Securities Act) in connection with such sale shall be entitled toindemnification from any Person involved in such sale of Registrable Securitieswho is not guilty of fraudulent misrepresentation. (E) The indemnification required by this Section 9 shall be made byperiodic payments of the amount thereof during the course of the investigationor defense, as and when bills are received or Indemnified Damages are incurred. (F) The indemnity agreements contained herein shall be in addition to(i) any cause of action or similar right of the Indemnified Party or IndemnifiedPerson against the indemnifying party or others, and (ii) any liabilities theindemnifying party may be subject to pursuant to the law. 2710. CONTRIBUTION. To the extent any indemnification by an indemnifying party is prohibited orlimited by law, the indemnifying party agrees to make the maximum contributionwith respect to any amounts for which it would otherwise be liable under Section9 to the fullest extent permitted by law; provided, however, that: (i) nocontribution shall be made under circumstances where the maker would not havebeen liable for indemnification under the fault standards set forth in Section 9of this Agreement, (ii) no Person involved in the sale of Registrable Securitieswhich Person is guilty of fraudulent misrepresentation (within the meaning ofSection 11(f) of the 1933 Act) in connection with such sale shall be entitled tocontribution from any Person involved in such sale of Registrable Securities whowas not guilty of fraudulent misrepresentation; and (iii) contribution by anyseller of Registrable Securities shall be limited in amount to the net amount ofproceeds received by such seller from the sale of such Registrable Securitiespursuant to such Registration Statement.11. NO INCONSISTENT AGREEMENTS OR ACTIONS. The Company agrees that it shall not hereafter enter into any agreement ortake any action that conflicts with the rights granted to the Investors in thisAgreement, and the Company shall not effect the registration of any shares ofits capital stock other than Registrable Securities at any time during the firstyear of the Registration Period without the prior written consent of Durus.Notwithstanding the foregoing, nothing herein shall prevent or limit theCompany’s ability to effect the registration of its capital stock relating toany employee benefit plan on Form S-8 (or any substitute form that may beadopted by the SEC).12. LOCKUP To the extent timely requested by an underwriter or broker-dealer in anoffering by the Existing Investors pursuant to a Registration Statement, theCompany agrees not to effect any offer, sale or other distribution of any of itscapital stock, including any private placement, or to pledge, contract orotherwise obligate itself to do so, during the period beginning 30 days beforethe ending of the number of days reasonably requested by such underwriter orbroker-dealer (but not to exceed 180 days) after such offering (except as partof such offering, if permitted, or pursuant to one or more registrationstatements relating to any employee benefit plan on Form S-8 or any substituteform that may be adopted by the SEC).13. AMENDMENT OF REGISTRATION RIGHTS. Provisions of this Agreement may be amended and the observance thereof maybe waived (either generally or in a particular instance and either retroactivelyor prospectively), only with the written consent of the Company, Durus and theholders of a majority in interest of the Registrable Securities; provided,however, that any such amendment or waiver that would have an adverse anddisproportionate effect on the holders of the Note Shares must be approved by amajority of the holders in interest of the Note Shares. Any amendment or waivereffected in accordance with this Section 13 shall be binding upon each ExistingInvestor and the Company. No consideration shall be offered or paid to anyPerson to amend or consent to a waiver or modification of any provision of anyof this Agreement unless the same consideration also is 28offered to all of the parties to this Agreement. Notwithstanding the foregoing,the rights specifically granted in this Agreement to Durus under Section 7 andSection 8.3 shall not be assignable by Durus without the prior written consentof the Company.14. ENTIRE AGREEMENT; TERMINATION OF EXISTING REGISTRATION RIGHTS AGREEMENT. This Agreement, the other Transaction Documents (as defined in the PurchaseAgreement) and the instruments referenced herein and therein constitute theentire agreement among the parties hereto with respect to the subject matterhereof and thereof. There are no restrictions, promises, warranties orundertakings, other than those set forth or referred to herein and therein. ThisAgreement, the other Transaction Documents and the instruments referenced hereinand therein supersede and terminate all prior agreements and understandingsamong the parties hereto with respect to the subject matter hereof and thereof,including the Registration Rights Agreement dated as of February 23, 2004 by andamong Durus, Artal and the Company.15. MISCELLANEOUS. (A) A Person is deemed to be a holder of Registrable Securitieswhenever such Person owns or is deemed to own of record such RegistrableSecurities. If the Company receives conflicting instructions, notices orelections from two or more Persons with respect to the same RegistrableSecurities, the Company shall act upon the basis of instructions, notice orelection received from such record owner of such Registrable Securities. (B) Any notices, consents, waivers or other communications required orpermitted to be given under the terms of this Agreement must be in writing andwill be deemed to have been delivered: (i) upon receipt, when deliveredpersonally; (ii) upon receipt, when sent by facsimile (provided confirmation oftransmission is mechanically or electronically generated and kept on file by thesending party); or (iii) one Business Day after deposit with a nationallyrecognized overnight delivery service, in each case properly addressed to theparty to receive the same. The addresses and facsimile numbers for suchcommunications shall be: 29 If to the Company: Aksys, Ltd. Two Marriott Drive Lincolnshire, Illinois 60069 Attn: ______________ Telecopy: (847) ___-____ Telephone: (847) ___-____ With a copy to: Kirkland & Ellis LLP 200 East Randolph Drive Chicago, Illinois 60601 Attn: Keith S. Crow, P.C. Telecopy: (312) ___-____ Telephone: (312) ___-____ If to Durus, to: Durus Life Sciences Master Fund Ltd. c/o International Fund Services (Ireland) Limited 3rd Floor, Bishops Square Redmonds Hill Dublin 2, Ireland Attn: Susan Byrne Telecopy: (011) 35-31-707-5113 Telephone: (011) 35-31-707-5013 With copies to: Morrison & Foerster, LLP 425 Market Street San Francisco, CA 94105 Attn: Gavin B. Grover Telecopy: (415) 268-7522 Telephone: (415) 268-7113 -and- Schulte Roth & Zabel LLP 919 Third Avenue New York, NY 10022 Attn: Paul N. Roth Telecopy: (212) 593-5955 Telephone: (212) 756-2000 30 If to Artal, to: Artal Long Biotech Portfolio LLC c/o Artal Alternative Treasury Management 19A Rue de la Croix-d’or Geneva Switzerland Attn: _________________ With a copy to: Shartsis, Friese & Ginsburg LLP One Maritime Plaza, 18th Floor San Francisco, CA 94111 Attn: Carolyn Gorman, Esq. Telecopy: (415) 421-2922 Telephone: (415) 421-6500 If to any Investor other than Durus or Artal, to such address as mayhereafter be designated in writing by such Investor to the other parties hereto. Written confirmation of receipt (A) given by the recipient of such notice,consent, waiver or other communication, (B) mechanically or electronicallygenerated by the sender’s facsimile machine containing the time, date, recipientfacsimile number and an image of the first page of such transmission or (C)provided by a courier or overnight courier service shall be rebuttable evidenceof personal service, receipt by facsimile or receipt from a nationallyrecognized overnight delivery service in accordance with clause (i), (ii) or(iii) above, respectively. (C) Failure of any party to exercise any right or remedy under thisAgreement or otherwise, or delay by a party in exercising such right or remedy,shall not operate as a waiver thereof. (D) In order to attract and retain the most qualified individuals whoare involved in the Company’s industry and who understand the Company’sbusiness, the parties hereto agree that Durus may designate as InvestorDesignees pursuant to Section 7 hereof individuals who (i) may participate orwill participate, directly or through Durus and its Affiliates, in businessesthat compete with, or are substantially the same as the business of the Companyor its subsidiaries, (ii) may have an interest in, participate with, and serveas directors, officers or employees of other Persons engaged in businesses thatcompete with, or are substantially the same as, the business of the Company orits subsidiaries and (iii) may develop business opportunities for Durus, Durus’Affiliates or the Investor Designees, other than in each case individuals whoare also employees of the Company or any of its subsidiaries. Although theparties hereto do not anticipate any overlap in terms of corporate opportunitiesof the businesses in which Durus or the Investor Designees are or will beinvolved and the business of the Company and its subsidiaries, in order toenable the Company to attract the most qualified individuals as members of theBoard, the Company wishes to, and hereby does, renounce any interest orexpectancy of the Company in, or in being offered an opportunity to participatein, 31any Excluded Opportunity. An “Excluded Opportunity” is any matter, transactionor interest that is presented to, or acquired, created or developed by, or whichotherwise comes into the possession of, (i) an Investor Designee who is not anemployee of the Company or any of its subsidiaries, or (ii) Durus or anypartner, member, director, stockholder, employee, Affiliate or agent of Durus,other than an individual who is an employee of the Company or any of itssubsidiaries (collectively, “Covered Persons”), unless such matter, transactionor interest is presented to, or acquired, created or developed by, or otherwisecomes into the possession of, a Covered Person expressly and solely in suchCovered Person’s capacity as a director of the Corporation. (E) Subject to Section 15(d), the Investor Designees, Durus and Durus’Affiliates may engage or invest independently or with others, in any businessactivity of any type or description, including without limitation those thatmight be the same as or similar to the businesses of the Company or itssubsidiaries, and neither the Company, any subsidiary of the Company, nor anyother stockholder of the Company shall have any right in or to such businessactivities or ventures or to receive or share in any income or proceeds derivedtherefrom. (F) All questions concerning the construction, validity, enforcementand interpretation of this Agreement shall be governed by the internal laws ofthe State of New York, without giving effect to any choice of law or conflict oflaw provision or rule (whether of the State of New York or any otherjurisdictions) that would cause the application of the laws of any jurisdictionsother than the State of New York. Each party hereby irrevocably submits to theexclusive jurisdiction of the state and federal courts sitting in The City ofNew York, Borough of Manhattan, for the adjudication of any dispute hereunder orin connection herewith or with any transaction contemplated hereby or discussedherein, and hereby irrevocably waives, and agrees not to assert in any suit,action or proceeding, any claim that it is not personally subject to thejurisdiction of any such court, that such suit, action or proceeding is broughtin an inconvenient forum or that the venue of such suit, action or proceeding isimproper. Each party hereby irrevocably waives personal service of process andconsents to process being served in any such suit, action or proceeding bymailing a copy thereof to such party at the address for such notices to it underthis Agreement and agrees that such service shall constitute good and sufficientservice of process and notice thereof. Nothing contained herein shall be deemedto limit in any way any right to serve process in any manner permitted by law.If any provision of this Agreement shall be invalid or unenforceable in anyjurisdiction, such invalidity or unenforceability shall not affect the validityor enforceability of the remainder of this Agreement in that jurisdiction or thevalidity or enforceability of any provision of this Agreement in any otherjurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, ANDAGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTEHEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANYTRANSACTION CONTEMPLATED HEREBY. (G) Subject to the requirements of Section 6, this Agreement shallinure to the benefit of and be binding upon the permitted successors and assignsof each of the parties hereto. (H) The headings in this Agreement are for convenience of referenceonly and shall not limit or otherwise affect the meaning hereof. 32 (I) This Agreement may be executed in identical counterparts, each ofwhich shall be deemed an original but all of which shall constitute one and thesame agreement. This Agreement, once executed by a party, may be delivered tothe other party hereto by facsimile transmission of a copy of this Agreementbearing the signature of the party so delivering this Agreement. (J) Each party shall do and perform, or cause to be done andperformed, all such further acts and things, and shall execute and deliver allsuch other agreements, certificates, instruments and documents as any otherparty may reasonably request in order to carry out the intent and accomplish thepurposes of this Agreement and the consummation of the transactions contemplatedhereby. (K) All consents and other determinations required to be made by theInvestors pursuant to this Agreement shall be made, unless otherwise specifiedin this Agreement, by the holders of a majority in interest of the RegistrableSecurities; provided, however, that any consent or other determination theresult of which would have an adverse and disproportionate effect on theExisting Investors must be consented to or determined by, as the case may be,the Existing Investors. (L) The language used in this Agreement will be deemed to be thelanguage chosen by the parties to express their mutual intent and no rules ofstrict construction will be applied against any party. (M) This Agreement is intended for the benefit of the parties heretoand their respective permitted successors and assigns, and is not for thebenefit of, nor may any provision hereof be enforced by, any other Person. (N) The parties hereto acknowledge that money damages would not be anadequate remedy at law if any party fails to perform in any material respect anyof its obligations hereunder, and accordingly agree that each party, in additionto any other remedy to which it may be entitled at law or in equity, shall beentitled to specific performance of the obligations of any other party underthis Agreement, without the posting of any bond, in accordance with the termsand conditions of this Agreement, and if any action should be brought in equityto enforce any of the provisions of this Agreement, none of the parties heretoshall raise the defense that there is an adequate remedy at law. Except asotherwise provided by law, a delay or omission by a party hereto in exercisingany right or remedy accruing upon any such breach shall not impair the right orremedy or constitute a waiver of or acquiescence in any such breach. No remedyshall be exclusive of any other remedy. All available remedies shall becumulative. (O) The obligations of each Investor hereunder are several and notjoint with the obligations of any other Investor, and no provision of thisAgreement is intended to confer any obligations on any Investor vis-a-vis anyother Investor. Nothing contained herein, and no action taken by any Investorpursuant hereto, shall be deemed to constitute the Investors as a partnership,an association, a joint venture or any other kind of entity, or create apresumption that the Investors are in any way acting in concert or as a groupwith respect to such obligations or the transactions contemplated herein. 33 IN WITNESS WHEREOF, the Existing Investors and the Company have causedtheir respective signature page to this Investor Rights Agreement to be dulyexecuted as of the date first written above. AKSYS, LTD. By: /s/ Larry Birch ———————————— Name: L. Birch Title: CFO DURUS LIFE SCIENCES MASTER FUND LTD. By: /s/ Leslie L. Lake ———————————— Name: Leslie L. Lake Title: Director ARTAL LONG BIOTECH PORTFOLIO LLC By: Artal Alternative Treasury Management Its: Managing Member By: /s/ Christian Tedeschi ———————————— Name: Christian Tedeschi Title: Managing Director 34