<SUBMISSION>
<ACCESSION-NUMBER>0000891020-00-002001
<TYPE>10-Q
<PUBLIC-DOCUMENT-COUNT>4
<PERIOD>20000930
<FILING-DATE>20001114
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>SONUS PHARMACEUTICALS INC
<CIK>0000949858
<ASSIGNED-SIC>2835
<IRS-NUMBER>954343413
<STATE-OF-INCORPORATION>DE
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>10-Q
<ACT>34
<FILE-NUMBER>000-21243
<FILM-NUMBER>764852
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>22026 2OTH AVE SE
<STREET2>STE 102
<CITY>BOTHELL
<STATE>WA
<ZIP>98021
<PHONE>2064879500
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>22026 20TH AVENUE SE, SUITE 102
<CITY>BOTHELL
<STATE>WA
<ZIP>98021
</MAIL-ADDRESS>
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<TYPE>10-Q
<SEQUENCE>1
<FILENAME>v67267e10-q.txt
<DESCRIPTION>FORM 10-Q FORM SONUS PHARMACEUTICALS, INC.
<TEXT>

<PAGE>   1

================================================================================

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549


                                    FORM 10-Q


        [X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
               SEPTEMBER 30, 2000

                                              or

        [ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
               ______________ TO _____________.


                         Commission file number 0-26866


                           SONUS PHARMACEUTICALS, INC.
             (Exact Name of Registrant as Specified in Its Charter)


             DELAWARE                                        95-4343413
  (State or Other Jurisdiction of       (I.R.S. Employer Identification Number)
   Incorporation or Organization)

                  22026 20TH AVE. SE, BOTHELL, WASHINGTON 98021
                    (Address of Principal Executive Offices)

                                 (425) 487-9500
              (Registrant's Telephone Number, Including Area Code)


Indicate by check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No __

State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.

               Class                        Outstanding at September 30, 2000
               -----                        ---------------------------------
    Common Stock, $.001 par value                       9,160,334

                               Page 1 of 16 Pages
                        Exhibit Index appears on Page 15

================================================================================


<PAGE>   2


                           SONUS PHARMACEUTICALS, INC.
                               INDEX TO FORM 10-Q


<TABLE>
<CAPTION>
PART I.  FINANCIAL INFORMATION
                                                                                          Page
                                                                                          Number
                                                                                          ------
<S>     <C>                                                                               <C>
        Item 1. Financial Statements

                Balance Sheets as of September 30, 2000 (unaudited) and
                  December 31, 1999                                                       3

                Statements of Operations (unaudited) for the three and
                  nine months ended September 30, 2000 and September 30, 1999...........  4

                Statements of Cash Flows (unaudited) for the nine months ended
                  September 30, 2000 and September 30, 1999.............................  5

                Notes to Financial Statements...........................................  6

        Item 2. Management's Discussion and Analysis of Financial Condition
                  and Results of Operations.............................................  7

        Item 3. Market Risk ............................................................ 13

PART II.  OTHER INFORMATION

        Item 1. Legal Proceedings....................................................... 14

        Item 6. Exhibits and Reports on Form 8-K........................................ 15

        Items 2, 3, 4 and 5 are not applicable and therefore have been omitted.

SIGNATURES.............................................................................. 16
</TABLE>


                                       2
<PAGE>   3


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


                                 SONUS PHARMACEUTICALS, INC.
                                        BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                        SEPTEMBER 30,      DECEMBER 31,
                                                                           2000                1999
                                                                        ------------       ------------
                                                                        (UNAUDITED)
<S>                                                                     <C>                <C>
ASSETS
Current assets:
   Cash, cash equivalents and marketable securities ..............      $ 15,286,417       $ 16,804,486
   Other current assets ..........................................           408,327            422,851
                                                                        ------------       ------------

      Total current assets .......................................        15,694,744         17,227,337

Equipment, furniture and leasehold improvements, net of
   accumulated depreciation of $3,485,614 and $3,179,956 .........           565,161            861,434
                                                                        ------------       ------------

Total assets .....................................................      $ 16,259,905       $ 18,088,771
                                                                        ============       ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Bank line of credit ...........................................      $  5,000,000       $  5,000,000
   Accounts payable and accrued expenses .........................         2,765,868          2,826,169
   Accrued clinical trial expenses ...............................           117,006            215,102
                                                                        ------------       ------------

      Total current liabilities ..................................         7,882,874          8,041,271

Commitments and contingencies
Stockholders' equity:
   Preferred stock; $.001 par value;
      5,000,000 authorized; no shares issued or outstanding ......                 -                  -
    Common stock; $.001 par value;
      30,000,000 shares authorized; 9,160,334 and 8,989,225
      shares issued and outstanding at September 30, 2000 and
      December 31, 1999, respectively ............................        37,726,876         37,142,965
   Accumulated deficit ...........................................       (29,332,134)       (27,071,604)
   Accumulated other comprehensive loss ..........................           (17,711)           (23,861)
                                                                        ------------       ------------
      Total stockholders' equity .................................         8,377,031         10,047,500
                                                                        ------------       ------------

Total liabilities and stockholders' equity .......................      $ 16,259,905       $ 18,088,771
                                                                        ============       ============
</TABLE>


                             See accompanying notes.


                                       3
<PAGE>   4


                           SONUS PHARMACEUTICALS, INC.
                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED                     NINE MONTHS ENDED
                                                                     SEPTEMBER 30,                          SEPTEMBER 30,
                                                            -------------------------------       -------------------------------
                                                                 2000               1999               2000               1999
                                                            ------------       ------------       ------------       ------------
<S>                                                         <C>                <C>                <C>                <C>
Revenues:
   Collaborative agreements ..........................      $          -       $ 10,000,000       $          -       $ 12,050,000
   Royalty revenue ...................................            68,338                  -            113,307                  -
                                                            ------------       ------------       ------------       ------------

Total revenue ........................................            68,338         10,000,000            113,307         12,050,000
                                                            ------------       ------------       ------------       ------------

Operating expenses:
   Research and development ..........................         1,374,687          1,214,740          3,753,346          4,406,223
   General and administrative ........................         1,028,660          1,916,067          3,549,949          5,499,311
                                                            ------------       ------------       ------------       ------------

Total operating expenses .............................         2,403,347          3,130,807          7,303,295          9,905,534
                                                            ------------       ------------       ------------       ------------

Operating income (loss) ..............................        (2,335,009)         6,869,193         (7,189,988)         2,144,466

Other income (expense):
   Interest income ...................................           173,672             63,471            526,269            355,662
   Interest expense ..................................            (4,998)           (20,335)           (23,750)           (91,814)
   Other income ......................................                 -                  -          4,250,000                  -
                                                            ------------       ------------       ------------       ------------

Income (loss) before taxes ...........................        (2,166,335)         6,912,329         (2,437,469)         2,408,314

Income taxes .........................................                 -                  -           (176,939)                 -
                                                            ------------       ------------       ------------       ------------

Net income (loss) ....................................      $ (2,166,335)      $  6,912,329       $ (2,260,530)      $  2,408,314
                                                            ============       ============       ============       ============
Net income (loss) per common share:
   Basic .............................................      $      (0.24)      $       0.77       $      (0.25)      $       0.27
   Diluted ...........................................      $      (0.24)      $       0.76       $      (0.25)      $       0.27

Shares used in computation of per share amounts:
   Basic .............................................         9,157,964          8,984,550          9,127,846          8,786,465
   Diluted ...........................................         9,157,964          9,089,663          9,127,846          8,932,683
</TABLE>


                             See accompanying notes.


                                       4
<PAGE>   5



                           SONUS PHARMACEUTICALS, INC.
                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                         NINE MONTHS ENDED SEPTEMBER 30,
                                                                        -------------------------------
                                                                            2000               1999
                                                                        ------------       ------------
<S>                                                                     <C>                <C>
OPERATING ACTIVITIES:
Net income (loss) ................................................      $ (2,260,530)      $  2,408,314
Adjustments to reconcile net income (loss) to net cash used in
   operating activities:
   Depreciation and amortization .................................           305,193            484,152
   Changes in operating assets and liabilities:
      Contract receivable ........................................                 -         (5,000,000)
      Other current assets .......................................            14,524            253,520
      Accounts payable and accrued expenses ......................           (60,301)         1,020,262
      Accrued clinical trial expenses ............................           (98,096)          (995,954)
                                                                        ------------       ------------
Net cash used in operating activities ............................        (2,099,210)        (1,829,706)


INVESTING ACTIVITIES:
Purchases of equipment, furniture and leasehold improvements .....            (8,920)           (39,098)
Purchases of marketable securities ...............................        (7,690,228)       (15,350,254)
Proceeds from sale of marketable securities ......................           499,995         12,613,763
Proceeds from maturities of marketable securities ................         8,883,781          7,049,147
                                                                        ------------       ------------
Net cash provided by investing activities ........................         1,684,568          4,273,558


FINANCING ACTIVITIES:
Proceeds from bank line of credit ................................        15,000,000         15,000,000
Repayment of bank line of credit .................................       (15,000,000)       (15,000,000)
Increase in long-term debt .......................................                 -             30,783
Repayment of capitalized lease obligations .......................                 -            (62,156)
Proceeds from issuance of common stock ...........................           583,911             41,668
                                                                        ------------       ------------
Net cash provided by financing activities ........................           583,911             10,295
                                                                        ------------       ------------

Increase in cash and cash equivalents for the period .............           169,269          2,454,147
Cash and cash equivalents at beginning of period .................         5,894,194          5,203,925
                                                                        ------------       ------------
Cash and cash equivalents at end of period .......................         6,063,463          7,658,072
Marketable securities at end of period ...........................         9,222,954          7,490,663
                                                                        ------------       ------------
Total cash, cash equivalents and marketable securities ...........      $ 15,286,417       $ 15,148,735
                                                                        ============       ============

Supplemental cash flow information:
   Conversion of long-term debt to common stock ..................                $-       $  2,080,005
   Interest paid .................................................      $     23,750       $     39,729
   Income taxes paid .............................................                $-                 $-
</TABLE>



                             See accompanying notes.



                                       5
<PAGE>   6

                           SONUS PHARMACEUTICALS, INC.
                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)


1. BASIS OF PRESENTATION

        The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required to be presented for complete financial
statements. The accompanying financial statements reflect all adjustments
(consisting only of normal recurring items) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented.

        The financial statements and related disclosures have been prepared with
the assumption that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year.
Accordingly, these financial statements should be read in conjunction with the
audited financial statements and the related notes thereto included in the Form
10-K for the year ended December 31, 1999 and filed with the SEC on February 29,
2000.


2. CONTINGENCIES

        The Company is party to certain legal matters related to its business.
See "Part II. Other Information; Item 1. Legal Proceedings."


                                       6
<PAGE>   7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS


MD&A OVERVIEW

        In Management's Discussion and Analysis we explain the general financial
condition and the results of operations for our Company, including:

        -   an overview of our Company's business;

        -   results of operations and why those results are different from the
            prior year;

        -   the capital resources our Company currently has and possible sources
            of additional funding for future capital requirements; and

        -   certain factors that may affect our business and future results.

BUSINESS OVERVIEW

        Our Company is engaged in the research and development of drug delivery
and blood substitute products based on our proprietary emulsion and surfactant
technology.

        In the area of drug delivery, we are applying our TOCOSOL(TM)
oil-in-water emulsion technology to the formulation of poorly soluble drugs for
delivery to the patient in a less toxic and more convenient method of
administration. The first application of our drug delivery technology is an
injectable paclitaxel emulsion formulation, S-8184, which is under development
for the treatment of breast, ovarian or lung cancer. We recently filed an
Investigational New Drug Application, or IND, with the U.S. Food and Drug
Administration and plan to initiate Phase 1 human clinical studies with S-8184
early in 2001.

        We are also developing a perfluorocarbon-based blood substitute product,
S-9156, for oxygenation of the body's tissues in applications such as acute or
surgical blood loss, treatment of radiotherapy resistant tumors or in cases of
compromised blood oxygen carrying capacity. We entered into a research agreement
with the State University of New York at Buffalo in March 2000 for development
of our blood substitute product and plan to complete pre-clinical studies with
S-9156 and file an Investigational New Drug Application, or IND, in 2001.


        In October 2000, we announced a strategic decision to refocus our
business on the development of our drug delivery and blood substitute products.
In addition, we withdrew the New Drug Application, or NDA, and discontinued
clinical activity for our ultrasound contrast product, EchoGen(R). We also
decided not to pursue commercialization of EchoGen in Europe. These decisions
were based on several factors, including discussions with the FDA that revealed
that significant amount of additional work would need to be done to get EchoGen
approved in the U.S. and the opportunities available to advance our drug
delivery and blood substitute products.



                                       7
<PAGE>   8


RESULTS OF OPERATIONS

        Our results of operations have varied and will continue to vary
significantly and depend on, among other factors:

-    timing of payments under contractual and license agreements;

-    entering into additional contractual agreements;

-    timing and costs of clinical trials, legal matters and expenses related to
     product development; and

-    timing of regulatory approvals.


        Revenue in the third quarter of 2000 was $68,000 compared to $10.0
million in the third quarter of 1999. Revenue in the third quarter of 2000
represents royalty income payable to us by Nycomed under our patent license
agreement with Nycomed. Revenue in the third quarter of 1999 represents the
$10.0 million license fee paid to us by Nycomed upon signing the patent
licensing agreement with Nycomed. Revenue was $113,000 for the nine months ended
September 30, 2000 and represented royalty income from Nycomed while revenue in
the prior year period was $12.1 million, consisting of the $10.0 million license
fee from Nycomed and $2.1 million received under collaborative agreements with
third parties.

        Total operating expenses were $2.4 million for the third quarter of 2000
compared with $3.1 million for the third quarter of 1999. Total operating
expenses for the nine months ended September 30, 2000 were $7.3 million compared
with $9.9 million for the same period in 1999. The decrease in operating
expenses from the prior year was primarily due to a lower level of research and
development spending and lower general and administrative expenses due to the
reduction in legal costs as a result of the transfer of ongoing patent
litigation responsibilities to Nycomed under the patent license agreement that
we entered into with Nycomed in 1999 and the settlement of that patent
litigation in May 2000.

        Other income for the nine months ended September 30, 2000 represents
payments received in the second quarter of 2000 totalling $4.25 million from
patent litigation and insurance settlements.

        Interest income, net of interest expense, was $168,000 for the third
quarter of 2000 compared with $43,000 for the same period of the prior year and
$503,000 and $264,000 for the nine months ended September 30, 2000 and 1999,
respectively. The increase in net interest income was primarily due to higher
levels of invested cash in 2000.


LIQUIDITY AND CAPITAL RESOURCES

        We have historically financed operations with payments received under
contractual agreements with third parties, proceeds from equity financings and a
bank line of credit. At September 30, 2000, we had cash, cash equivalents and
marketable securities of $15.3 million compared with $16.8 million at December
31, 1999. The slight decrease in cash balances from December 31, 1999 was
primarily due to the current year net loss of $2.2 million offset in part by
cash received of $583,000 from the exercise of stock options.

        We have a bank loan agreement which provides for a $5.0 million
revolving line of credit facility and bears interest at the prime rate plus
1.0%. At September 30, 2000, we had borrowings of $5.0 million outstanding under
the line of credit. The line of credit expires August 30, 2001 and is secured by
our tangible assets. We are required to maintain a minimum of $5.0 million of
cash in order to borrow under the line of credit, and the borrowed funds are
required to be held at the borrowing bank. We cannot give assurance that we will
be able to renew the loan agreement or that we will be able to maintain the
minimum balances necessary to borrow under the line of credit.

                                       8
<PAGE>   9

        We expect that our cash needs will increase in future periods due to
planned clinical trials and other product development costs associated with our
drug delivery and blood substitute products. Based on our current operating plan
for 2001 including planned clinical trials and other product development costs,
we estimate that existing cash and marketable securities will be sufficient to
meet our cash requirements through 2001. However, we may seek additional funding
through available means, which may include debt and/or equity financing or
funding under additional third party agreements. Our future capital requirements
depend on many factors including:

-    the ability to attract and retain new collaborative agreement partners;

-    the ability to obtain funding under contractual and licensing agreements;

-    the ability to maintain our bank line of credit;

-    the progress of our research and development programs and clinical trials;

-    the time and costs required to obtain regulatory approvals;

-    the costs of filing, prosecuting and enforcing patents, patent
     applications, patent claims and trademarks; and

-    the cost of defending, and any damages or settlement payments that may be
     paid pursuant to legal proceedings.

We cannot give assurance that additional financing will be available on
acceptable terms, if at all. Any equity financing would likely result in
substantial dilution to our existing stockholders and debt financing, if
available, may include restrictive covenants. If we are unable to raise
additional financing, we may be required to curtail or delay the development of
our products and new product research and development, which could seriously
harm our business.


CERTAIN FACTORS THAT MAY AFFECT OUR BUSINESS AND FUTURE RESULTS

        This report contains forward looking statements which are based upon
management's current beliefs and judgment. These statements and our business are
subject to a number of risks and uncertainties, some of which are discussed
below. Other risks are presented elsewhere in this report. You should consider
the following risks carefully in addition to the other information contained in
this report before purchasing shares of our common stock. If any of the
following risks actually occur, they could seriously harm our business,
financial condition or results of operations. In such case, the trading price of
our common stock could decline, and you may lose all or part of your investment.

        If we fail to develop products, then we may never realize revenue from
product commercialization. A key element of our business strategy is to utilize
our technologies for the development and commercialization of drug delivery and
blood substitute products. Our drug delivery technology is a new approach to the
formulation of water insoluble compounds for therapeutic applications. To date,
we have performed preclinical testing on our blood substitute product, S-9156,
and only one of our drug delivery products, S-8184. Significant expenditures in
additional research and development, clinical testing, regulatory and sales and
marketing activities will be necessary in order for us to commercialize any
products developed with our technology. While it is our strategy to develop
additional products under our drug delivery technology by entering into
feasibility study agreements with companies who own active compounds, there can
be no assurance that we will enter into any additional feasibility studies.
Moreover, there can be no assurance that these feasibility studies will result
in development or license agreements. Without feasibility studies or development
or license agreements, we may need to scale back or terminate our efforts to
develop other products under our drug delivery technology.

        We have a history of operating losses; and we may never become
profitable. We have experienced significant accumulated losses since our
inception in 1991, and are expected to incur net losses in the foreseeable
future. These losses have resulted primarily from expenses associated with our
research and development activities, including preclinical and clinical trials,
and general and administrative expenses.

                                       9
<PAGE>   10

We anticipate that our operating losses will continue as we further invest in
research and development for our drug delivery and blood substitute products.
Even if we generate significant product revenues, there can be no assurance that
we will be able to sustain profitability. Our results of operations have varied
and will continue to vary significantly and depend on, among other factors:

        -   the entering into new collaborative or product license agreements;

        -   the timing of payments, if any, under collaborative partner
            agreements;

        -   the timing and costs of clinical trials;

        -   the success of our research and development efforts; and

        -   costs related to obtaining, defending and enforcing patents.

        We may need additional capital in the future. If additional capital is
not available, we may have to curtail or cease operations. Our development
efforts to date have consumed substantial amounts of cash and we have generated
only limited revenues from payments received from our contractual agreements.
Our future capital requirements depend on many factors including:

        -   our ability to obtain and retain funding from third parties under
            contractual agreements;

        -   the ability to maintain our bank line of credit;

        -   our progress on research and development programs and clinical
            trials;

        -   the time and costs required to gain regulatory approvals;

        -   the costs of filing, prosecuting and enforcing patents, patent
            applications, patent claims and trademarks;

        -   the costs of marketing and distribution;

        -   the status of competing products; and

        -   the market acceptance and third-party reimbursement of our products,
            if approved.

        Additional capital may not be available on terms acceptable to us, or at
all. Any equity financing would likely result in substantial dilution to
existing stockholders and debt financing, if available, may include restrictive
covenants. If we are unable to raise additional financing, we may have to reduce
our expenditures, scale back our development of new products or license to
others products that we otherwise would seek to commercialize ourselves.

        We depend on third parties for funding, clinical development and
distribution. We are dependent on third parties for funding and performance of a
variety of activities including research, clinical development and manufacturing
our products. If we are unable to establish these arrangements with third
parties, if they are terminated or the collaborations are not successful, we
will be required to identify alternative partners to fund or perform research,
clinical development, and/or manufacturing, which could have a material adverse
effect on our business, financial condition and results of operations. Our
success depends in part upon the performance by these collaborators of their
responsibilities under these arrangements. We have no control over the resources
that any collaborator may devote to the development and commercialization of
products under these collaborations and our collaborators may fail to conduct
their collaborative activities successfully or in a timely manner.

        Governmental regulatory requirements are lengthy and expensive and
failure to obtain necessary approvals will prevent us or our collaborators from
commercializing a product. We are subject to uncertain governmental regulatory
requirements and a lengthy approval process for our products prior to any
commercial sales of our products. The development and commercial use of our
products is regulated by the U.S. Food and Drug Administration, or FDA, the
European Medicines Evaluation Agency, or EMEA, and comparable foreign regulatory
agencies. The regulatory approval process for new products is lengthy and
expensive. Before we can file an application with the FDA and comparable foreign
agencies, the product candidate must undergo extensive testing, including animal
studies and human clinical trials that can take many years and may require
substantial expenditures. Data obtained from such testing may

                                       10
<PAGE>   11

be susceptible to varying interpretations which could delay, limit or prevent
regulatory approval. In addition, changes in regulatory policy for product
approval may cause delays or rejections. Our company, and any collaborative
partners may encounter significant delays or excessive costs in our efforts to
secure necessary approvals. We cannot predict if or when any of our products
under development will be commercialized.

        Future U.S. or foreign legislative or administrative actions also could
prevent or delay regulatory approval of our products. Even if regulatory
approvals are obtained, they may include significant limitations on the
indicated uses for which a product may be marketed. A marketed product also is
subject to continual FDA, EMEA and other regulatory agency review and
regulation. Later discovery of previously unknown problems or failure to comply
with the applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market, as well as
possible civil or criminal sanctions. In addition, if marketing approval is
obtained, the FDA, EMEA or other regulatory agency may require post-marketing
testing and surveillance programs to monitor the product's efficacy and side
effects. Results of these post-marketing programs may prevent or limit the
further marketing of a product.

        The markets for pharmaceutical products are highly competitive and if we
fail to compete effectively our revenues will decline. The health care industry
is characterized by extensive research efforts and rapid technological change.
Competition in the development of pharmaceutical products is intense and
expected to increase. We also believe that other medical and pharmaceutical
companies will compete with us in the areas of research and development,
acquisition of products and technology licenses, and the manufacturing and
marketing of drug delivery and blood substitute products. We expect that
competition in the drug delivery and blood substitute fields will be based
primarily on:

        -   efficacy;

        -   safety;

        -   ease of administration;

        -   breadth of approved indications; and

        -   physician, healthcare payor and patient acceptance.

Many of our competitors and potential competitors have substantially greater
financial, technical and human resources than we do and have substantially
greater experience in developing products, obtaining regulatory approvals and
marketing and manufacturing medical products. Accordingly, these competitors may
succeed in obtaining FDA approval for their products more rapidly than us. In
addition, other technologies or products may be developed that have an entirely
different that would render our technology and products noncompetitive or
obsolete.

        We primarily rely on third party suppliers and manufacturers to produce
products that we develop and failure to retain such suppliers and manufacturers
would adversely impact our ability to commercialize our products. We currently
rely on third parties to supply the chemical ingredients necessary for our drug
delivery and blood substitute products. The active chemical ingredients for our
products are manufactured by a limited number of vendors. The inability of these
vendors to supply medical-grade materials to us could delay the manufacture of,
or cause us to cease the manufacturing of our products. We also rely on third
parties to manufacture our drug delivery and blood substitute products for
research and development and clinical trials. Suppliers and manufacturers of our
products must operate under GMP regulations, as required by the FDA, and there
are a limited number of contract manufacturers that operate under GMP
regulations. If we do not develop an in-house manufacturing capability or we are
not able to identify and qualify alternative contract manufacturers, we may not
be able to produce the required amount of our products for research and
development and clinical trials. Failure to retain qualified suppliers and
manufacturers will delay our research and development efforts as well as the
time it takes to commercialize our products, which could materially adversely
affect our operating results.

                                       11
<PAGE>   12

        If we fail to secure adequate intellectual property protection or become
involved in an intellectual property dispute, it could significantly harm our
financial results and ability to compete. Our success will depend, in part, on
our ability to obtain and defend patents and protect trade secrets. The patent
position of medical and pharmaceutical companies is highly uncertain and
involves complex legal and factual questions. There can be no assurance that any
claims which are included in pending or future patent applications will be
issued, that any issued patents will provide us with competitive advantages or
will not be challenged by third parties, or that the existing or future patents
of third parties will not have an adverse effect on our ability to commercialize
our products. Furthermore, there can be no assurance that other companies will
not independently develop similar products, duplicate any of our products or
design around patents that may be issued to us. Litigation may be necessary to
enforce any patents issued to us or to determine the scope and validity of
others' proprietary rights in court or administrative proceedings. Any
litigation or administrative proceeding could result in substantial costs to us
and distraction of our management. An adverse ruling in any litigation or
administrative proceeding could have a material adverse effect on our business,
financial condition and results of operations.

        Our commercial success will depend in part on not infringing patents
issued to competitors. There can be no assurance that patents belonging to
competitors will not require us to alter our products or processes, pay
licensing fees or cease development of our current or future products. Any
litigation regarding infringement could result in substantial costs to us and
distraction of our management, and any adverse ruling in any litigation could
have a material adverse effect on our business, financial condition and results
of operations. Further, there can be no assurance that we will be able to
license other technology that we may require at a reasonable cost or at all.
Failure by us to obtain a license to any technology that we may require to
commercialize our products would have a material adverse effect on our business,
financial condition and results of operations. In addition, to determine the
priority of inventions and the ultimate ownership of patents, we may participate
in interference, reissue or re-examination proceedings conducted by the PTO or
in proceedings before foreign agencies with respect to any of our existing
patents or patent applications or any future patents or applications, any of
which could result in loss of ownership of existing, issued patents, substantial
costs to us and distraction of our management.

        The success of our products will depend, in part, on the acceptance of
our products by third party payors. Our ability to successfully commercialize
products that we develop will depend, in part, upon the extent to which
reimbursement of the cost of such products will be available from domestic and
foreign health administration authorities, private health insurers and other
payor organizations. Third party payors are increasingly challenging the price
of medical products and services or restricting the use of certain procedures in
an attempt to limit costs. Further, significant uncertainty exists as to the
reimbursement status of newly approved health care products, and there can be no
assurance that adequate third party coverage will be available.

        Failure to satisfy Nasdaq National Market Listing requirements may
result in our stock being delisted from the Nasdaq National Market. Our common
stock is currently listed on the Nasdaq National Market under the symbol "SNUS."
For continued inclusion on the Nasdaq National Market, we must maintain among
other requirements net tangible assets of at least $4.0 million, a minimum bid
price of $1.00 per share, and a market value of our public float of at least
$5.0 million. As of the date of this report, we had net tangible assets in
excess of the $4.0 million requirement; however, our shares were trading at less
than $1.00 per share and the market cap of our public float was less than $5.0
million. In the event that we fail to satisfy the listing standards on a
continuous basis, our common stock may be removed from listing on the Nasdaq
National Market. If our common stock is delisted from the Nasdaq National
Market, trading of our common stock, if any, would be conducted in the
over-the-counter market in the so-called "pink sheets" or, if available, the
NASD's "Electronic Bulletin Board." As a result, stockholders could find it more
difficult to dispose of, or to obtain accurate quotations as to the value of,
our common stock and the trading price per share could be reduced.

                                       12
<PAGE>   13

        If we lose our key personnel or are unable to attract and retain
qualified scientific and management personnel, we may be unable to become
profitable. We are highly dependent on our key executives. The loss of any of
these key executives or the inability to recruit and retain qualified scientific
personnel to perform research and development and qualified management personnel
could have a material adverse effect on our business, financial condition and
results of operations. There can be no assurance that we will be able to attract
and retain such personnel on acceptable terms, if at all, given the competition
for experienced scientists and other personnel among numerous medical and
pharmaceutical companies, universities and research institutions.


ITEM 3. MARKET RISK

        The market risk inherent in our short-term investment portfolio
represents the potential loss that could arise from adverse changes in interest
rates. If market rates hypothetically increase immediately and uniformly by 100
basis points from levels at September 30, 2000, the decline in the fair value of
the investment portfolio would not be material. We believe we have the ability
to hold our fixed income investments until maturity and therefore we do not
expect our operating results or cash flows to be affected to any significant
degree by a sudden change in market interest rates.


                                       13
<PAGE>   14

PART II. OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

a. In July 2000, DuPont Pharmaceuticals Company, DuPont Contrast Imaging, Inc.,
E.I. Du Pont de Nemours & Co., Inc. and DuPont Pharma, Inc. (collectively
"DuPont") filed a complaint in the United States District Court for the District
of Massachusetts against us and certain Nycomed Amersham-related entities.
DuPont's complaint seeks a declaratory judgment that certain ultrasound contrast
patents owned by us and licensed to Nycomed are invalid and not infringed by
DuPont. We and Nycomed believe DuPont's complaint is without merit and intend to
vigorously defend against the complaint.

        Under our license agreement with Nycomed, Nycomed has the right to
enforce the patents in the field of non-perflouropentane ultrasound contrast
agents on behalf of Nycomed and on our behalf, at Nycomed's expense. Pursuant to
this right, Nycomed and we also have filed against DuPont a patent infringement
action in the U.S. District Court for the Western District of Washington
alleging that DuPont's contrast agent known as "Definity" infringes patents we
own and have licensed to Nycomed. The patent infringement action filed in
Washington is based on the same questions of patent infringement and validity
that were raised in the Massachusetts action. It is likely that only one of
these actions will go forward so that the entire patent dispute between Nycomed,
us, and DuPont will be heard in one court, either in Washington or in
Massachusetts.

        Pursuant to our license agreement with Nycomed, Nycomed will bear all
costs and expenses associated with the prosecution of the Washington action and
the defense of the Massachusetts action.

b. In 1998, various class action complaints were filed in the Superior Court of
Washington (the "State Action") and in the U.S. District Court for the Western
District of Washington (the "Federal Action") against us and certain of our
officers and directors, alleging violations of Washington State and U.S.
securities laws. In October 1998, we and the individual defendants moved to
dismiss and stay the State Action. The state law claims in the State Action were
subsequently re-filed in the Federal Action. In February 1999, plaintiffs filed
a consolidated and amended complaint in the Federal Action, alleging violations
of Washington State and U.S. securities laws. In March 1999, we and the
individual defendants filed a motion to dismiss the consolidated amended
complaint in the Federal Action. In July 1999, the Court entered an order
denying in part and granting in part the motion to dismiss the complaint in the
Federal Action. In November 1999, we filed motions for summary judgment and to
stay discovery.

        In July 2000, we, with the consent of our insurance carrier, entered
into a Memorandum of Understanding with plaintiffs to settle the Federal Action
for an amount within our directors and officers' insurance policy limits. In
November 2000, the parties filed with the Court a Stipulation of Settlement and
related exhibits. The settlement is subject to approval of the Court after
notice and an opportunity to object is provided to the shareholder class.
Because of the time involved in providing notice and obtaining approvals, it is
not likely that final approval would be obtained until early 2001. Given the
uncertainties of litigation, we believe that the settlement is in the best
interests of our shareholders. However, there can be no assurance that the
settlement will be approved by the Court.


                                       14
<PAGE>   15

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

    (a)  EXHIBITS

         10.43       Loan and Security Agreement between SONUS Pharmaceuticals,
                     Inc. and Silicon Valley Bank

         10.44       Change in Control Agreement for Richard J. Klein

         27.1        Financial Data Schedule


    (b)  REPORTS ON FORM 8-K

        The Company filed no reports on Form 8-K during the quarter ended
September 30, 2000.


ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.



                                       15
<PAGE>   16

SIGNATURES


In accordance with the requirements of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                              SONUS PHARMACEUTICALS, INC.

Date:   November 14, 2000           By: /s/  Richard J. Klein
                                        ----------------------------------------
                                    Richard J. Klein
                                    Chief Financial Officer
                                    (Principal Financial and Accounting Officer)



                                       16
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.43
<SEQUENCE>2
<FILENAME>v67267ex10-43.txt
<DESCRIPTION>LOAN & SECURITY AGREEMENT SONUS PHARMACEUTICALS
<TEXT>

<PAGE>   1

                                                                   EXHIBIT 10.43


                           LOAN AND SECURITY AGREEMENT
                           SONUS PHARMACEUTICALS, INC.





<PAGE>   2





                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                   Page
                                                                                   ----
<S>     <C>                                                                        <C>
1       ACCOUNTING AND OTHER TERMS...............................................   4

2       LOAN AND TERMS OF PAYMENT................................................   4
        2.1    Advances..........................................................   4
        2.2    Interest Rate, Payments...........................................   4
        2.3    Fees..............................................................   5

3       CONDITIONS OF LOANS......................................................   5
        3.1    Conditions Precedent to Initial Advance...........................   5
        3.2    Conditions Precedent to all Advances..............................   5

4       CREATION OF SECURITY INTEREST............................................   5
        4.1    Grant of Security Interest........................................   5

5       REPRESENTATIONS AND WARRANTIES...........................................   5
        5.1    Due Organization and Authorization................................   5
        5.2    Collateral........................................................   6
        5.3    Litigation........................................................   6
        5.4    No Material Adverse Change in Financial Statements................   6
        5.5    Solvency..........................................................   6
        5.6    Regulatory Compliance.............................................   6
        5.7    Subsidiaries......................................................   7
        5.8    Full Disclosure...................................................   7

6       AFFIRMATIVE COVENANTS....................................................   7
        6.1    Government Compliance.............................................   7
        6.2    Financial Statements, Reports, Certificates.......................   7
        6.3    Inventory; Returns................................................   8
        6.4    Taxes.............................................................   8
        6.5    Insurance.........................................................   8
        6.6    Primary Accounts..................................................   8
        6.7    Other Covenants...................................................   8
        6.8    Further Assurances................................................   9

7       NEGATIVE COVENANTS.......................................................   9
        7.1    Dispositions......................................................   9
        7.2    Changes in Business, Ownership, Management or Business Locations..   9
        7.3    Mergers or Acquisitions...........................................   9
        7.4    Indebtedness......................................................   9
        7.5    Encumbrance.......................................................   9
        7.6    Distributions; Investments........................................   9
        7.7    Transactions with Affiliates......................................  10
        7.8    Subordinated Debt.................................................  10
        7.9    Compliance........................................................  10

8       EVENTS OF DEFAULT........................................................  10
        8.1    Payment Default...................................................  10
        8.2    Covenant Default..................................................  10
        8.3    Material Adverse Change...........................................  10
        8.4    Attachment........................................................  11
        8.5    Insolvency........................................................  11
</TABLE>


                                       2
<PAGE>   3

<TABLE>
<S>     <C>                                                                        <C>
        8.6    Other Agreements..................................................  11
        8.7    Judgments.........................................................  11
        8.8    Misrepresentations................................................  11

9       BANK'S RIGHTS AND REMEDIES...............................................  11
        9.1    Rights and Remedies...............................................  11
        9.2    Power of Attorney.................................................  12
        9.3    Accounts Collection...............................................  12
        9.4    Bank Expenses.....................................................  12
        9.5    Bank's Liability for Collateral...................................  12
        9.6    Remedies Cumulative...............................................  13
        9.7    Demand Waiver.....................................................  13

10      NOTICES..................................................................  13

11      CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER..............................  13

12      GENERAL PROVISIONS.......................................................  13
        12.1   Successors and Assigns............................................  13
        12.2   Indemnification...................................................  13
        12.3   Time of Essence...................................................  14
        12.4   Severability of Provision.........................................  14
        12.5   Amendments in Writing, Integration................................  14
        12.6   Counterparts......................................................  14
        12.7   Survival..........................................................  14
        12.8   Confidentiality...................................................  14
        12.9   Effect of Amendment and Restatement...............................  14
        12.10  Attorneys' Fees, Costs and Expenses...............................  15

13      DEFINITIONS..............................................................  15
        13.1   Definitions.......................................................  15
</TABLE>


                                       3
<PAGE>   4


        THIS LOAN AND SECURITY AGREEMENT dated September 6, 2000, between
SILICON VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive, Santa Clara,
California 95054 with a loan production office located at 4110 Carillon Point,
Kirkland, Washington 98033 and SONUS PHARMACEUTICALS, INC. ("Borrower"), whose
address is 22026 20th Avenue SE, Bothell , Washington 98021. Additionally,
Borrower has reincorporated and assumed the outstanding Obligations between
Sonus Pharmaceuticals, Inc., a Delaware corporation pursuant to that certain
Loan and Security Agreement dated August 11, 1995.

                                    AGREEMENT

        The parties agree as follows:

1       ACCOUNTING AND OTHER TERMS

        Accounting terms not defined in this Agreement will be construed
following GAAP. Calculations and determinations must be made following GAAP. The
term "financial statements" includes the notes and schedules. The terms
"including" and "includes" always mean "including (or includes) without
limitation," in this or any Loan Document. This Agreement shall be construed to
impart upon Bank a duty to act reasonably at all times.


2       LOAN AND TERMS OF PAYMENT

2.1     ADVANCES.

        Borrower will pay Bank the unpaid principal amount of all Advances and
interest on the unpaid principal amount of the Advances.

2.1.1   REVOLVING ADVANCES.

        (a) Bank will make Advances not exceeding the Committed Revolving Line.
Amounts borrowed under this Section may be repaid and reborrowed during the term
of this Agreement.

        (b) To obtain an Advance, Borrower must notify Bank by facsimile or
telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be
made. Borrower must promptly confirm the notification by delivering to Bank the
Payment/Advance Form attached as Exhibit B. Bank will credit Advances to
Borrower's deposit account. Bank may make Advances under this Agreement based on
instructions from a Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet Obligations which have become
due. Bank may rely on any telephone notice given by a person whom Bank believes
is a Responsible Officer or designee. Borrower will indemnify Bank for any loss
Bank suffers due to such reliance.

        (c) The Committed Revolving Line terminates on the Revolving Maturity
Date, when all Advances are immediately payable.

2.2     INTEREST RATE, PAYMENTS.

        (a) Interest Rate. Advances accrue interest on the outstanding principal
balance at a per annum rate of 1 percentage point above the Prime Rate. After an
Event of Default, Obligations accrue interest at 5 percent above the rate
effective immediately before the Event of Default. The interest rate increases
or decreases when the Prime Rate changes. Interest is computed on a 360 day year
for the actual number of days elapsed.

        (b) Payments. Interest due on the Committed Revolving Line is payable on
the last day of each month. Bank may debit any of Borrower's deposit accounts
for principal and interest payments owing or any amounts Borrower owes Bank.
Bank will promptly notify Borrower when


                                       4
<PAGE>   5


it debits Borrower's accounts. These debits are not a set-off. Payments received
after 12:00 noon Pacific time are considered received at the opening of business
on the next Business Day. When a payment is due on a day that is not a Business
Day, the payment is due the next Business Day and additional fees or interest
accrue.

2.3     FEES.

        Borrower will pay:

        (a) Facility Fee. A fully earned, non-refundable Facility Fee of $15,000
due on the Closing Date; and

        (b) Bank Expenses. All Bank Expenses (including reasonable attorneys'
fees and reasonable expenses) incurred through and after the date of this
Agreement, are payable when due.

3       CONDITIONS OF LOANS

3.1     CONDITIONS PRECEDENT TO INITIAL ADVANCE.

        Bank's obligation to make the initial Advance is subject to the
condition precedent that it receive the agreements, documents and fees it
requires.

3.2     CONDITIONS PRECEDENT TO ALL ADVANCES.

        Bank's obligations to make each Advance, including the initial Advance,
is subject to the following:

        (a) timely receipt of any Payment/Advance Form; and

        (b) the representations and warranties in Section 5 must be materially
true on the date of the Payment/Advance Form and on the effective date of each
Advance and no Event of Default may have occurred and be continuing, or result
from the Advance. Each Advance is Borrower's representation and warranty on that
date that the representations and warranties of Section 5 remain true.

4       CREATION OF SECURITY INTEREST

4.1     GRANT OF SECURITY INTEREST.

        Borrower grants Bank a continuing security interest in all presently
existing and later acquired Collateral to secure all Obligations and performance
of each of Borrower's duties under the Loan Documents. Except for Permitted
Liens, any security interest will be a first priority security interest in the
Collateral. Bank may place a "hold" on any deposit account pledged as
Collateral. If this Agreement is terminated, Bank's lien and security interest
in the Collateral will continue until Borrower fully satisfies its Obligations.

5       REPRESENTATIONS AND WARRANTIES

        Borrower represents and warrants as follows:

5.1     DUE ORGANIZATION AND AUTHORIZATION.

        Borrower and each Subsidiary is duly existing and in good standing in
its state of formation and qualified and licensed to do business in, and in good
standing in, any state in which


                                       5
<PAGE>   6

the conduct of its business or its ownership of property requires that it be
qualified, except where the failure to do so could not reasonably be expected to
cause a Material Adverse Change.

        The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it is
bound in which the default could reasonably be expected to cause a Material
Adverse Change.

5.2     COLLATERAL.

        Borrower has good title to the Collateral, free of Liens except
Permitted Liens. All Inventory is in all material respects of good and
marketable quality, free from material defects.

5.3     LITIGATION.

        Except as shown in the Schedule, there are no actions or proceedings
pending or, to the knowledge of Borrower's Responsible Officers, threatened by
or against Borrower or any Subsidiary in which a likely adverse decision could
reasonably be expected to cause a Material Adverse Change.

5.4     NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.

        All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.

5.5     SOLVENCY.

        The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as they
mature.

5.6     REGULATORY COMPLIANCE.

        Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations T and U of the Federal Reserve Board of Governors). Borrower has
complied in all material respects with the Federal Fair Labor Standards Act.
Borrower has not violated any laws, ordinances or rules, the violation of which
could reasonably be expected to cause a Material Adverse Change. None of
Borrower's or any Subsidiary's properties or assets has been used by Borrower or
any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in
disposing, producing, storing, treating, or transporting any hazardous substance
other than legally. Borrower and each Subsidiary has timely filed all required
tax returns and paid, or made adequate provision to pay, all material taxes,
except those being contested in good faith with adequate reserves under GAAP.
Borrower and each Subsidiary has obtained all consents, approvals and
authorizations of, made all declarations or filings with, and given all notices
to, all government authorities that are necessary to continue its business as
currently conducted, except where the failure to do so could not reasonably be
expected to cause a Material Adverse Change.


                                       6
<PAGE>   7

5.7     SUBSIDIARIES.

        Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.

5.8     FULL DISCLOSURE.

        No written representation, warranty or other statement of Borrower in
any certificate or written statement given to Bank (taken together with all such
written certificates and written statements to Bank) contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the statements contained in the certificates or statements not misleading. It
being recognized by Bank that the projections and forecasts provided by Borrower
in good faith and based upon reasonable assumptions are not viewed as facts and
that actual results during the period or periods covered by such projections and
forecasts may differ from the projected and forecasted results.

6       AFFIRMATIVE COVENANTS

        Borrower will do all of the following:

6.1     GOVERNMENT COMPLIANCE.

        Borrower will maintain its and all Subsidiaries' legal existence and
good standing in its jurisdiction of formation and maintain qualification in
each jurisdiction in which the failure to so qualify would reasonably be
expected to cause a material adverse effect on Borrower's business or
operations. Borrower will comply, and have each Subsidiary comply, with all
laws, ordinances and regulations to which it is subject, noncompliance with
which could have a material adverse effect on Borrower's business or operations
or would reasonably be expected to cause a Material Adverse Change.

6.2     FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.

        (a) Borrower will deliver to Bank: (i) as soon as available, but no
later than 30 days after the last day of each month, a company prepared
consolidated balance sheet and income statement covering Borrower's consolidated
operations during the period, in a form and certified by a Responsible Officer
acceptable to Bank; (ii) as soon as available, but no later than 90 days after
the last day of Borrower's fiscal year, audited consolidated financial
statements prepared under GAAP, consistently applied, together with an
unqualified opinion on the financial statements from an independent certified
public accounting firm reasonably acceptable to Bank; (iii) within 5 days of
filing, copies of all statements, reports and notices made available to
Borrower's security holders or to any holders of Subordinated Debt and all
reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange
Commission; (iv) a prompt report of any legal actions pending or threatened
against Borrower or any Subsidiary that could result in damages or costs to
Borrower or any Subsidiary of $100,000 or more; and (v) budgets, sales
projections, operating plans or other financial information Bank reasonably
requests.

        (b) Within 30 days after the last day of each month, Borrower will
deliver to Bank aged listings of its accounts receivable and accounts payable.

        (c) Within 30 days after the last day of each month, Borrower will
deliver to Bank with the monthly financial statements a Compliance Certificate
signed by a Responsible Officer in the form of Exhibit C.

        (d) Bank has the right to audit Borrower's Collateral at Borrower's
expense, but the audits will be conducted no more often than every year unless
an Event of Default has occurred and is continuing.


                                       7
<PAGE>   8


6.3     INVENTORY; RETURNS.

        Borrower will keep all Inventory in good and marketable condition, free
from material defects. Returns and allowances between Borrower and its account
debtors will follow Borrower's customary practices as they exist at execution of
this Agreement. Borrower must promptly notify Bank of all returns, recoveries,
disputes and claims, that involve more than $50,000.

6.4     TAXES.

        Borrower will make, and cause each Subsidiary to make, timely payment of
all material federal, state, and local taxes or assessments and will deliver to
Bank, on demand, appropriate certificates attesting to the payment.

6.5     INSURANCE.

        Borrower will keep its business and the Collateral insured for risks and
in amounts, as Bank may reasonably request. Insurance policies will be in a
form, with companies, and in amounts that are satisfactory to Bank in Bank's
reasonable discretion. All property policies will have a lender's loss payable
endorsement showing Bank as an additional loss payee and all liability policies
will show the Bank as an additional insured and provide that the insurer must
give Bank at least 20 days notice before canceling its policy. At Bank's
request, Borrower will deliver certified copies of policies and evidence of all
premium payments. Proceeds payable under any policy will, at Bank's option, be
payable to Bank on account of the Obligations. Statutory notice regarding
insurance:

                                     WARNING

        Unless you provide us with evidence of the insurance coverage as
required by our contract or loan agreement, we may purchase insurance at your
expense to protect our interest. This insurance may, but need not, also protect
your interest. If the collateral becomes damaged, the coverage we purchase may
not pay any claim you make or any claim made against you. You may later cancel
this coverage by providing evidence that you have obtained property coverage
elsewhere.

        You are responsible for the cost of any insurance purchased by us. The
cost of this insurance may be added to your contract or loan balance. If the
cost is added to your contract or loan balance, the interest rate on the
underlying contract or loan will apply to this added amount. The effective date
of coverage may be the date your prior coverage lapsed or the date you failed to
provide proof of coverage.

        This coverage we purchased may be considerably more expensive than
insurance you can obtain on your own and may not satisfy any need for property
damage coverage or any mandatory liability insurance requirements imposed by
applicable law.

6.6     PRIMARY ACCOUNTS.

        Borrower will maintain its primary depository and operating accounts
with Bank.

6.7     OTHER COVENANTS.

        (a) Borrower shall maintain at all times cash and cash equivalents of
not less than $5,000,000 net of any outstanding borrowings with Bank.

        (b) Any Advances shall be deposited directly into Borrower's deposit
account with Bank.


                                       8
<PAGE>   9


6.8     FURTHER ASSURANCES.

        Borrower will execute any further instruments and take further action as
Bank reasonably requests to perfect or continue Bank's security interest in the
Collateral or to effect the purposes of this Agreement.

7       NEGATIVE COVENANTS

        Borrower will not do any of the following without Bank's prior written
consent, which will not be unreasonably withheld:

7.1     DISPOSITIONS.

        Convey, sell, lease, transfer or otherwise dispose of (collectively
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, other than Transfers (i) of Inventory in the ordinary
course of business; (ii) of licenses and similar arrangements for the use of the
property of Borrower or its Subsidiaries in the ordinary course of business; or
(iii) of worn-out or obsolete Equipment.

7.2     CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS.

        Engage in or permit any of its Subsidiaries to engage in any business
other than the businesses currently engaged in by Borrower or reasonably related
thereto or have a material change in its ownership or management (other than the
sale of Borrower's equity securities in a public offering or to private equity
investors approved by Bank) of greater than 25%. Borrower will not, without at
least 30 days prior written notice, relocate its chief executive office or add
any new offices or business locations.

7.3     MERGERS OR ACQUISITIONS.

        Merge or consolidate, or permit any of its Subsidiaries to merge or
consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person, except where (i) no Event of Default has occurred
and is continuing or would result from such action during the term of this
Agreement and (ii) such transaction would not result in a decrease of more than
25% of Tangible Net Worth. A Subsidiary may merge or consolidate into another
Subsidiary or into Borrower.

7.4     INDEBTEDNESS.

        Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness.

7.5     ENCUMBRANCE.

        Create, incur, or allow any Lien on any of its property, or assign or
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest granted
here, subject to Permitted Liens.

7.6     DISTRIBUTIONS; INVESTMENTS.

        Directly or indirectly acquire or own any Person, or make any Investment
in any Person, other than Permitted Investments, or permit any of its
Subsidiaries to do so. Pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock, except for repurchases of stock
from former employees or directors of Borrower under the terms applicable


                                       9
<PAGE>   10


repurchase agreements in an aggregate amount not to exceed $50,000 in any fiscal
year, provided that no Event of Default has occurred, is continuing or would
exist after giving effect to the repurchases.

7.7     TRANSACTIONS WITH AFFILIATES.

        Directly or indirectly enter into or permit any material transaction
with any Affiliate except transactions that are in the ordinary course of
Borrower's business, on terms less favorable to Borrower than would be obtained
in an arm's length transaction with a non-affiliated Person.

7.8     SUBORDINATED DEBT.

        Make or permit any payment on any Subordinated Debt, except under the
terms of the Subordinated Debt, or amend any provision in any document relating
to the Subordinated Debt without Bank's prior written consent.

7.9     COMPLIANCE.

        Become an "investment company" or a company controlled by an "investment
company," under the Investment Company Act of 1940 or undertake as one of its
important activities extending credit to purchase or carry margin stock, or use
the proceeds of any Advance for that purpose; fail to meet the minimum funding
requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as
defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards
Act or violate any other law or regulation, if the violation could reasonably be
expected to have a material adverse effect on Borrower's business or operations
or would reasonably be expected to cause a Material Adverse Change, or permit
any of its Subsidiaries to do so.

8       EVENTS OF DEFAULT

        Any one of the following is an Event of Default:

8.1     PAYMENT DEFAULT.

        If Borrower fails to pay any of the Obligations within 3 days after
their due date. During the additional period the failure to cure the default is
not an Event of Default (but no Advance will be made during the cure period);

8.2     COVENANT DEFAULT.

        If Borrower violates any covenant in Section 7 or does not perform or
observe any other material term, condition or covenant in this Agreement, any
Loan Documents, or in any agreement between Borrower and Bank and as to any
default under a term, condition or covenant that can be cured, has not cured the
default within 10 days after it occurs, or if the default cannot be cured within
10 days or cannot be cured after Borrower's attempts within 10 day period, and
the default may be cured within a reasonable time, then Borrower has an
additional period (of not more than 30 days) to attempt to cure the default.
During the additional time, the failure to cure the default is not an Event of
Default (but no Advances will be made during the cure period);

8.3     MATERIAL ADVERSE CHANGE.

        (i) If there occurs a material impairment in the perfection or priority
of the Bank's security interest in the Collateral or in the value of such
Collateral which is not covered by adequate insurance or (ii) if the Bank
determines, based upon information available to it and in its reasonable
judgment, that there is a reasonable likelihood that Borrower will fail to
comply with


                                       10
<PAGE>   11

one or more of the financial covenants in Section 6.7 during the next succeeding
financial reporting period.

8.4     ATTACHMENT.

        If any material portion of Borrower's assets is attached, seized, levied
on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days, or if Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business or if a judgment or other claim becomes a Lien on a material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed against
any of Borrower's assets by any government agency and not paid within 10 days
after Borrower receives notice. These are not Events of Default if stayed or if
a bond is posted pending contest by Borrower (but no Advances will be made
during the cure period);

8.5     INSOLVENCY.

        If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 30 days (but no Advances will be made before any
Insolvency Proceeding is dismissed);

8.6     OTHER AGREEMENTS.

        If there is a default in any agreement between Borrower and a third
party that gives the third party the right to accelerate any Indebtedness
exceeding $100,000 or that could cause a Material Adverse Change;

8.7     JUDGMENTS.

        If a money judgment(s) in the aggregate of at least $50,000 is rendered
against Borrower and is unsatisfied and unstayed for 10 days (but no Advances
will be made before the judgment is stayed or satisfied); or

8.8     MISREPRESENTATIONS.

        If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document.

9       BANK'S RIGHTS AND REMEDIES

        9.1 RIGHTS AND REMEDIES.

        When an Event of Default occurs and continues Bank may, without notice
or demand, do any or all of the following:

        (a) Declare all Obligations immediately due and payable (but if an Event
of Default described in Section 8.5 occurs all Obligations are immediately due
and payable without any action by Bank);

        (b) Stop advancing money or extending credit for Borrower's benefit
under this Agreement or under any other agreement between Borrower and Bank;

        (c) Settle or adjust disputes and claims directly with account debtors
for amounts, on terms and in any order that Bank considers advisable;


                                       11
<PAGE>   12


        (d) Make any payments and do any acts it considers necessary or
reasonable to protect its security interest in the Collateral. Borrower will
assemble the Collateral if Bank requires and make it available as Bank
designates. Bank may enter premises where the Collateral is located, take and
maintain possession of any part of the Collateral, and pay, purchase, contest,
or compromise any Lien which appears to be prior or superior to its security
interest and pay all expenses incurred. Borrower grants Bank a license to enter
and occupy any of its premises, without charge, to exercise any of Bank's rights
or remedies;

        (e) Apply to the Obligations any (i) balances and deposits of Borrower
it holds, or (ii) any amount held by Bank owing to or for the credit or the
account of Borrower;

        (f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sale, and sell the Collateral; and

        (g) Dispose of the Collateral according to the Code.

9.2     POWER OF ATTORNEY.

        Effective only when an Event of Default occurs and continues, Borrower
irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's name
on any checks or other forms of payment or security; (ii) sign Borrower's name
on any invoice or bill of lading for any Account or drafts against account
debtors, (iii) make, settle, and adjust all claims under Borrower's insurance
policies; (iv) settle and adjust disputes and claims about the Accounts directly
with account debtors, for amounts and on terms Bank determines reasonable; and
(v) transfer the Collateral into the name of Bank or a third party as the Code
permits. Bank may exercise the power of attorney to sign Borrower's name on any
documents necessary to perfect or continue the perfection of any security
interest regardless of whether an Event of Default has occurred. Bank's
appointment as Borrower's attorney in fact, and all of Bank's rights and powers,
coupled with an interest, are irrevocable until all Obligations have been fully
repaid and performed and Bank's obligation to provide Advances terminates.

9.3     ACCOUNTS COLLECTION.

        When an Event of Default occurs and continues, Bank may notify any
Person owing Borrower money of Bank's security interest in the funds and verify
the amount of the Account. Borrower must collect all payments in trust for Bank
and, if requested by Bank, immediately deliver the payments to Bank in the form
received from the account debtor, with proper endorsements for deposit.

9.4     BANK EXPENSES.

        If Borrower fails to pay any amount or furnish any required proof of
payment to third persons, Bank may make all or part of the payment or obtain
insurance policies required in Section 6.5, and take any action under the
policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then applicable rate and
secured by the Collateral. No payments by Bank are deemed an agreement to make
similar payments in the future or Bank's waiver of any Event of Default.

9.5     BANK'S LIABILITY FOR COLLATERAL.

        If Bank complies with reasonable banking practices and Section 9-207 of
the Code, it is not liable for: (a) the safekeeping of the Collateral; (b) any
loss or damage to the Collateral; (c) any diminution in the value of the
Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or
other person. Borrower bears all risk of loss, damage or destruction of the
Collateral.


                                       12
<PAGE>   13


9.6     REMEDIES CUMULATIVE.

        Bank's rights and remedies under this Agreement, the Loan Documents, and
all other agreements are cumulative. Bank has all rights and remedies provided
under the Code, by law, or in equity. Bank's exercise of one right or remedy is
not an election, and Bank's waiver of any Event of Default is not a continuing
waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is
effective unless signed by Bank and then is only effective for the specific
instance and purpose for which it was given.

9.7     DEMAND WAIVER.

        Borrower waives demand, notice of default or dishonor, notice of payment
and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.

10      NOTICES

        All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to the addresses set forth at the beginning of
this Agreement. A party may change its notice address by giving the other party
written notice.

11      CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER

        Washington law governs the Loan Documents without regard to principles
of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in King County, Washington.

BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.

12      GENERAL PROVISIONS

12.1    SUCCESSORS AND ASSIGNS.

        This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Borrower may not assign this Agreement or any
rights under it without Bank's prior written consent which may be granted or
withheld in Bank's discretion. Bank has the right, without the consent of or
notice to Borrower, to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
under this Agreement.

12.2    INDEMNIFICATION.

        Borrower will indemnify, defend and hold harmless Bank and its officers,
employees, and agents against: (a) all obligations, demands, claims, and
liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or in connection with transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.


                                       13
<PAGE>   14

12.3    TIME OF ESSENCE.

        Time is of the essence for the performance of all obligations in this
Agreement.

12.4    SEVERABILITY OF PROVISION.

        Each provision of this Agreement is severable from every other provision
in determining the enforceability of any provision.

12.5    AMENDMENTS IN WRITING, INTEGRATION.

        All amendments to this Agreement must be in writing and signed by
Borrower and Bank. This Agreement represents the entire agreement about this
subject matter, and supersedes prior negotiations or agreements. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties about the subject matter of this Agreement merge into this
Agreement and the Loan Documents. UNDER WASHINGTON AND OREGON LAW, MOST
AGREEMENTS, PROMISES AND COMMITMENTS MADE BY THE BANK AFTER OCTOBER 3, 1989
CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY
OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN
WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY US TO BE ENFORCEABLE.

12.6    COUNTERPARTS.

        This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one Agreement.

12.7    SURVIVAL.

        All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The obligations
of Borrower in Section 12.2 to indemnify Bank will survive until all statutes of
limitations for actions that may be brought against Bank have run.

12.8    CONFIDENTIALITY.

        In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective transferees
or purchasers of any interest in the loans, (iii) as required by law,
regulation, subpoena, or other order, (iv) as required in connection with Bank's
examination or audit and (v) as Bank considers appropriate exercising remedies
under this Agreement. Confidential information does not include information that
either: (a) is in the public domain or in Bank's possession when disclosed to
Bank, or becomes part of the public domain after disclosure to Bank; or (b) is
disclosed to Bank by a third party, if Bank does not know that the third party
is prohibited from disclosing the information.

12.9    EFFECT OF AMENDMENT AND RESTATEMENT.

        This Agreement is intended to and does completely amend and restate,
without novation, the Original Agreement. All advances or loans outstanding
under the Original Agreement are and shall continue to be outstanding under this
Agreement. All security interests granted under the Original Agreement are
hereby confirmed and ratified and shall continue to secure all Obligations under
this Agreement.


                                       14
<PAGE>   15

12.10   ATTORNEYS' FEES, COSTS AND EXPENSES.

        In any action or proceeding between Borrower and Bank arising out of the
Loan Documents, the prevailing party will be entitled to recover its reasonable
attorneys' fees and other reasonable costs and expenses incurred, in addition to
any other relief to which it may be entitled.

13      DEFINITIONS

13.1    DEFINITIONS.

        In this Agreement:

        "ACCOUNTS" are all existing and later arising accounts, contract rights,
and other obligations owed Borrower in connection with its sale or lease of
goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.

        "ADVANCE" or "ADVANCES" is a loan advance (or advances) under the
Committed Revolving Line.

        "AFFILIATE" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.

        "BANK EXPENSES" are all audit fees and expenses and reasonable costs and
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).

        "BORROWER'S BOOKS" are all Borrower's books and records including
ledgers, records regarding Borrower's assets or liabilities, the Collateral,
business operations or financial condition and all computer programs or discs or
any equipment containing the information.

        "BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on
which the Bank is closed.

        "CLOSING DATE" is the date of this Agreement.

        "CODE" is the Washington Uniform Commercial Code.

        "COLLATERAL" is the property described on Exhibit A.

        "COMMITTED REVOLVING LINE" is an Advance of up to $5,000,000.

        "CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by


                                       15
<PAGE>   16


the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.

        "EQUIPMENT" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.

        "ERISA" is the Employment Retirement Income Security Act of 1974, and
its regulations.

        "GAAP" is generally accepted accounting principles.

        "INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred
price of property or services, such as reimbursement and other obligations for
surety bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.

        "INSOLVENCY PROCEEDING" are proceedings by or against any Person under
the United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.

        "INVENTORY" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.

        "INVESTMENT" is any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.

        "LIEN" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.

        "LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes
or guaranties executed by Borrower or Guarantor, and any other present or future
agreement between Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, extended or restated.

        "MATERIAL ADVERSE CHANGE" is defined in Section 8.3.

        "OBLIGATIONS" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including cash management services,
letters of credit and foreign exchange contracts, if any and including interest
accruing after Insolvency Proceedings begin and debts, liabilities, or
obligations of Borrower assigned to Bank.

        "PERMITTED INDEBTEDNESS" is:

        (a) Borrower's indebtedness to Bank under this Agreement or any other
            Loan Document;

        (b) Indebtedness existing on the Closing Date and shown on the Schedule;

        (c) Subordinated Debt;

        (d) Indebtedness to trade creditors incurred in the ordinary course of
            business; and


                                       16
<PAGE>   17


        (e) Indebtedness secured by Permitted Liens.

        "PERMITTED INVESTMENTS" are:

        (a) Investments shown on the Schedule and existing on the Closing Date;
            and

        (b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States or its agency or any State maturing within 1
year from its acquisition, (ii) commercial paper maturing no more than 1 year
after its creation and having the highest rating from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates of
deposit issued maturing no more than 1 year after issue and (iv) any Investments
permitted by Borrower's investment policy, as amended from time to time,
provided that such investment policy has been approved by Bank.

        "PERMITTED LIENS" are:

        (a) Liens existing on the Closing Date and shown on the Schedule or
arising under this Agreement or other Loan Documents;

        (b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority over
any of Bank's security interests;

        (c) Purchase money Liens (i) on Equipment acquired or held by Borrower
or its Subsidiaries incurred for financing the acquisition of the Equipment, or
(ii) existing on equipment when acquired, if the Lien is confined to the
property and improvements and the proceeds of the equipment;

        (d) Licenses or sublicenses granted in the ordinary course of Borrower's
business and any interest or title of a licensor or under any license or
sublicense, if the licenses and sublicenses permit granting Bank a security
interest;

        (e) Leases or subleases granted in the ordinary course of Borrower's
business, including in connection with Borrower's leased premises or leased
property;

        (f) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase.

        "PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.

        "PRIME RATE" is Bank's most recently announced "prime rate," even if it
is not Bank's lowest rate.

        "RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.

        "REVOLVING MATURITY DATE" is September 6, 2001.

        "SCHEDULE" is any attached schedule of exceptions.


                                       17
<PAGE>   18

        "SUBORDINATED DEBT" is debt incurred by Borrower subordinated to
Borrower's indebtedness owed to Bank and which is reflected in a written
agreement in a manner and form acceptable to Bank and approved by Bank in
writing.

        "SUBSIDIARY" is for any Person, or any other business entity of which
more than 50% of the voting stock or other equity interests is owned or
controlled, directly or indirectly, by the Person or one or more Affiliates of
the Person.

        "TANGIBLE NET WORTH" is, on any date, the consolidated total assets of
Borrower and its Subsidiaries minus, (i) any amounts attributable to (a)
goodwill, (b) intangible items such as unamortized debt discount and expense,
Patents, trade and service marks and names, Copyrights and research and
development expenses except prepaid expenses, and (c) reserves not already
deducted from assets, and (ii) Total Liabilities.

        "TOTAL LIABILITIES" is on any day, obligations that should, under GAAP,
be classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion Subordinated Debt allowed to be paid, but
excluding all other Subordinated Debt.


BORROWER:

Sonus Pharmaceuticals, Inc.


By:    /s/ Richard J. Klein
       ---------------------------
Title: Chief Financial Officer
       ---------------------------

BANK:

SILICON VALLEY BANK


By:    /s/ John T. Flemming
       ---------------------------
Title: Vice President
       ---------------------------


                                       18
<PAGE>   19

                                    EXHIBIT A


        The Collateral consists of all of Borrower's right, title and interest
in and to the following:

        All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;

        All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;

        All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;

        All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower;

        All documents, cash, deposit accounts, securities, securities
entitlements, securities accounts, investment property, financial assets,
letters of credit, certificates of deposit, instruments and chattel paper now
owned or hereafter acquired and Borrower's Books relating to the foregoing;

        All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential information,
now owned or hereafter acquired; all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of any of
the foregoing; and

        All Borrower's Books relating to the foregoing and any and all claims,
rights and interests in any of the above and all substitutions for, additions
and accessions to and proceeds thereof.

        Notwithstanding the foregoing, the Collateral shall not be deemed to
include any copyrights, copyright applications, copyright registration and like
protection in each work of authorship and derivative work thereof, whether
published or unpublished, now owned or hereafter acquired; any patents, patent
applications and like protections including without limitation improvements,
divisions, continuations, renewals, reissues, extensions and
continuations-in-part of the same, trademarks, servicemarks and applications
therefor, whether registered or not, and the goodwill of the business of
Borrower connected with and symbolized by such trademarks, any trade secret
rights, including any rights to unpatented inventions, know-how, operating
manuals, license rights and agreements and confidential information, now owned
or hereafter acquired; or any claims for damage by way of any past, present and
future infringement of any of the foregoing (collectively, the "Intellectual
Property"), except that the Collateral shall include the proceeds of all the
Intellectual Property that are accounts, (i.e. accounts receivable) of Borrower,
or general intangibles consisting of rights to payment, if a judicial authority
(including a U.S. Bankruptcy Court) holds that a security interest in the
underlying Intellectual Property is necessary to have a security interest in
such accounts and general intangibles of Borrower that are proceeds of the

<PAGE>   20


Intellectual Property, then the Collateral shall automatically, and effective as
of the Closing Date, include the Intellectual Property to the extent necessary
to permit perfection of Bank's security interest in such accounts and general
intangibles of Borrower that are proceeds of the Intellectual Property.)

        Borrower and Bank are parties to that certain Negative Pledge Agreement,
whereby Borrower, in connection with Bank's loan or loans to Borrower, has
agreed, among other things, not to sell, transfer, assign, mortgage, pledge,
lease grant a security interest in, or encumber any of its Intellectual
Property, excluding the sale of licenses in the ordinary course of business,
without Bank's prior written consent.


                                       2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.44
<SEQUENCE>3
<FILENAME>v67267ex10-44.txt
<DESCRIPTION>CHANGE IN CONTROL AGREEMENT FOR RICHARD KLEIN
<TEXT>

<PAGE>   1

                                                                   EXHIBIT 10.44


October 25, 2000




Richard J. Klein
c/o SONUS Pharmaceuticals, Inc.
22026 20th Avenue S.E.
Bothell, Washington  98021

               Re:  Change In Control Agreement

Dear Rick:

        In consideration of your continued employment with SONUS
Pharmaceuticals, Inc., a Delaware corporation (the "Company"), this letter
agreement (the "Agreement") sets forth the compensation and benefits you will be
entitled to receive in the event your employment terminates in connection with a
change in control of the Company under the conditions described below. This
Agreement takes effect on the date set forth above.

1.      TERMINATION OF EMPLOYMENT.

        1.1. During the term of this Agreement, you will be entitled to the
benefits provided in Section 2 of this Agreement in the event (A) a Change in
Control has occurred; and (B) (i) you terminate your employment with the Company
for Good Reason within 12 months following the Change of Control, or (ii) the
Company terminates your employment for reasons other than Cause, Disability, or
your death within 12 months following the Change of Control, provided you
fulfill your obligations under this Agreement.

        1.2 For purposes of this Agreement, the term "Change in Control" shall
mean (i) a sale of fifty percent (50%) or more of the outstanding shares of
common stock of the Company; (ii) a sale of all or substantially all of the
assets of the Company, or (iii) a merger, consolidation or reorganization
whereby the stockholders of the Company immediately prior to the consummation of
such merger, consolidation or reorganization own less than fifty percent (50%)
of the outstanding shares of common stock immediately following the consummation
of the merger, consolidation or reorganization.

        1.3. For purposes of this Agreement, the term "Good Reason" shall mean
any of the following, if done without your consent:

            1.3.1. A substantial diminution in your duties and responsibilities
to a level substantially beneath that of your duties and responsibilities at the
outset of your employment under this Agreement other than actions that are not
taken in bad faith and are remedied by the Company within thirty days after
written notice by you;

<PAGE>   2

            1.3.2. A reduction by the Company in your current annual base salary
unless such reduction is attributable to an across the board salary reduction
for all of management personnel of the Company and then only if the percentage
of your reduction is (i) not greater than 20%, and (ii) no greater than that of
the other management personnel;

            1.3.3. The Company requires the relocation of your base of
employment outside the Seattle, Washington metropolitan area;

            1.3.4. A material breach by the Company of any of the terms and
provisions of this Agreement, which is not cured within 30 days of written
notice by you of such breach; or

            1.3.5. The failure of the Company to obtain a satisfactory agreement
from any successor in a Change of Control to assume and agree to perform this
Agreement, as contemplated in Section 6 hereof.

        1.4 For purposes of this Agreement, the term "Cause" shall mean any of
the following: (i) your willful and continued failure or refusal to perform your
duties with the Company; (b) your willfully engaging in gross misconduct
injurious to the Company; (c) your being convicted or pleading guilty or nolo
contendere to any misdemeanor involving moral turpitude or to any felony; (d)
your having materially breached any provision of this Agreement, or any
agreement concerning confidentiality or ownership of inventions with the Company
and failed to cure such breach to the reasonable satisfaction of the Company
promptly after receiving written notice of breach if such cure is possible.

        1.5. For purposes of this Agreement, the term "Disability" shall mean
your inability to perform the essential functions of your position due to any
physical or mental illness even with reasonable accommodation to the extent
required by law, for any period of six months in the aggregate during any twelve
months, provided the Company has given you a written demand to return to your
fill time duties.

        1.6 Any termination of employment by you or by the Company pursuant to
this Agreement shall be communicated by written Notice of Termination indicating
the termination provision in this Agreement relied upon, if any. For purposes of
this Agreement, the "Date of Termination" shall mean the date specified in the
Notice of Termination which shall not be earlier than ten (10) business days
after the date on the Notice of Termination is given.

2.      COMPENSATION UPON TERMINATION.

        2.1. If your employment shall be terminated and you are entitled to
benefits under Section 1 of this Agreement then, except as provided in
Subsection 2.2, you shall receive the following benefits:

            2.1.1. the Company shall pay to you in a lump sum within ten days
following the Date of Termination (a) your base salary unpaid through the Date
of Termination at the rate in effect as of the time of Notice of Termination and
(b) an amount equal to the value as of the Date


                                       2
<PAGE>   3


of Termination of the deferred portion of any bonus which has been declared but
is unpaid under any incentive compensation plan or program of the Company then
in effect;

            2.1.2. the Company shall pay to you as severance pay in a lump sum
within thirty days following the Date of Termination an amount equal to your
highest annual base salary in effect any time during the twelve (12) month
period prior to the Date of Termination; and

            2.1.3. the Company shall maintain in full force and effect, for the
continued benefit of you for one year after the Date of Termination, or, if
sooner, until you are employed in a full-time capacity by another employer, all
non-cash health and welfare plans and programs (excluding 401(k) or any employee
bonus plans and programs or retirement plans or programs) in which you
participated immediately prior to the Date of Termination provided that your
continued participation is permissible under the general terms and provisions of
such plans and programs. In the event that your participation in any such plan
or program is barred, the Company shall arrange to provide you with benefits
substantially similar to those which you are entitled to receive under such
plans and programs at no cost to you. At the end of the period of coverage, you
shall have the option to have assigned to you at no cost and with no
apportionment of prepaid premiums, any assignable insurance policy owned by the
Company and relating to specifically to you.

        2.2. Notwithstanding Section 1, the respective obligations of, and
benefits afforded to, the Company and you as provided in this Section 2, shall
survive termination of this Agreement.

        2.3. No compensation or benefits shall be due under this Agreement in
the event your employment is terminated by you or the Company in circumstances
other than those described in Section 1.1, including but not limited to a
termination by you for any reason other than Good Reason, a termination by the
Company for Cause, disability, or death, or any termination that does not occur
within twelve months following a Change in Control.

        2.4. To the extent that any or all of the payments and benefits provided
for in this Agreement constitute "parachute payments" within the meaning of
Section 280G of the Internal Revenue Code (the "Code") and, but for this Section
2.4 would be subject to the excise tax imposed by Section 4999 of the Code, the
aggregate amount of such payments and benefits shall be reduced such that the
present value thereof (as determined under the Code and applicable regulations)
is equal to 2.99 times the Executive's "base amount" (as defined in the Code).
The determination of any reduction of any payment or benefits under Section 2
pursuant to the foregoing provision shall be made by a nationally recognized
public accounting firm chosen by the Company in good faith, and such
determination shall be conclusive and binding on the Company and you.



                                       3
<PAGE>   4

3.      OTHER BENEFITS.

        In the event you are entitled to any compensation or benefits under this
Agreement, you shall not be entitled to any other severance compensation or
benefits under any other policy or agreement with the Company.

4.      PROPRIETARY INFORMATION AND UNFAIR COMPETITION.

        4.1 You acknowledge that in the course of your employment with the
Company, you will be entrusted with access to extensive confidential information
of the Company concerning its products and service, methods of manufacture,
research and development, know-how, patents, copyrights, trademarks, and other
proprietary data, as well as the identity, needs, and preferences of its
customers and prospects, all of which the Company considers its legally
protected trade secrets and intellectual property. You further acknowledge the
highly competitive nature of the business of the Company, and the fact that
unauthorized disclosure or use of such trade secrets and intellectual property
would be inevitable if you were to compete with the Company or solicit competing
business from its prospects and customers. You therefore agree as follows:

        4.2 Commencing on the Date of Termination, and ending one year
thereafter (the "Non-Compete Period"), you will not provide goods or services to
or become an employee, owner (except for passive investments of not more than
three percent of the outstanding shares of, or any other equity interest in, any
company or entity listed or traded on a national securities exchange or in an
over-the-counter securities market), officer, agent, consultant, advisor or
director of any firm or person in any geographic area which competes in the
"Business". For purposes of this Agreement, the term "Business" shall mean the
research, design, development, manufacture, sale or distribution of (i)
ultrasound contrast agents, (ii) drug delivery products using Vitamin E
technology, or (iii) blood substitute products using flurocarbon technology.

        4.3 During the Non-Compete Period, you will not directly or indirectly
induce any employee of the Company or any of its affiliates to engage in any
activity in which you are prohibited from engaging by paragraph 5.1 above, or to
terminate such employee's employment with the Company, or any of its affiliates,
and will not directly or indirectly employ or offer employment to any person who
was employed by the Company or any of its affiliates unless such person shall
cease to be employed by the Company or any of its affiliates for a period of at
least 12 months; provided, however, that this provision shall not apply to any
person who is no longer an employee of the Company or any of its affiliates as
of a result of actions taken by the Company or its affiliates.

        4.4 During the Non-Compete Period, you will refrain from making any
statement which has the effect of demeaning the name or the business reputation
of the Company or its subsidiaries or affiliates, or any officer or employee
thereof, or which materially adversely effects the best interests (economic or
otherwise) of the Company, its subsidiaries or affiliates.

        4.5. It is expressly understood and agreed that although you and the
Company consider the restrictions contained in this Section 5 to be reasonable,
if a final judicial


                                       4
<PAGE>   5


determination is made by a court of jurisdiction that the time or territory or
any other restriction contained in this Agreement is an unenforceable
restriction against you, provisions of this Agreement shall not be rendered
void, but shall be deemed amended to apply to such maximum time and territory
and to such maximum extent as such court may judicially determine or indicate to
be enforceable. Alternatively, if any court of competent jurisdiction finds that
any restriction contained in this Agreement is unenforceable, and such
restriction cannot be amended so as to make it enforceable, such finding shall
not effect the enforceability of any of the other restriction contained herein.

5.      MISCELLANEOUS.

        Any payment required under this Agreement shall be subject to all
requirements of the law with regard to withholding, filing, making of reports
and the like, and the Company shall use its commercially reasonable best efforts
to satisfy promptly all such requirements. No provisions of this Agreement may
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in a writing signed by both parties. The validity, interpretation,
construction and performance of this Agreement shall be governed by the law of
the State of Delaware.

6.      SUCCESSORS AND ASSIGNMENT.

        This agreement and all of your rights thereunder shall inure to the
benefit of and be enforceable by your personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. Except as expressly provided in this Agreement, this Agreement is
personal to you and may not be assigned to you. If you should die while any
amounts would still be payable to you hereunder if you had continued to live,
all such amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to your devisee, legatee, or other designee or,
if there be no such designee, to your estate. This Agreement shall be binding
upon any successor to the Company (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company.

7.      TERM OF AGREEMENT.

        This Agreement shall commence as of the date of this Agreement and shall
terminate on the earliest of (i) three (3) years from the date of this
Agreement, (ii) the termination of your employment by the Company for Cause,
Disability or death; (iii) your termination of employment other than for Good
Reason or (iv) your reaching age 65.



                                       5
<PAGE>   6

8.      NO GUARANTEE OF CONTINUED EMPLOYMENT.

        This Agreement is intended solely to provide you with certain
compensation and benefits in the event your employment terminates in the
circumstances described in Section 1.1. Nothing in this Agreement constitutes or
implies any specific term of employment. You acknowledge and agree that your
employment with the Company can be terminated by you or the Company at any time
with or without cause or prior warning. Nothing in this Agreement limits or
supercedes any other agreements between you and the Company concerning
confidentiality or ownership of intellectual property.

9.      MEDIATION.

        In the event that the Company terminates you for Cause and you dispute
its right to do so or you claim that your are entitled to terminate your
employment for Good Reason and the Company disputes your right to do so, a
mediator acceptable to you and the Company will be appointed within ten (10)
days to assist in reaching a mutually satisfactory resolution but will have no
authority to issue a binding decision. Such mediation must be concluded within
60 days of the date of termination or claim to termination. Should such
mediation fail to reach an acceptable conclusion and you are successful in any
litigation or settlement that issues from such dispute, you shall be entitled to
receive from the Company all of the expenses incurred by you in connection with
any such dispute including reasonable attorney's fees.

        If this Agreement is acceptable to you, kindly sign and return to the
Company the enclosed copy of this letter.

                                   Sincerely,

                                   SONUS Pharmaceuticals, Inc.


                                   By: /s/ Michael A. Martino
                                       -----------------------------

AGREED AND ACCEPTED:

/s/ Richard J. Klein
-----------------------------
Richard J. Klein


Dated:  October 25, 2000


                                       6
</TEXT>
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<DESCRIPTION>FINANCIAL DATA SCHEDULE
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