Exhibit 10.1

SECOND AMENDED AND RESTATED
LOAN AGREEMENT

THIS LOAN AGREEMENT (this “Agreement”) is dated as of December 10, 2001, and
amended and restated as of October 25, 2006 (the “Restatement Date”), by and
between DISCOVERY LABORATORIES, INC., a Delaware corporation (“Borrower”), and
PHARMABIO DEVELOPMENT INC., a North Carolina corporation, d/b/a NovaQuest
(“Lender”).

WHEREAS, Borrower and Lender entered into the Loan Agreement dated as of
December 10, 2001 (the “Original Date”), as amended by the Amended and Restated
Loan Agreement (the “Amended and Restated Loan Agreement”) dated as of November
3, 2004;

WHEREAS, Lender has advanced to Borrower an aggregate principal amount of Eight
Million, Five Hundred Thousand Dollars ($8,500,000) under the terms of the
Amended and Restated Loan Agreement, all of which, together with accrued
interest in the amount of $222,652.78 as of September 30, 2006, remains
outstanding and payable to Lender as of the Restatement Date (such principal and
interest, the “Loan”);

WHEREAS, Borrower and Lender wish to amend and restate the Amended and Restated
Loan Agreement in its entirety as set forth in this Agreement; and

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged by the parties, the parties hereby amend and
restate the Amended and Restated Loan Agreement in its entirety and hereby agree
as follows:

ARTICLE I
DEFINITIONS

1.01 Definitions. Capitalized terms used but not defined in the text of this
Agreement shall have the meanings ascribed to them on Exhibit A attached hereto
and incorporated herein by reference.

ARTICLE II
AMOUNT AND TERMS OF LOAN

2.01 Term Loan.

(a) Subject to and upon the terms and conditions set forth herein, Lender agrees
to continue to make the Loan available to Borrower as of the Restatement Date.
Borrower acknowledges that the Loan satisfies Lender’s obligation to make
available loans or advances, and Lender has no obligation under the terms of
this Agreement to make any additional future loans or advances to Borrower.

1

--------------------------------------------------------------------------------

2.02   [Intentionally Omitted.]

2.03 Note. Borrower’s obligation to pay the principal of, and interest on, the
Loan made by Lender shall be evidenced by a single promissory note (the “Note”)
duly executed and delivered by Borrower in the form of Exhibit B attached hereto
dated as of the Original Date and amended and restated as of the Restatement
Date. Any prepayments made by Borrower to Lender shall be recorded by Lender and
shall be endorsed on the grid attached to the Note.

2.04  Repayment; Interest; Prepayments.

(a) Borrower shall pay the aggregate outstanding principal amount of the Loan
and all accrued interest on or before April 30, 2010 (the “Maturity Date”),
unless any such amount becomes due and payable sooner pursuant to the provisions
of this Agreement. Borrower may prepay all or a portion of the Loan at any time
and from time to time without penalty, on the following terms and conditions:
(i) Borrower shall give Lender at least three (3) Business Days’ prior notice of
its intent to prepay and of the amount of the prepayment and (ii) each
prepayment shall not be less than $250,000. Any prepayments shall be credited
first to accrued and unpaid interest and then to principal.

(b) Interest on the Loan shall accrue beginning October 1, 2006, and be payable
at a rate per annum (the “Base Rate”) equal to the Prime Rate in effect from
time to time, or, if less, the maximum rate permitted by law. Interest shall be
calculated on the basis of a 360-day year for the actual number of days elapsed.
All interest shall compound annually and be payable on the Maturity Date.
 
(c) The outstanding principal amount of the Loan and any accrued interest
thereon that are not paid when due shall accrue interest on a daily basis at the
lesser of (i) three percent (3.00%) in excess of the Base Rate, or (ii) the
maximum rate permitted by law, such accrual beginning on the date payment is due
and continuing until the date payment is made in full. All such interest shall
compound as set forth in Section 2.04(b).

(d) All payments of principal and interest described above shall be made to
Lender in lawful money of the United States of America in immediately available
funds.

ARTICLE III
CONDITIONS PRECEDENT

3.01 Conditions Precedent to this Agreement. The obligation of Lender to execute
and deliver this Agreement to Borrower is subject to the conditions precedent
that Lender shall have received from Borrower each of the following documents on
the Restatement Date:

(a) The Note duly executed by Borrower;

(b) A Security Agreement in a form acceptable to the parties (the “Security
Agreement”), the related financing statement and one or more appropriate
instruments to be recorded with the United States Patent and Trademark Office,
each in a form acceptable to the parties, in each case duly executed by
Borrower;

2

--------------------------------------------------------------------------------

(c) A Warrant Agreement in a form acceptable to the parties and dated as of the
Restatement Date (the “Warrant”), duly executed by Borrower;

(d) Copies of resolutions of the Board of Directors of Borrower approving this
Agreement, the Note, the Security Agreement, the Warrant and any other documents
required or necessary to consummate the transactions contemplated in
this Agreement (the Agreement, the Note, and the Security Agreement (including
any amendment, modification, extension, refinancing, or restructuring thereof)
shall be referred to, collectively, as the “Loan Documents”; the Loan Documents
and the Warrant shall be referred to, collectively, as the “Transaction
Documents”), certified by an appropriate officer of Borrower;

(e) A certificate of the appropriate officers of Borrower certifying (i) that
the representations and warranties contained in Article IV are true and correct
in all material respects, (ii) that Borrower has performed, satisfied and
complied with, in all material respects, all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with on or prior to the date of this Agreement, and (iii) that no event has
occurred and is continuing, which constitutes an Event of Default or would
constitute an Event of Default but for the requirement that notice be given or
time elapse or both;

(f) A certificate of good standing (or comparable document) regarding Borrower
from the State of Delaware; and

(g) A subordination agreement in a form acceptable to Lender and executed by
Borrower and General Electric Capital Corporation.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BORROWER

For purposes of this Agreement and the Security Agreement, with respect to
Borrower, all references to “knowledge”, “knowingly” and similar words should be
construed to refer to the knowledge of the executive officers of Borrower
(including the Chief Executive Officer, Chief Financial Officer, General
Counsel, and Executive Vice Presidents or any comparable officer), after
reasonable investigation and inquiry. Borrower represents, warrants and
covenants to Lender, as of the Restatement Date, as follows:

4.01 Corporate Status. Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware, and
Borrower is qualified to do business as a foreign corporation in each
jurisdiction in which qualification is required, except where failure to so
qualify will not violate any provision of the organizational documents of
Borrower, and would not have a material adverse effect on the financial
condition, properties, business or results of operations of Borrower (a
“Material Adverse Effect”). Except for Acute Therapeutics, Inc., a wholly owned
subsidiary of Borrower that is presently inactive and has no material assets
(“ATI”), Borrower does not own or control, directly or indirectly, any interest
in any other corporation, partnership, limited liability company, association,
or other business entity. Except as set forth in the SEC Reports, Borrower is
not a participant in any joint venture, partnership, or similar arrangement.
Borrower has all requisite corporate power and authority to carry on its
business as now conducted.

3

--------------------------------------------------------------------------------

4.02 Issuance, Sale and Delivery of the Securities. The Warrant is, and the
Warrant Shares, when issued and paid for pursuant to the terms of the Warrant,
will be, duly and validly authorized, duly issued and outstanding, fully paid,
nonassessable and free and clear of all pledges, liens, encumbrances and
restrictions (other than restrictions arising under federal or state securities
or “blue sky” laws). The issuance of the Warrant is not, and the issuance of the
Warrant Shares by Borrower (hereinafter such securities are sometimes
collectively referred to as the “Securities”) will not be, subject to any
preemptive or other similar rights. No further approval or authority of the
stockholders or the Board of Directors of Borrower will be required for the
issuance and sale of the Securities to be sold by Borrower as contemplated
herein.

4.03 Due Execution, Delivery and Performance of the Agreements. Borrower has
full legal right, corporate power and authority to enter into the Transaction
Documents and to perform the transactions contemplated under the Transaction
Documents. The Transaction Documents have been duly authorized, executed and
delivered by Borrower. Except as set forth herein, the making and performance of
the Transaction Documents by Borrower and the consummation of the transactions
contemplated therein will not result in the creation of any lien, charge,
security interest or encumbrance upon any assets of Borrower pursuant to the
terms or provisions of, or will not conflict with, result in the breach or
violation of, or constitute, either by itself or upon notice or the passage of
time or both, a default under any agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which Borrower is a
party or by which Borrower or its properties may be bound or affected and in
each case which would have a Material Adverse Effect or violate any statute or
any authorization, judgment, decree, order, rule or regulation of any court or
any regulatory body, administrative agency or other governmental body,
applicable to Borrower or any of its properties. Except for any required
notifications or qualifications under the federal and state securities or “blue
sky” laws and regulations with respect to the issuance of the Warrant, the
Warrant Shares and the Note, no consent, approval, authorization or other order
of any court, regulatory body, administrative agency or other governmental body,
or any other party, is required for the execution and delivery of the
Transaction Documents or the consummation in the U.S. of the transactions
contemplated thereby. The Transaction Documents constitute valid and binding
obligations of Borrower, enforceable in the U.S. in accordance with their
respective terms except as such enforceability may be limited by bankruptcy,
insolvency, moratorium, reorganization or other similar laws affecting the
enforcement of creditors’ rights generally and as to limitations on the
enforcement of the remedy of specific performance and other equitable remedies.

4.04 Financial Statements and Reports. Unless available on the Internet free of
charge, Borrower has made available to Lender true and complete copies of the
SEC Reports. As of their respective filing dates, the SEC Reports were prepared
in all material respects in accordance with the requirements of the Securities
Act or the Exchange Act, as the case may be, and the rules and regulations of
the SEC promulgated thereunder applicable to such SEC Reports. The SEC Reports,
when read as a whole, do not contain any untrue statements of a material fact
and do not omit to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited consolidated financial statements and unaudited interim
financial statements of Borrower included in the SEC Reports have been prepared
in accordance with United States generally accepted accounting principles
(“GAAP”) applied on a consistent basis (except as may be indicated therein or in
the notes thereto) and fairly present, in all material respects, the financial
position of Borrower as at the dates thereof and the results of its operations
and cash flows for the periods then ended subject, in the case of the unaudited
interim financial statements, to normal year-end adjustments and any other
adjustments described in such financial statements. Since January 1, 2006,
Borrower has filed with the SEC on a timely basis, or received a valid extension
of such time of filing, all forms, reports and documents required to be filed by
it under the Exchange Act.

4

--------------------------------------------------------------------------------

4.05 No Defaults. Except as to defaults, violations and breaches which
individually or in the aggregate would not have a Material Adverse Effect,
Borrower is not in violation or default of any provision of its certificate of
incorporation or bylaws, or other organizational documents, or in breach of or
default with respect to any provision of any agreement, judgment, decree, order,
mortgage, deed of trust, lease, franchise, license, indenture, permit or other
instrument to which it is a party or by which it or any of its properties are
bound; and there does not exist any state of fact which, with notice or lapse of
time or both, would constitute an event of default or default on the part of
Borrower as defined in such documents, except such defaults which individually
or in the aggregate would not have a Material Adverse Effect.

4.06 Contracts.

(a) The contracts and agreements of Borrower described in the SEC Reports and in
Schedule 3(e)(ii) and Schedule 3(e)(iii) of the Security Agreement, including
without limitation Borrower’s licenses and options for licenses, are in full
force and effect as of the Restatement Date and Borrower is not, nor to
Borrower’s knowledge is any other party, in breach of or default under any of
such contracts or agreements which would have a Material Adverse Effect, except
such contracts or agreements as may have expired in accordance with their terms.
All such contracts and agreements constitute valid and binding obligations of
Borrower, enforceable in accordance with their respective terms except as such
enforceability may be limited by bankruptcy, insolvency, moratorium,
reorganization or other similar laws affecting the enforcement of creditors’
rights generally and as to limitations on the enforcement of the remedy of
specific performance and other equitable remedies.

(b) Without limiting the generality of Section 4.06(a), Borrower makes the
following representations and warranties in this Section 4.06(b) regarding (i)
the Sublicense Agreement dated October 28, 1996 (as in effect on the Restatement
Date, the “Sublicense”) among Johnson & Johnson and Ortho Pharmaceutical
Corporation, as licensors (collectively, “Licensor”), and ATI, as licensee, and
(ii) the Research Funding and Option Agreement dated March 1, 2000 (the
“Research Agreement”) between the Scripps Research Institute and Borrower:

(1) Borrower is the successor to ATI under the Sublicense.

5

--------------------------------------------------------------------------------

(2) The Sublicense is in full force and effect, and Borrower is not, nor to
Borrower’s knowledge is the Licensor, in breach or default under the Sublicense
in any material respect or in any manner that would permit a party to terminate
the Sublicense. To Borrower’s knowledge, no event or condition exists or has
occurred which would permit a party to terminate the Sublicense. The Sublicense
is a valid and binding agreement, enforceable in accordance with its terms
except as such enforceability may be limited by bankruptcy, insolvency,
moratorium, reorganization or other similar laws affecting the enforcement of
creditors’ rights generally and as to limitations on the enforcement of the
remedy of specific performance and other equitable remedies. Borrower has not
received any notice or other communication from the Licensor under the
Sublicense regarding any actual, alleged or potential violation, breach, default
or termination of the Sublicense or any material change in the rights of
Borrower under the Sublicense.

(3) To Borrower’s knowledge, (x) the representations and warranties of the
Licensor under Section 12 of the Sublicense are true and correct and (y) the
Scripps Agreement (as defined in the Sublicense) is in full force and effect.

(4) Borrower has achieved all milestones required to be achieved under the
Sublicense by the dates required thereunder (including without limitation under
Section 6.2 of the Sublicense), taking into account any valid and binding
extensions obtained by Borrower.

(5) The Research Agreement is not a material contract of Borrower with respect
to its financial condition, results of operations, prospects, or products.
Borrower has not exercised any option under the Research Agreement.
 
4.07 No Actions. Except as set forth on Schedule 4.07, there are no legal or
governmental actions, suits, proceedings, arbitrations or investigations pending
or, to Borrower’s knowledge, threatened, to which Borrower is or may be a party
or of which property owned, leased or licensed by Borrower is or may be the
subject, or related to environmental or discrimination matters, which actions,
suits, proceedings or investigations, individually or in the aggregate, might
prevent or might reasonably be expected to have a material adverse effect on the
transactions contemplated by this Agreement or result in a material adverse
change in the financial condition, properties, business, or results of
operations of Borrower (a “Material Adverse Change”); and no labor disturbance
by the employees of Borrower exists or is imminent, to Borrower’s knowledge,
which might reasonably be expected to have a Material Adverse Effect. Borrower
is not a party to or subject to the provisions of any material injunction,
judgment, decree or order of any court, regulatory body administrative agency or
other governmental body.

4.08 Properties. Borrower has good and marketable title to all the properties
and assets reflected as owned by it in the SEC Reports, subject to no lien,
mortgage, pledge, charge or encumbrance of any kind except Permitted Liens.
Borrower holds its leased properties under valid and binding leases. Borrower
owns, leases or licenses all such properties necessary for the conduct of its
business (as described in the SEC Reports).

6

--------------------------------------------------------------------------------

4.09 No Material Change. Except as disclosed in the SEC Reports, since June 30,
2006: (i) Borrower has not incurred any material liabilities or obligations,
indirect, or contingent, or entered into any material verbal or written
agreement or other transaction which is not in the ordinary course of business
or which could reasonably be expected to result in a material reduction in the
future earnings of Borrower; (ii) Borrower has not sustained any material loss
or interference with its business or properties from fire, flood, windstorm,
accident or other calamity not covered by insurance; (iii) Borrower has not paid
or declared any dividends or other distributions with respect to its capital
stock and Borrower is not in default in the payment of principal or interest on
any outstanding debt obligations; (iv) except as disclosed in the SEC Reports
and on Schedule 4.09, there has not been any change in the capital stock of
Borrower, other than options issued pursuant to employee equity incentive plans
or purchase plans approved by Borrower’s Board of Directors (including the
issuance of capital stock under Borrower’s 401(k) Plan), or indebtedness
material to Borrower; and (v) except for the operating losses and negative cash
flow Borrower has continued to incur, there has not been any Material Adverse
Change.

4.10 Intellectual Property.

(a)  Borrower owns or has obtained valid rights to use the Intellectual Property
necessary for the conduct of Borrower’s business (as described in the SEC
Reports).

(b)  To Borrower’s knowledge: (i) there are no third parties who have any
ownership rights to any Intellectual Property that is owned by, or has been
licensed to, Borrower for the product indications described in the SEC Reports
that would preclude Borrower from conducting its business (as described in the
SEC Reports), except for the ownership rights of the owners of the Intellectual
Property licensed or optioned by Borrower; (ii) there are currently no sales of
any products that would constitute an infringement by third parties of any
Intellectual Property owned, licensed or optioned by Borrower; (iii) there is no
pending or threatened action, suit, proceeding or claim by others challenging
the rights of Borrower in or to any Intellectual Property owned, licensed or
optioned by Borrower; (iv) there is no pending or threatened action, suit,
proceeding or claim by others challenging the validity or scope of any
Intellectual Property owned, licensed or optioned by Borrower; (v) there is no
pending or threatened action, suit, proceeding or claim by others that Borrower
infringes or otherwise violates any patent, trademark, copyright, trade secret
or other proprietary right of others; and (vi) Borrower is not subject to any
judgment, order, writ, injunction or decree of any court or any Federal, state,
local, foreign or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, or any arbitrator, and Borrower
has not entered into or is a party to any contract which restricts or impairs
the use of any such Intellectual Property in a manner which would have a
Material Adverse Effect.

4.11 Compliance. Borrower has been and is in compliance with, in all material
respects, all applicable laws, rules, regulations and orders, in respect of the
conduct of its business and the ownership of its properties, including without
limitation with respect to the FFDCA, environmental issues, and taxes and other
governmental charges.

7

--------------------------------------------------------------------------------

4.12 Taxes. Borrower has filed all federal, state, local and foreign income and
other tax returns required to be filed by it and has paid or accrued all taxes
shown as due thereon, and, except as set forth on Schedule 4.12, Borrower has no
knowledge of a tax deficiency which has been or might be asserted or threatened
against it.

4.13 Insurance. Borrower maintains insurance with sound and reputable insurance
companies of the types and in the amounts that Borrower reasonably believes is
adequate for its business, including, but not limited to, insurance covering all
real and personal property owned or leased by Borrower against all risks
customarily insured against by similarly situated companies, all of which
insurance is in full force and effect.

4.14 No Undisclosed Liabilities.

(a)  Neither Borrower nor any of its subsidiaries has any liabilities,
obligations, claims or losses (whether liquidated or unliquidated, secured or
unsecured, absolute, accrued, contingent or otherwise) that would be required to
be disclosed on a balance sheet of Borrower or any subsidiary (including the
notes thereto) in accordance with GAAP and are not disclosed in the SEC Reports
other than those incurred in the ordinary course of Borrower’s or its
subsidiaries’ respective businesses since June 30, 2006, and which, individually
or in the aggregate, do not or would not have a Material Adverse Effect.

(b) Set forth on Schedule 6.03(e) attached hereto is a true and complete list
and description of all Debt of Borrower and its subsidiaries outstanding on the
Restatement Date.
 
(c) Set forth on Schedule 6.04(i) attached hereto is a true and complete list
and description of all Liens of Borrower and its subsidiaries outstanding on the
Restatement Date, other than Liens existing under Sections 6.04(a), 6.04(b),
6.04(c), 6.04(g) or 6.04(h).

4.15 No Undisclosed Events or Circumstances. To Borrower’s knowledge, no event
or circumstance has occurred or exists with respect to Borrower or its
subsidiaries or their respective businesses, properties, operations or financial
condition, which, under applicable law, rule or regulation, requires public
disclosure or announcement by Borrower but which has not been so publicly
announced or disclosed and which, individually or in the aggregate, do not or
would not have a Material Adverse Effect.

4.16 Disclosure. To Borrower’s knowledge, as of the Restatement Date, the
Transaction Documents contain no untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements made herein or
therein, in the light of the circumstances under which they were made herein or
therein, not misleading.

4.17 Material Non-Public Information. Except for this Agreement and the
transactions contemplated hereby, neither Borrower nor its agents have disclosed
to Lender any material non-public information that, according to applicable law,
rule or regulation, should have been disclosed publicly by Borrower prior to the
Restatement Date but which has not been so disclosed.

8

--------------------------------------------------------------------------------

4.18  Fixed Assets. Set forth on Schedule 4.18 attached hereto is a true and
complete list and description, including the book value, of all material fixed
assets of Borrower.

ARTICLE V
REPRESENTATIONS AND WARRANTIES OF LENDER

Lender represents and warrants to Borrower, as of the Restatement Date as
follows:

5.01 Corporate Status. Lender is a corporation duly organized, validly existing
and in good standing under the laws of the State of North Carolina. Lender has
all requisite corporate power and authority to carry on its business as now
conducted.

5.02 Due Execution, Delivery and Performance of Agreement. Lender and its
Affiliates have full legal right, corporate power and authority to enter into
the Transaction Documents and to perform the transactions contemplated
thereunder. This Agreement has been duly authorized, executed and delivered by
Lender. This Agreement constitutes the valid and binding obligation of Lender
enforceable in accordance with its terms.

5.03 Investment. Lender is acquiring the Note, the Warrant and the Warrant
Shares for Lender’s own account, and not with a view to, or for resale in
connection with, any distribution or public offering thereof within the meaning
of the Securities Act. Lender acknowledges having access to the SEC Reports.
Lender has been afforded (i) the opportunity to ask such questions as it has
deemed necessary of, and to receive answers from, representatives of Borrower
concerning the business affairs and financial condition of Borrower and (ii) the
opportunity to request such additional documents and information which Borrower
possesses or can acquire without unreasonable effort or expense and has had
access to and has acquired sufficient information about Borrower to reach an
informed and knowledgeable decision to acquire the Securities to be purchased
hereunder. Lender, either by reason of its own business or financial experience
or the business or financial experience of its professional advisors (who are
unaffiliated with and who are not compensated by Borrower or any Affiliate,
finder or selling agent of Borrower, directly or indirectly), has such business
and financial experience as is required to give it the capacity to utilize the
information received, to evaluate the risks involved in purchasing such
securities, to make an informed decision about purchasing the Securities and is
able to bear the risks of an investment in the Securities. Lender is able to
bear the economic risk of holding the Securities for an indefinite period of
time and can afford a complete loss of its investment. Lender is not a “broker”
or a “dealer” as defined in the Exchange Act and is not an “affiliate” of
Borrower as defined in Rule 405 promulgated under the Securities Act.

5.04 Accredited Investor. Lender is an “accredited investor” within the meaning
of Rule 501 of Regulation D promulgated under the Securities Act.

9

--------------------------------------------------------------------------------

5.05 Note, the Warrant and the Warrant Shares Not Registered. Lender understands
that the Note, the Warrant and the Warrant Shares are not registered under the
Securities Act or registered or qualified under any state securities or “blue
sky” laws in reliance on specific exemptions therefrom. Lender acknowledges and
agrees that it shall not directly or indirectly, offer, sell, pledge, transfer
or otherwise dispose of (or solicit any offers to buy, purchase or otherwise
acquire or take a pledge of) the Note, the Warrant and the Warrant Shares,
except in compliance with the Securities Act and state securities or “blue sky”
laws and the rules and regulations promulgated thereunder and with this
Agreement and the Warrant. Lender understands that unless and until the Warrant
and the Warrant Shares have been registered for resale by Borrower or Lender in
compliance with applicable securities laws, the certificates evidencing the
Warrant and the Warrant Shares will be imprinted with a legend (in accordance
with Section 5.06) that prohibits the transfer of the Warrant and the Warrant
Shares unless (a) such transaction is registered or such registration is not
required or (b) if the transfer is pursuant to an exemption from registration,
upon the reasonable request of Borrower, an opinion of counsel reasonably
satisfactory to Borrower is obtained to the effect that the transaction is not
required to be registered or is so exempt. Notwithstanding anything in this
Agreement to the contrary, Lender may pledge the Note, the Warrant, and the
Warrant Shares in connection with bona fide loan transactions in which Lender or
its Affiliate is the borrower, provided that no such pledge shall occur
knowingly, after reasonable investigation and inquiry, to any person or entity
which actively sells, distributes, markets, develops, or produces a
pharmaceutical product or device which directly competes with the Product.
 
5.06 Legend. To the extent applicable, each certificate evidencing the Warrant
and the Warrant Shares, shall be endorsed with the legend substantially in the
form set forth below:
 
“THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES OR "BLUE-SKY" LAWS AND MAY NOT BE
SOLD, TRANSFERRED, ASSIGNED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF UNLESS
REGISTERED UNDER SUCH ACT OR UNDER SUCH LAWS, OR PURSUANT TO AN EXEMPTION FROM
SUCH REGISTRATION.”

ARTICLE VI
COVENANTS OF BORROWER

So long as any or all of the Loan or other obligations of Borrower under the
Loan Documents shall remain unpaid, Borrower shall comply with the following
covenants:

6.01 Compliance with Laws. Borrower shall comply, and cause each of its
subsidiaries to comply, in all material respects with all applicable laws,
rules, regulations and orders, in respect of the conduct of its business and the
ownership of its properties, including without limitation with respect to the
FFDCA, environmental issues, and taxes and other governmental changes, where the
failure to so comply would have a Material Adverse Effect.

6.02 Transfers of Assets. Borrower shall not, and shall not permit any of its
subsidiaries to, sell, convey, transfer, lease, license, assign or otherwise
dispose of (whether in one transaction or in a series of transactions) (a) all
or substantially all of its assets or properties (whether now owned or hereafter
acquired) to any entity or person, (b) without Lender’s written consent (which
consent shall not be unreasonably withheld), any material assets, properties or
rights relating to the Product, or (c) any of its assets or properties except in
the ordinary course of business and, in the case of this clause (c), so long as
such action is not likely to have a Material Adverse Effect or a material
adverse effect on Lender’s rights hereunder.

10

--------------------------------------------------------------------------------

6.03 Debt. Borrower shall not create or incur or allow to be created, incurred
or exist, or permit any of its subsidiaries to create or incur or allow to be
created, incurred or exist, any Debt, except each of the following forms of
Debt, individually and not in the aggregate:

(a)  accounts payable incurred or created in the ordinary course of Borrower’s
business;

(b)  Debt incurred or created in the ordinary course of Borrower’s business and
which does not exceed $5,000,000 in the aggregate (which shall not include any
Debt described in clauses (c) and (d));

(c) Debt incurred or created solely for the purpose of financing the acquisition
of property (other than real property), leasehold improvements and equipment for
use in Borrower’s business and which does not exceed $15,000,000 in the
aggregate;

(d)  Debt which is junior and subordinate in right of payment to Borrower’s
obligations to Lender under the Loan Documents (“Junior Debt”) so long as, prior
to the creation of such Junior Debt, unless such Junior Debt is described in
clauses (a) through (c) above, Lender has consented in writing to such Junior
Debt (such consent not to be unreasonably withheld), and Lender and the holder
of such Junior Debt have entered into a subordination agreement in form and
substance reasonably satisfactory to Lender providing for the subordination of
the Junior Debt to the obligations of Borrower under the Loan Documents; and

(e) Debt existing on the Restatement Date and set forth on Schedule 6.03(e)
attached hereto. For the avoidance of doubt, Schedule 6.03(e) includes a true
and complete list and description of all Debt of Borrower existing on the
Restatement Date, regardless of whether any such Debt is permitted by clauses
(a) through (d) above.

6.04 Liens, Etc. Borrower shall not create or incur or allow to be created,
incurred or exist, or permit any of its subsidiaries to create or incur or allow
to be created, incurred or exist, any Lien upon or with respect to any of
Borrower’s or its subsidiaries’ assets or properties, except each of the
following (collectively, “Permitted Liens”):

(a)  Liens for taxes, assessments or other governmental charges in the ordinary
course of business and for which no interest, late charge or penalty is
attaching or which are being contested in good faith by appropriate proceedings;

(b)  Liens, not delinquent, created by statute in connection with worker’s
compensation, unemployment insurance, social security and similar statutory
obligations;

(c)  Liens of mechanics, materialmen, carriers, warehousemen or other like
statutory or common law liens securing obligations incurred in good faith in the
ordinary course of business that are not due and payable or which are being
contested in good faith; provided that Borrower has set aside reserves
reasonable under the circumstances for any such liens being contested in good
faith;

11

--------------------------------------------------------------------------------

(d) Purchase money Liens upon property and equipment of Borrower acquired for
use in Borrower’s business, securing the purchase price thereof or securing Debt
incurred solely for the purpose of financing the acquisition thereof, and all of
which Liens in the aggregate do not secure Debt in excess of $15,000,000 at any
time outstanding;

(e)  Liens securing capital lease obligations under which the lessor’s recourse
is limited to the leased property;

(f) Liens securing indebtedness which is junior and subordinate in right of
payment to Borrower’s obligations to Lender under the Loan Documents (“Junior
Liens”) so long as, prior to the creation of such Junior Liens, unless such
Junior Liens are described in clauses (a) through (e) above, Lender has
consented in writing to such Junior Liens (such consent not to be unreasonably
withheld), and Lender and the holder of such Junior Liens have entered into a
subordination agreement in form and substance reasonably satisfactory to Lender
providing for the subordination of the indebtedness secured by the Junior Liens
to the obligations of Borrower under the Loan Documents;

(g)  any rights reserved to or vested in any municipality or public authority to
control or regulate the use of the real property used and occupied by Borrower
in any manner; easements, rights-of-way, servitudes, restrictions and other
defects, encumbrances and irregularities in title to the real property used and
occupied by Borrower which could not, individually or in the aggregate,
materially and adversely affect the condition or operation of such real
property; rights of landlords under real property leases; so long as, in any
case under this clause (g), any lienholder’s recourse is limited to the related
real property; 

(h) statutory purchase-money Liens, including without limitation under Article 2
of the Uniform Commercial Code securing obligations related to the acquisition
of goods and services incurred in good faith in the ordinary course of business
that are not due and payable or which are being contested in good faith;
provided that Borrower has set aside reserves reasonable under the circumstances
for any such liens being contested in good faith; and

(i) Liens, other than Liens existing under clauses (a) through (c) and (g) and
(h) above, existing on the Restatement Date and set forth on Schedule 6.04(i)
attached hereto; provided, however, that no such Liens may be modified,
extended, or otherwise amended in any way that adversely affects, including by
reason of delay, the perfection or priority of Borrower’s security interest in
the Collateral unless Lender has consented to such amendment in writing. For the
avoidance of doubt, Schedule 6.04(i) includes a true and complete list and
description of all Liens of Borrower existing on the Restatement Date, other
than Liens existing under clauses (a) through (c) and (g) and (h) above,
regardless of whether any such Lien is permitted by clauses (d) through (f)
above.

12

--------------------------------------------------------------------------------

6.05 Corporate Existence; Business. Borrower will (i) maintain and preserve in
full force and effect its corporate existence, and (ii) continue to engage in
the business in which it is engaged on the Restatement Date.

6.06 Exchange Act Registration. Borrower will cause the Common Stock to continue
to be registered under Section 12(g) of the Exchange Act, will comply in all
material respects with its reporting and filing obligations under the Exchange
Act, and will not take any action or file any documents to terminate or suspend
such registration or terminate or suspend its reporting or filing obligations
under the Exchange Act.

6.07 SEC and Other Information.

(a) Upon written request, Borrower will provide to Lender, within three (3)
Business Days of receipt of such written request, a copy of any publicly
available forms, reports or other documents filed by Borrower with the SEC if
such documents are not available on the Internet free of charge. If for any
reason at any time Borrower is not required to file annual, quarterly and other
periodic reports with the SEC pursuant to the terms of the Exchange Act, then
Borrower shall make available at no charge to Lender financial statements no
later than the time they would be filed with the SEC if Borrower was required to
file such annual, quarterly and other periodic reports. Any audited consolidated
financial statements and unaudited interim financial statements prepared
pursuant to the preceding sentence shall be prepared in accordance with GAAP
applied on a consistent basis (except as may be indicated therein or in the
notes thereto) during the periods involved, and shall fairly present in all
material respects the financial position of Borrower as of the dates thereof and
the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited interim financial statements, to normal
year-end audit adjustments).

(b)  Borrower will permit officers and designated representatives of Lender, at
reasonable times and intervals during normal business hours, and upon reasonable
prior notice, to visit and inspect, under guidance of officers of Borrower and
in accordance with Borrower’s quality and standard operating procedures, any of
the properties of Borrower, and to examine the Collateral and the books of
record and account of Borrower and discuss the affairs, finances and accounts of
Borrower with, and be advised as to the same by, Borrower’s officers; provided,
that (i) so long as Lender shall not have any reasonable basis for insecurity
with respect to Borrower, the Loan or the Collateral, such visitations and
inspections shall not occur more than twice in any fiscal year of Borrower, and
(ii) Lender shall, in accordance with the Confidentiality and Non-Disclosure
Agreement, dated July 11, 2006, between Lender and Borrower (the
“Confidentiality Agreement”), cause its Affiliates and representatives to, treat
all nonpublic information made available to it in strict confidence and disclose
such information only on a need-to-know basis to Affiliates, subcontractors and
employees who are under a written obligation to maintain the confidentiality of
the information. Lender shall be responsible for any disclosure of such
information by its Affiliates, subcontractors and employees.

6.08 Notice of Certain Events. Promptly, and in any event within five (5)
Business Days after an executive officer of Borrower obtains knowledge thereof,
Borrower will notify Lender of (a) the occurrence of an Event of Default, (b)
any litigation, governmental proceeding or investigation or other event that is
likely to materially and adversely affect the financial condition, properties,
business, or results of operations of Borrower, or (c) any Change of Control.

13

--------------------------------------------------------------------------------

6.09 Compliance with Certain Agreements. Borrower shall perform and fulfill all
of its obligations under the Sublicense as necessary to maintain Borrower’s
rights in such agreement in full force and effect in all material respects.
Borrower shall provide written notice to Lender within five (5) Business Days of
Borrower’s receipt of any notice from any other parties to the Sublicense
proposing or threatening to terminate any such agreement. 

6.10 Insurance. Borrower shall maintain in full force and effect insurance with
sound and reputable insurance companies of the types and in the amounts that
Borrower reasonably believes is adequate for its business, including, but not
limited to, insurance covering all real and personal property owned or leased by
Borrower against all risks customarily insured against by similarly situated
companies.

ARTICLE VII
EVENTS OF DEFAULT

7.01 Events of Default. The occurrence of each of the following events shall be
considered an event of default (each an “Event of Default”):

(a) Borrower shall fail to pay all principal and interest due under this
Agreement on or before the Maturity Date;

(b) Any representation or warranty made by Borrower under this Agreement or any
other Transaction Document shall prove to have been incorrect or untrue when
made or deemed made and such incorrect or untrue representation or warranty has
a Material Adverse Effect;

(c) Borrower shall fail to perform or observe any term, covenant or agreement
contained in this Agreement required to be performed or observed by Borrower
(other than Section 6.02, 6.03 or 6.04) and such failure to perform or observe
such term, covenant or agreement has a Material Adverse Effect and is not cured
within thirty (30) days after receipt of notice thereof by Borrower;

(d) Borrower shall fail to perform or observe the provisions of Section 6.02,
6.03 or 6.04, except, in the case of Section 6.04, if an Event of Default is
based on a tax lien, judgment lien or materialman’s lien, such lien shall
continue without discharge or stay for a period of sixty (60) days;

(e) One or more judgments, decrees or orders for the payment of money shall be
entered against Borrower or any of its subsidiaries involving in the aggregate a
liability of $300,000 or more in excess of any applicable insurance proceeds
(or, in the case of shareholder class actions, $600,000 or more), and any such
judgment, decree or order shall continue without discharge or stay for a period
of sixty (60) days;

14

--------------------------------------------------------------------------------

(f) Borrower shall (i) commence a voluntary case under the federal bankruptcy
laws (as now or hereafter in effect), (ii) file a petition seeking to take
advantage of any other laws relating to bankruptcy, insolvency, reorganization,
winding up or composition for adjustment of debts, (iii) consent to or fail to
contest in a timely manner any petition filed against it in an involuntary case
under such bankruptcy laws or other laws, (iv) apply for or consent to, or fail
to contest in a timely and appropriate manner, the appointment of, or the taking
of possession by, a receiver, custodian, trustee, or liquidator of itself or of
a substantial part of its property, (v) admit in writing its inability to pay
its debts as they become due, (vi) make a general assignment for the benefit of
creditors, or (vii) take any corporate action for the purpose of authorizing or
effecting any of the foregoing;

(g) A case or other proceeding shall be commenced against Borrower or any of its
subsidiaries in any court of competent jurisdiction seeking (i) relief under the
federal bankruptcy laws (as now or hereafter in effect) or under any other laws
relating to bankruptcy, insolvency, reorganization, winding up or adjustment of
debts, or (ii) the appointment of a trustee, receiver, custodian, liquidator or
the like for Borrower or any of its subsidiaries or for all or any substantial
part of their respective assets, and such case or proceeding shall continue
without dismissal or stay for a period of sixty (60) consecutive days, or an
order granting the relief requested in such case or proceeding (including, but
not limited to, an order for relief under such federal bankruptcy laws) shall be
entered;

(h) A Change of Control shall occur; provided, however, that a Change of
Control, as defined in clauses (ii) and (iii) of the definition of Change of
Control, shall not be an Event of Default if Lender shall have consented to such
Change of Control in writing (such consent not to be unreasonably withheld and
taking into account, without limitation, the business strategy and adequacy of
collateral for the Loan following such Change of Control);

(i) Borrower or any of its subsidiaries shall default in the performance or
observance of any agreement or instrument relating to any Debt, or any other
event shall occur or condition exist, and the effect of such default, event or
condition is to cause or permit the holder of any such Debt to cause any such
Debt to become due prior to its stated maturity;

(j) Borrower shall fail to perform or observe any term, covenant or agreement
under the Security Agreement in any material respect, or the Security Agreement
or any material provision thereof shall cease to be in full force and effect;

(k) There shall have been a Material Adverse Change (other than with respect to
matters relating to general economic conditions on Borrower’s industry as a
whole) which, taken as a whole, materially adversely affects Borrower’s ability
to satisfy its obligations under the Loan Documents; provided, however, that in
no event shall a Material Adverse Change be deemed to have occurred by virtue of
the incurrence by Borrower or its Affiliates of any debt or other obligations
permitted by this Agreement;

(l) the Common Stock shall not be listed or quoted on an Eligible Market;

15

--------------------------------------------------------------------------------

(m) The Sublicense shall have been terminated or expired, or cease to be in full
force and effect for the benefit of Borrower;

(n) Borrower shall withdraw, terminate, or abandon the NDA to market the Product
for the indication prevention of respiratory distress syndrome in premature
infants (RDS);

(o) The Product Launch Date for the indication prevention of RDS shall not have
occurred within one hundred eighty (180) days after the related FDA Approval
Date;

(p) Following the Product Launch Date, Borrower shall withdraw the Product for
the indication prevention of RDS from the market; or
 
(q) Borrower shall receive a Not Approvable Letter.

7.02 Effect of Event of Default. If any Event of Default shall occur and be
continuing, then Lender (i) may, by notice to Borrower, declare the Loan to be
terminated, whereupon the same shall forthwith terminate, (ii) may, by notice to
Borrower, declare the Note, all interest thereon and all other amounts payable
under this Agreement to be forthwith due and payable, whereupon the Note, all
such interest and all such amounts shall become and be forthwith due and
payable, without presentment, demand, protest or further notice of any kind, all
of which are hereby expressly waived by Borrower, and (iii) exercise any rights
or remedies under the Security Agreement; provided, however, that if an Event of
Default specified in Section 7.01(f) or (g) shall occur, (A) the Loan shall
automatically be terminated and (B) the Note, all such interest and all such
amounts shall automatically become and be due and payable, without presentment,
demand, protest or any notice of any kind, all of which are hereby expressly
waived by Borrower.

ARTICLE VIII
MISCELLANEOUS

8.01 Amendments. No amendment or waiver of any provision of this Agreement or
the Note, nor consent to any departure by Borrower therefrom, shall in any event
be effective unless the same shall be in writing and signed by Borrower and
Lender, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.

8.02 Notices. All notices and other communications provided for hereunder shall
be in writing, shall specifically refer to this Agreement, shall be addressed to
the receiving party’s address set forth below or to such other address as a
party may designate by notice hereunder, and shall be deemed to have been
sufficiently given for all purposes if (i) mailed by first class certified or
registered mail, postage prepaid, (ii) sent by nationally recognized overnight
courier for next Business Day delivery, (iii) personally delivered, or (iv) made
by telecopy or facsimile transmission with confirmed receipt.

If to Borrower:
Discovery Laboratories, Inc.

2600 Kelly Road, Suite 100
Warrington, PA 18976
Attn: Chief Executive Officer and General Counsel
Facsimile: (215) 488-9301

16

--------------------------------------------------------------------------------

with a copy to:
Dickstein Shapiro LLP

1177 Avenue of the Americas
New York, NY 10036-2714 
Attn: Ira L. Kotel
Facsimile: (212) 277-6501
 

If to Lender:
PharmaBio Development Inc. d/b/a NovaQuest

4709 Creekstone Drive
Riverbirch Bldg., Suite 200
Durham, NC 27703
Attn: President
Facsimile: (919) 998-2090

with a copy to:
Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.

2500 Wachovia Capitol Center
Raleigh, NC 27601
Attn: Christopher B. Capel
Facsimile: (919) 821-6800

8.03 No Waiver; Remedies. No failure on the part of Lender to exercise, and no
delay in exercising, any right hereunder or under the Notes shall operate as a
waiver thereof; nor shall any single or partial exercise of any such right
preclude any other or further exercise thereof or the exercise of any other
right. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law.

8.04 Attorneys’ Fees. In the event that any dispute among the parties to the
Loan Documents should result in litigation, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses
enforcing any right of such prevailing party under or with respect to the Loan
Documents, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expense of appeals.

8.05 Binding Effect; Assignment. This Agreement shall be binding upon and inure
to the benefit of Borrower and Lender and their respective successors and
permitted assigns, provided that (a) Borrower shall not assign or transfer any
or all of its rights or obligations under any of the Loan Documents, and (b) so
long as no Event of Default shall have occurred, Lender shall not assign or
transfer any or all of its rights or obligations under the Loan Documents,
provided, however, that the foregoing shall not limit Lender’s right to assign
or transfer the right to receive money or proceeds under the Loan Documents or
any comparable arrangement so long as Lender remains the party to the Loan
Documents and provided that Borrower shall continue to deal solely and directly
with Lender in connection with Lender’s rights and obligations under the Loan
Documents. Lender shall not assign or transfer any or all of its rights or
obligations under the Warrant or the Warrant Shares knowingly, after reasonable
investigation and inquiry, to any person or entity which actively sells,
distributes, markets, develops, or produces a pharmaceutical product or device
which directly competes with the Product. Notwithstanding the foregoing, Lender
may assign any or all of its rights or obligations under any of the Loan
Documents to an Affiliate of Lender, provided, that any such Affiliate shall
agree in writing to be subject to the foregoing limitations. Any assignment or
attempted assignment in violation of this Section 8.05 shall be null and void.

17

--------------------------------------------------------------------------------

8.06 Severability. To the extent any provision of this Agreement is prohibited
by or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.

8.07  Entire Agreement. This Agreement, the other Transaction Documents and the
Confidentiality Agreement embody the entire agreement and understanding between
the parties hereto with respect to the subject matter thereof and supersede all
prior oral or written agreements and understandings relating to the subject
matter thereof. No statement, representation, warranty, covenant or agreement of
any kind not expressly set forth in the Transaction Documents shall affect, or
be used to interpret, change or restrict, the express terms and provisions of
the Transaction Documents. If any provision contained in this Agreement shall be
deemed to conflict with any provision of any of the other Transaction Documents,
then the provision contained in this Agreement shall be controlling.

8.08 Further Action. Each party shall, without further consideration, take such
further action and execute and deliver such further documents as may be
reasonably requested by the other party in order to carry out the provisions and
purposes of the Transaction Documents.

8.09 Counterparts.  This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original and all of which, when taken
together, shall constitute one and the same instrument. This Agreement may be
executed and delivered by telecopy or facsimile transmission and any execution
by such means shall be deemed an original.

8.10 Publicity. Except as otherwise required by applicable law or by obligations
pursuant to any listing agreement with or rules of any securities exchange or
automated quotation system, each party shall, and shall cause its respective
Affiliates to, not, issue any press release or make any other public statement
relating to, connected with or arising out of this Agreement or the matters
contained herein without the other parties’ prior written approval of the
contents and the manner of presentation and publication thereof (which approval
shall not be unreasonably withheld or delayed).

8.11 Termination by Borrower. At such time that the Loan and accrued interest
have irrevocably been paid in full and Borrower has satisfied all of its
obligations under the Loan Documents, Lender shall, at the request and expense
of Borrower, promptly, and in no event later than ten (10) Business Days
thereafter, make, execute, endorse, acknowledge, file and/or deliver to Borrower
any and all agreements, certificates, instruments or other documents, and take
all other action, as reasonably requested by Borrower to terminate this
Agreement.

18

--------------------------------------------------------------------------------

8.12 Disclaimer. Neither Lender nor Borrower, nor any of such party’s
Affiliates, directors, officers, employees, subcontractors or agents shall have,
under any legal theory (including, but not limited to, contract, negligence and
tort liability), any liability to any other party hereto for any loss of
opportunity or goodwill, or any type of special, incidental, indirect or
consequential damage or loss, in connection with or arising out of this
Agreement.

8.13 Governing Law. This Agreement, including, without limitation, the
interpretation, performance, enforcement, breach or termination thereof and any
remedies relating thereto, shall be governed by and construed in accordance with
the laws of the State of Delaware, United States of America, as applied to
agreements executed and performed entirely in the State of Delaware, without
regard to conflicts of law rules.

8.14 Internal Review. In the event that a dispute, difference, claim, action,
demand, request, investigation, controversy, threat, discovery request or
request for testimony or information or other question arises pertaining to any
matters which arise under, out of, in connection with, or in relation to this
Agreement (a “Dispute”) and either party so requests in writing, prior to the
initiation of any formal legal action, the Dispute will be submitted to the
Chief Executive Officers of Borrower and Lender. For all Disputes referred to
the Chief Executive Officers, the Chief Executive Officers shall use their good
faith efforts to meet at least two times in person and to resolve the Dispute
within ten (10) days after such referral.

8.15 Arbitration.

(a)  If the parties are unable to resolve any Dispute under Section 8.14, then
either party may require the matter to be settled by final and binding
arbitration by sending written notice of such election to the other party
clearly marked “Arbitration Demand”. Thereupon such Dispute shall be arbitrated
in accordance with the terms and conditions of this Section 8.15.
Notwithstanding the foregoing, either party may apply to a court of competent
jurisdiction for a temporary restraining order, a preliminary injunction, or
other equitable relief to preserve the status quo or prevent irreparable harm.

(b)  The arbitration panel will be composed of three arbitrators, one of whom
will be chosen by Borrower, one by Lender, and the third by the two so chosen.
If both or either of Borrower or Lender fails to choose an arbitrator or
arbitrators within fourteen (14) days after receiving notice of commencement of
arbitration, or if the two arbitrators fail to choose a third arbitrator within
fourteen (14) days after their appointment, the American Arbitration Association
shall, upon the request of both or either of the parties to the arbitration,
appoint the arbitrator or arbitrators required to complete the panel. The
arbitrators shall have reasonable experience in the matter under dispute. The
decision of the arbitrators shall be final and binding on the parties, and
specific performance giving effect to the decision of the arbitrators may be
ordered by any court of competent jurisdiction.

(c)  Nothing contained herein shall operate to prevent either party from
asserting counterclaim(s) in any arbitration commenced in accordance with this
agreement, and any such party need not comply with the procedural provisions of
this Section 8.15 in order to assert such counterclaim(s).

19

--------------------------------------------------------------------------------

(d)  The arbitration shall be filed with the office of the American Arbitration
Association (“AAA”) located in Wilmington, Delaware or such other AAA office as
the parties may agree upon (without any obligation to so agree). The arbitration
shall be conducted pursuant to the Commercial Arbitration Rules of AAA as in
effect at the time of the arbitration hearing, such arbitration to be completed
in a sixty (60) day period. In addition, the following rules and procedures
shall apply to the arbitration:

(i)  The arbitrators shall have the sole authority to decide whether or not any
Dispute between the parties is arbitrable and whether the party presenting the
issues to be arbitrated has satisfied the conditions precedent to such party’s
right to commence arbitration as required by this Section 8.15. 

(ii)  The decision of the arbitrators, which shall be in writing and state the
findings the facts and conclusions of law upon which the decision is based,
shall be final and binding upon the parties, who shall forthwith comply after
receipt thereof. Judgment upon the award rendered by the arbitrator may be
entered by any competent court. Each party submits itself to the jurisdiction of
any such court, but only for the entry and enforcement to judgment with respect
to the decision of the arbitrators hereunder.

(iii)  The arbitrators shall have the power to grant all legal and equitable
remedies (including, without limitation, specific performance) and award
compensatory damages provided by applicable law, but shall not have the power or
authority to award punitive damages. No party shall seek punitive damages in
relation to any matter under, arising out of, or in connection with or relating
to this Agreement in any other forum.

(iv)  The parties shall bear their own costs in preparing for and participating
in the resolution of any Dispute pursuant to this Section 8.15, and the costs of
the arbitrator(s) shall be equally divided between the parties; provided,
however, that each party shall bear the costs incurred in connection with any
Dispute brought by such party that the arbitrators determine to have been
brought in bad faith.

(e) Except as provided in the last sentence of Section 8.15(a), the provisions
of this Section 8.15 shall be a complete defense to any suit, action or
proceeding instituted in any federal, state or local court or before any
administrative tribunal with respect to any Dispute arising with regard to this
Agreement. Any party commencing a lawsuit in violation of this Section 8.15
shall pay the costs of the other party, including, without limitation,
reasonable attorney’s fees and defense costs.

[Rest of page intentionally left blank; signatures on following page]
 
20

--------------------------------------------------------------------------------

[Signature page to Second Amended and Restated Loan Agreement] 

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

  BORROWER:       DISCOVERY LABORATORIES, INC.           By: /s/ John G. Cooper 
  Name: John G. Cooper    Title: Executive Vice President and Chief Financial
Officer               LENDER:       PHARMABIO DEVELOPMENT INC.   d/b/a NOVAQUEST
          By: /s/ Tom Perkins   Name: Tom Perkins   Title: Senior Vice
President, Corporate Development

 
 
21

--------------------------------------------------------------------------------

 
EXHIBIT A
DEFINITIONS

“Affiliate” shall mean, as to any person or entity, any corporation or business
entity controlled by, controlling or under common control with such party or
entity. For this purpose, “control” shall mean direct or indirect beneficial
ownership of at least fifty percent (50%) of the voting stock or income interest
in such corporation or other business entity.

“ATI” shall have the meaning set forth in Section 4.01.

“Business Day” shall mean any day other than a Saturday, Sunday or legal holiday
on which banks in North Carolina and New York are open for the conduct of their
banking business.

“Change of Control” shall mean the occurrence of any of the following events:
(i) the acquisition, whether directly or indirectly, by any person or entity,
including a “group” as defined in Section 13(d)(3) of the Exchange Act, of fifty
percent (50%) or more of the Common Stock; (ii) Borrower shall merge or
consolidate (or engage in any other share exchange, acquisition or business
combination transaction) with or into another corporation or other entity, with
the effect that the persons who were the shareholders of Borrower immediately
prior to the effective time of such transaction hold less than fifty-one percent
(51%) of the combined voting power of the outstanding equity securities of the
surviving, continuing or acquiring entity in such transaction; (iii) Borrower
shall sell, convey, transfer, lease, license, assign or otherwise transfer or
dispose of (whether in one transaction or a series of transactions) all or
substantially all of its assets or properties (whether now owned or hereafter
acquired) to any person or entity, or permit any of its subsidiaries to do so;
or (iv) at any time during any calendar year, fifty percent (50%) or more of the
members of the full Board of Directors of Borrower shall have resigned or been
removed or replaced. The determination of “combined voting power” shall be based
on the aggregate number of votes that are attributable to outstanding securities
entitled to vote in the election of directors, general partners, managers or
persons performing analogous functions to directors of the entity in question,
without regard to contractual arrangements or rights accruing in special
circumstances.

“Collateral” shall have the meaning set forth in the Security Agreement.

“Common Stock” shall mean the common stock, par value $0.001 per share, of
Borrower.

“Debt” shall mean (i) indebtedness for borrowed money, (ii) obligations
evidenced by bonds, debentures, notes or other similar instruments, (iii)
obligations to pay the deferred purchase price of property or services, (iv)
obligations as lessee under leases which shall have been or should be, in
accordance with GAAP, recorded as capital leases, and (v) obligations under
direct or indirect guaranties in respect of, and obligations (contingent or
otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor
against loss in respect of, indebtedness or obligations of others of the kinds
referred to in clauses (i) through (iv) above; provided, however, Debt shall not
include any Debt of Borrower under this Agreement.

1

--------------------------------------------------------------------------------

“Eligible Market” means any national securities exchange, the NASDAQ Global
Select Market, the NASDAQ Global Market or the NASDAQ Capital Market.

“Event of Default” shall have the meaning set forth in Section 7.01.

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

“FDA” shall mean the United States Food and Drug Administration or its
successor.

“FDA Approval Date” shall mean the first date on which the FDA approves an
application to market the Product.

“FFDCA” shall mean the United States Federal Food, Drug and Cosmetic Act, as
amended from time to time, and all regulations promulgated thereunder.

“Intellectual Property” shall have the meaning set forth in the Security
Agreement.

“Liens” shall mean any lien, security interest, mortgage, pledge, encumbrance,
charge or claim.

“Loan” shall have the meaning set forth in Section 2.01(a).

“Loan Documents” shall have the meaning set forth in Section 3.01(d).

“Material Adverse Change” shall have the meaning set forth in Section 4.07.

“Material Adverse Effect” shall have the meaning set forth in Section 4.01.

“Maturity Date” shall have the meaning set forth in Section 2.04(a).
 
“NDA” shall mean a “new drug application” as such term is used under the FFDCA.
 
“Not Approvable Letter” shall mean a letter from the FDA pursuant to 21 CFR
314.120 with respect to the NDA for the Product that has been filed with the FDA
prior to the date hereof, for the indication prevention of respiratory distress
syndrome in premature infants (RDS).

 “Note” shall have the meaning set forth in Section 2.04.

“Permitted Lien” shall have the meaning set forth in Section 6.04.

“Prime Rate” shall mean the rate which Wachovia Bank, N.A. (or its successor)
announces from time to time as its prime lending rate, the Prime Rate to change
when and as such prime lending rate changes.
 
“Product” shall mean the product currently known as Surfaxin, as such name may
change from time to time, for any and all formulations and delivery mechanisms,
and for any and all indications.

2

--------------------------------------------------------------------------------

“Product Launch Date” shall mean the first date on which the Product is shipped
in the United States for commercial sale.

“SEC” shall mean the United States Securities and Exchange Commission.

“SEC Reports” shall mean Borrower’s most recently filed Annual Report on Form
10-K and the Proxy Statement filed in connection with Borrower’s most recent
annual meeting of stockholders and all Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K filed by Borrower after January 1, 2006.

“Securities” shall have the meaning set forth in Section 4.02.

“Securities Act” shall mean the Securities Act of 1933, as amended.

“Security Agreement” shall have the meaning set forth in Section 3.01(b).

“Sublicense” shall have the meaning set forth in Section 4.06(b).

“Transaction Documents” shall have the meaning set forth in Section 3.01(d).

“Warrant” shall have the meaning set forth in Section 3.01(c).

“Warrant Shares” shall mean the shares issuable by Borrower upon the exercise of
the Warrant.

3

--------------------------------------------------------------------------------

EXHIBIT B
FORM OF NOTE

 
 

 

--------------------------------------------------------------------------------

 
Schedules

 
 

 

--------------------------------------------------------------------------------