EXECUTION COPY
 
EMPLOYMENT AGREEMENT
 
This Amended and Restated Employment Agreement (the “Agreement") is made as of
this 12th day of June, 2006, by and between DISCOVERY LABORATORIES, INC., a
Delaware corporation (the "Company"), and THOMAS MILLER, PH.D. (the
"Executive").
 
WHEREAS, the Company and Executive desire that Executive be employed by the
Company to act as the Company’s Senior Vice President, Commercialization and
Corporate Development, and that the terms and conditions of such employment be
defined.
 
NOW, THEREFORE, in consideration of the covenants contained herein, and for
other valuable consideration, the Company and the Executive hereby agree as
follows:
 
1.           Certain Definitions.  Certain definitions used herein shall have
the meanings set forth on Exhibit A attached hereto.
 
2.           Term of the Agreement.  The term (“Term”) of this Agreement shall
commence on the date first above written and shall continue through December 31,
2007; provided, however, that commencing on January 1, 2008, and on each January
1st thereafter, the term of this Agreement shall automatically be extended for
one additional year, unless at least 90 days prior to such January1st date, the
Company or the Executive shall have given notice that it does not wish to extend
this Agreement.  Upon the occurrence of a Change of Control during the term of
this Agreement, including any extensions thereof, this Agreement shall
automatically be extended until the end of the Effective Period if the end of
the Effective Period is after the then current expiration date of the
Term.  Notwithstanding the foregoing, this Agreement shall terminate prior to
the scheduled expiration date of the Term on the Date of Termination.
 
3.           Executive's Duties and Obligations.
 
(a)           Duties.  The Executive shall continue to serve as the Company's
Senior Vice President, Commercialization and Corporate Development.  The
Executive shall be responsible for all duties customarily associated with this
title.  The Executive shall at all times report directly to the Company’s Chief
Executive Officer.
 
(b)           Location of Employment.  The Executive's principal place of
business shall continue to be at the Company's headquarters to be located within
thirty (30) miles of Doylestown, Pennsylvania; provided, that the Executive
acknowledges and agrees that the performance by the Executive of his duties
shall require frequent travel including, without limitation, overseas travel
from time to time.
 
(c)           Proprietary Information and Inventions Matters.  In consideration
of the covenants contained herein, the Executive hereby agrees to execute the
Company's standard form of Proprietary Information and Inventions Agreement (the
"Confidentiality Agreement"), a copy of which is attached to this Agreement as
Exhibit B.  The Executive shall comply at all times with the terms and
conditions of the Confidentiality Agreement and all other reasonable policies of
the Company governing its confidential and proprietary information.

 
 

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4.           Devotion of Time to Company's Business.
 
(a)           Full-Time Efforts.  During his employment with the Company, the
Executive shall devote substantially all of his time, attention and efforts to
the proper performance of his implicit and explicit duties and obligations
hereunder to the reasonable satisfaction of the Company.
 
(b)           No Other Employment.  During his employment with the Company, the
Executive shall not, except as otherwise provided herein, directly or
indirectly, render any services of a commercial or professional nature to any
other person or organization, whether for compensation or otherwise, without the
prior written consent of the Executive Committee or the Board.
 
(c)           Non-Competition During and After Employment.  During the Term and
for 12 months from the Date of Termination, the Executive shall not, directly or
indirectly, without the prior written consent of the Company, either as an
employee, employer, consultant, agent, principal, partner, stockholder,
corporate officer, director, or in any other individual or representative
capacity (X) compete with the Company in the business of developing or
commercializing pulmonary surfactants or any other category of compounds which
forms the basis of the Company's material products or any material products
under development on the Date of Termination, or (Y) solicit, encourage, induce
or endeavor to entice away from the Company, or otherwise interfere with the
relationship of the Company with, any person who is employed or engaged by the
Company as an employee, consultant or independent contractor or who was so
employed or engaged at any time during the preceding six (6) months; provided,
that nothing herein shall prevent the Executive from engaging in discussions
regarding employment, or employing, any such employee, consultant or independent
contractor (i) if such person shall voluntarily initiate such discussions
without any such solicitation, encouragement, enticement or inducement prior
thereto on the part of the Executive or (ii) if such discussions shall be held
as a result of or employment be the result of the response by any such person to
a written employment advertisement placed in a publication of general
circulation, general solicitation conducted by executive search firms,
employment agencies or other general employment services, not directed
specifically at any such employee, consultant or independent contractor.
 
(d)           Injunctive Relief.  In the event that the Executive breaches any
provisions of Section 4(c) or of the Confidentiality Agreement or there is a
threatened breach thereof, then, in addition to any other rights which the
Company may have, the Company shall be entitled, without the posting of a bond
or other security, to injunctive relief to enforce the restrictions contained
therein.  In the event that an actual proceeding is brought in equity to enforce
the provisions of Section 4(c) or the Confidentiality Agreement, the Executive
shall not urge as a defense that there is an adequate remedy at law nor shall
the Company be prevented from seeking any other remedies which may be available.
 
(e)           Reformation.  To the extent that the restrictions imposed by
Section 4(c) are interpreted by any court to be unreasonable in geographic
and/or temporal scope, such restrictions shall be deemed automatically reduced
to the extent necessary to coincide with the maximum geographic and/or temporal
restrictions deemed by such court not to be unreasonable.

 
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5.           Compensation and Benefits.
 
(a)           Base Compensation.  During the Term, the Company shall pay to the
Executive (i) base annual compensation ("Base Salary") of at least $220,000,
payable in accordance with the Company's regular payroll practices and less all
required withholdings and (ii) additional compensation, if any, and benefits as
hereinafter set forth in this Section 5.  The Base Salary shall be reviewed at
least annually for the purposes of determining increases, if any, based on the
Executive's performance, the performance of the Company, inflation, the then
prevailing salary scales for comparable positions and other relevant factors;
provided, however, that any such increase in Base Salary shall be solely within
the discretion of the Company.
 
(b)           Bonuses.  During the Term, the Executive shall be eligible for
such year-end bonus, which may be paid in either cash or equity, or both, as is
awarded solely at the discretion of the Compensation Committee of the Board
after consultation with the Company’s Chief Executive Officer, provided, that
the Company shall be under no obligation whatsoever to pay such discretionary
year-end bonus for any year.  Any such equity bonus shall contain such rights
and features as are typically afforded to other Company employees of similar
level in connection with comparable equity bonuses awarded by the Company.
 
(c)           Benefits.  During the Term, the Executive shall be entitled to
participate in all employee benefit plans, programs and arrangements made
available generally to the Company's senior executives or to its employees on
substantially the same basis that such benefits are provided to such executives
or employees (including, without limitation profit-sharing, savings and other
retirement plans (e.g., a 401(k) plan) or programs, medical, dental,
hospitalization, vision, short-term and long-term disability and life insurance
plans or programs, accidental death and dismemberment protection, travel
accident insurance, and any other employee welfare benefit plans or programs
that may be sponsored by the Company from time to time, including any plans or
programs that supplement the above-listed types of plans or programs, whether
funded or unfunded); provided, however, that nothing in this Agreement shall be
construed to require the Company to establish or maintain any such plans,
programs or arrangements.  Anything contained herein to the contrary
notwithstanding, throughout the Term, Executive shall be entitled to receive
life insurance on behalf of Executive’s named beneficiaries in the amount of two
times the Executive’s then current annual salary for the Term of this Agreement
at no cost to the Executive, except the Company shall have no liability
whatsoever for any taxes (whether based on income or otherwise) imposed upon or
incurred by Executive in connection with any such insurance.
 
(d)           Vacations.  During the Term, the Executive shall be entitled to 20
days paid vacation per year, to be earned ratably throughout the year, 5 days of
which may be carried over from year to year (provided, that in no event shall
the aggregate number of such vacation days carried over to any succeeding year
exceed 10 days).
 
(e)           Reimbursement of Business Expenses.  The Executive is authorized
to incur reasonable expenses in carrying out his duties and responsibilities
under this Agreement and the Company shall reimburse him for all such expenses,
in accordance with reasonable policies of the Company.

 
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6.           Change of Control Benefits.
 
(a)           Bonus.   The Executive shall be awarded an annual cash bonus for
each fiscal year of the Company ending during the Effective Period at least
equal to the Highest Annual Bonus.
 
(b)           Options. Notwithstanding any provision to the contrary in the
Company’s Amended and Restated 1998 Stock Incentive Plan or any stock option or
restricted stock agreement between the Company and the Executive, all shares of
stock and all options to acquire Company stock held by the Executive shall
accelerate and become fully vested and, with respect to restricted stock, all
restrictions shall be lifted upon the Change of Control Date.  In the case of
any Change of Control in which the Company’s common stockholders receive cash,
securities or other consideration in exchange for, or in respect of, their
Company common stock, (i) the Executive shall be permitted to exercise his
options at a time and in a fashion that will entitle him to receive, in exchange
for any shares acquired pursuant to any such exercise, the same per share
consideration as is received by the other holders of the Company’s common stock,
and (ii) if the Executive shall elect not to exercise all or any portion of such
options, any such unexercised options shall terminate and cease to be
outstanding following such Change of Control, except to the extent assumed by a
successor corporation (or its parent) or otherwise expressly continued in full
force and effect pursuant to the terms of such Change of Control.
 
7.           Termination of Employment.
 
(a)           Termination by the Company for Cause or Termination by the
Executive without Good Reason, Death or Disability.
 
(i)             In the event of a termination of the Executive’s employment by
the Company for Cause, a termination by the Executive without Good Reason, or in
the event this Agreement terminates by reason of the death or Disability of the
Executive, the Executive shall be entitled to any unpaid compensation accrued
through the last day of the Executive's employment, a lump sum payment in
respect of all accrued but unused vacation days (provided, that in no event
shall the aggregate number of such accrued vacation days exceed 10 days) at his
Base Salary in effect on the date such vacation was earned, and payment of any
other amounts owing to the Executive but not yet paid.  The Executive shall not
be entitled to receive any other compensation or benefits from the Company
whatsoever (except as and to the extent the continuation of certain benefits is
required by law).
 
(ii)            In the case of a termination due to death or disability,
notwithstanding any provision to the contrary in any stock option or restricted
stock agreement between the Company and the Executive, all shares of stock and
all options to acquire Company stock held by the Executive shall accelerate and
become fully vested upon the Date of Termination (and all options shall
thereupon become fully exercisable), and all stock options shall continue to be
exercisable for the remainder of their stated terms.
 
(b)           Termination by the Company without Cause or by the Executive for
Good Reason.  If (x) the Executive’s employment is terminated by the Company
other than for Cause, death or Disability (i.e., without Cause) or (y) the
Executive terminates employment with Good Reason, then the Executive shall be
entitled to receive the following from the Company:
 
(i)             The amounts set forth in Section 7(a)(i);

 
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(ii)            Within 10 days after the Date of Termination, a lump sum cash
payment equal to the Highest Annual Bonus multiplied by the fraction obtained by
dividing the number of days in the year through the Date of Termination by 365;
 
(iii)           Within 10 days after the Date of Termination, a lump sum cash
payment in an amount equal to the sum of (A) the Executive’s Base Salary then in
effect (determined without regard to any reduction in such Base Salary
constituting Good Reason) and (B) the Highest Annual Bonus;
 
(iv)           For one year from the Date of Termination, the Company shall
either (A) arrange to provide the Executive and his dependents, at the Company’s
cost (except to the extent such cost was borne by the Executive prior to the
Date of Termination, and further, to the extent that such post-termination
coverages are available under the Company’s plans), with life, disability,
medical and dental coverage, whether insured or not insured, providing
substantially similar benefits to those which the Executive and his dependents
were receiving immediately prior to the Date of Termination, or (B) in lieu of
providing such coverage, pay to the Executive no less frequently than quarterly
in advance an amount which, after taxes, is sufficient for the Executive to
purchase equivalent benefits coverage referred to in clause (A); provided,
however, that the Company’s obligation under this Section 7(b)(iv) shall be
reduced to the extent that substantially similar coverages (determined on a
benefit-by-benefit basis) are provided by a subsequent employer;
 
(v)            Any other additional benefits then due or earned in accordance
with applicable plans and programs of the Company; and
 
(vi)           The Company will provide out-placement counseling assistance in
the form of reimbursement of the reasonable expenses incurred for such
assistance within the 12-month period following the Date of Termination.  Such
reimbursement amount shall not exceed $40,000.
 
(c)           Termination in connection with a Change of Control.  If the
Executive’s employment is terminated by the Company other than for Cause or by
the Executive for Good Reason during the Effective Period, then the Executive
shall be entitled to receive the following from the Company:
 
(i)             All amounts and benefits described in Section 7(a)(i) above;
 
(ii)            Within 10 days after the Date of Termination, a lump sum cash
payment equal to the Highest Annual Bonus multiplied by the fraction obtained by
dividing the number of days in the year through the Date of Termination by 365;
 
(iii)           Within 10 days after the Date of Termination, a lump sum cash
payment in an amount equal to the product of two (2) times the sum of (A) the
Executive’s Base Salary then in effect (determined without regard to any
reduction in such Base Salary constituting Good Reason) and (B) the Highest
Annual Bonus;

 
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(iv)           For two years from the Date of Termination, the Company shall
either (A) arrange to provide the Executive and his dependents, at the Company’s
cost (except to the extent such cost was borne by the Executive prior to the
Date of Termination, and further, to the extent that such post-termination
coverages are available under the Company’s plans), with life, disability,
medical and dental coverage, whether insured or not insured, providing
substantially similar benefits to those which the Executive and his dependents
were receiving immediately prior to the Date of Termination, or (B) in lieu of
providing such coverage, pay to the Executive no less frequently than quarterly
in advance an amount which, after taxes, is sufficient for the Executive to
purchase equivalent benefits coverage referred to in clause (A); provided,
however, that the Company’s obligation under this Section 7(c)(iv) shall be
reduced to the extent that substantially similar coverages (determined on a
benefit-by-benefit basis) are provided by a subsequent employer;
 
(v)            Notwithstanding any provision to the contrary in any stock option
or restricted stock agreement between the Company and the Executive, all shares
of stock and all options to acquire Company stock held by the Executive shall
accelerate and become fully vested upon the Date of Termination (and all options
shall thereupon become fully exercisable), and all stock options shall continue
to be exercisable for the remainder of their stated terms;
 
(vi)           Any other additional benefits then due or earned in accordance
with applicable plans and programs of the Company; and
 
(vii)          The Company will provide out-placement counseling assistance in
the form of reimbursement of the reasonable expenses incurred for such
assistance within the 12-month period following the Date of Termination.  Such
reimbursement amount shall not exceed $40,000.
 
8.           Notice of Termination.
 
(a)           Any termination of the Executive’s employment by the Company for
Cause, or by the Executive for Good Reason shall be communicated by a Notice of
Termination to the other party hereto given in accordance with Section 12.  For
purposes of this Agreement, a “Notice of Termination” means a written notice
which: (i) is given at least 10 days prior to the Date of Termination, (ii)
indicates the specific termination provision in this Agreement relied upon,
(iii) to the extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive’s
employment under the provision so indicated, and (iv) specifies the employment
termination date.  The failure to set forth in the Notice of Termination any
fact or circumstance which contributes to a showing of Good Reason or Cause will
not waive any right of the party giving the Notice of Termination hereunder or
preclude such party from asserting such fact or circumstance in enforcing its
rights hereunder.
 
(b)           A Termination of Employment of the Executive will not be deemed to
be for Good Reason unless the Executive gives the Notice of Termination provided
for herein within 12 months after the Executive has actual knowledge of the act
or omission of the Company constituting such Good Reason.
 
9.           Mitigation of Damages.  The Executive will not be required to
mitigate damages or the amount of any payment or benefit provided for under this
Agreement by seeking other employment or otherwise.  Except as otherwise
provided in Sections 7(b)(iv) and 7(c)(iv), the amount of any payment or benefit
provided for under this Agreement will not be reduced by any compensation or
benefits earned by the Executive as the result of self-employment or employment
by another employer or otherwise.

 
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10.         Excise Tax Gross-Up.
 
(a)           Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined that any payment, award, benefit or distribution
(including any acceleration) by the Company or any entity which effectuates a
transaction described in Section 280G(b)(2)(A)(i) of the Code to or for the
benefit of the Executive (whether pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional payments required
under this Section 10) (a “Payment”) would be subject to the excise tax imposed
by Section 4999 of the Code or any interest or penalties are incurred with
respect to such excise tax by the Executive (such excise tax, together with any
such interest and penalties, are hereinafter collectively referred to as the
“Excise Tax”), then the Executive shall be entitled to receive an additional
payment (a “Gross-Up Payment”) in an amount such that after payment by the
Executive of all taxes, including, without limitation, any income taxes (and any
interest and penalties imposed with respect thereto) and Excise Taxes imposed
upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments.  For purposes of this
Section 10, the Executive shall be deemed to pay federal, state and local income
taxes at the highest marginal rate of taxation for the calendar year in which
the Gross Up Payment is to be made, taking into account the maximum reduction in
federal income taxes which could be obtained from the deduction of state and
local income taxes.
 
(b)           All determinations required to be made under this Section 10,
including whether and when a Gross-Up Payment is required and the amount of such
Gross-Up Payment and the assumptions to be utilized in arriving at such
determination, shall be made by the Company’s independent auditors or such other
certified public accounting firm of national standing reasonably acceptable to
the Executive as may be designated by the Company (the “Accounting Firm”) which
shall provide detailed supporting calculations both to the Company and the
Executive within 15 business days of the receipt of notice from the Executive
that there has been a Payment, or such earlier time as is requested by the
Company.  All fees and expenses of the Accounting Firm shall be borne solely by
the Company.  Any Gross-Up Payment, as determined pursuant to this Section 10,
shall be paid by the Company to the Executive within five days of the later of
(i) the due date for the payment of any Excise Tax, and (ii) the receipt of the
Accounting Firm’s determination.  If the Accounting Firm determines that no
Excise Tax is payable by the Executive, it shall furnish the Executive with a
written opinion to such effect, and to the effect that failure to report the
Excise Tax, if any, on the Executive’s applicable federal income tax return will
not result in the imposition of a negligence or similar penalty.  Any
determination by the Accounting Firm shall be binding upon the Company and the
Executive.  As a result of the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination by the Accounting Firm
hereunder, it is possible that Gross-Up Payments which will not have been made
by the Company should have been made (“Underpayment”) or Gross-up Payments are
made by the Company which should not have been made (“Overpayments”), consistent
with the calculations required to be made hereunder.  In the event the Executive
is required to make a payment of any Excise Tax, the Accounting Firm shall
determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.  In the event the amount of Gross-up Payment exceeds the amount
necessary to reimburse the Executive for his Excise Tax, the Accounting Firm
shall determine the amount of the Overpayment that has been made and any such
Overpayment shall be promptly paid by the Executive (to the extent he has
received a refund if the applicable Excise Tax has been paid to the Internal
Revenue Service) to or for the benefit of the Company.  The Executive shall
cooperate, to the extent his expenses are reimbursed by the Company, with any
reasonable requests by the Company in connection with any contests or disputes
with the Internal Revenue Service in connection with the Excise Tax.

 
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11.         Legal Fees.  All reasonable legal fees and related expenses
(including costs of experts, evidence and counsel) paid or incurred by the
Executive pursuant to any claim, dispute or question of interpretation relating
to this Agreement shall be paid or reimbursed by the Company if the Executive is
successful on the merits pursuant to a legal judgment or arbitration.  Except as
provided in this Section 11, each party shall be responsible for its own legal
fees and expenses in connection with any claim or dispute relating to this
Agreement.
 
12.         Notices.  All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed within the continental United States by first class
certified mail, return receipt requested, postage prepaid, addressed as follows:
 
(a)           if to the Board or the Company:
 
Discovery Laboratories, Inc.
2600 Kelly Road, Suite 100
Warrington, PA 18976
Attn:  David Lopez, Esq.
 
(b)           if to the Executive:

 
Thomas Miller
The address on file with the records of the Company
 
Addresses may be changed by written notice sent to the other party at the last
recorded address of that party.
 
13.         Withholding.  The Company shall be entitled to withhold from
payments due hereunder any required federal, state or local withholding or other
taxes.
 
14.         Entire Agreement.  This Agreement contains the entire agreement
between the parties with respect to the subject matter hereof and supercedes the
Employment Agreement and all other prior agreements, written or oral, with
respect thereto.

 
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15.         Arbitration.
 
(a)           If the parties are unable to resolve any dispute or claim relating
directly or indirectly to this agreement (a “Dispute”), 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 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 the Company, one by the Executive, and the third by
the two so chosen.  If both or either of the Company or the Executive fails to
choose an arbitrator or arbitrators within 14 days after receiving notice of
commencement of arbitration, or if the two arbitrators fail to choose a third
arbitrator within 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 15 in order to assert such counterclaim(s).
 
(d)           The arbitration shall be filed with the office of the American
Arbitration Association ("AAA") located in New York, New York 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 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 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.

 
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(iv)           Except as provided in Section 11, the parties shall bear their
own costs in preparing for and participating in the resolution of any Dispute
pursuant to this Section 15, and the costs of the arbitrator(s) shall be equally
divided between the parties.
 
(v)            Except as provided in the last sentence of Section 15(a), the
provisions of this Section 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 in connection with
this Agreement.  Any party commencing a lawsuit in violation of this Section 15
shall pay the costs of the other party, including, without limitation,
reasonable attorney’s fees and defense costs.
 
16.         Miscellaneous.
 
(a)           Governing Law.  This Agreement shall be interpreted, construed,
governed and enforced according to the laws of the State of New York without
regard to the application of choice of law rules.
 
(b)           Amendments.  No amendment or modification of the terms or
conditions of this Agreement shall be valid unless in writing and signed by the
parties hereto.
 
(c)           Severability.  If one or more provisions of this Agreement are
held to be invalid or unenforceable under applicable law, such provisions shall
be construed, if possible, so as to be enforceable under applicable law, or such
provisions shall be excluded from this Agreement and the balance of the
Agreement shall be interpreted as if such provision were so excluded and shall
be enforceable in accordance with its terms.
 
(d)           Binding Effect.  This Agreement shall be binding upon and inure to
the benefit of the beneficiaries, heirs and representatives of the Executive
(including the Beneficiary) and the successors and assigns of the Company.  The
Company shall require any successor (whether direct or indirect, by purchase,
merger, reorganization, consolidation, acquisition of property or stock,
liquidation, or otherwise) to all or substantially all of its assets, by
agreement in form and substance satisfactory to the Executive, expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform this Agreement if no such
succession had taken place.  Regardless whether such agreement is executed, this
Agreement shall be binding upon any successor of the Company in accordance with
the operation of law and such successor shall be deemed the Company for purposes
of this Agreement.
 
(e)           Successors and Assigns.  Except as provided in Section16(d) in the
case of the Company, or to the Beneficiary in the case of the death of the
Executive, this Agreement is not assignable by any party and no payment to be
made hereunder shall be subject to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance or other charge.
 
(f)           Remedies Cumulative; No Waiver.  No remedy conferred upon either
party by this Agreement is intended to be exclusive of any other remedy, and
each and every such remedy shall be cumulative and shall be in addition to any
other remedy given hereunder or now or hereafter existing at law or in
equity.  No delay or omission by either party in exercising any right, remedy or
power hereunder or existing at law or in equity shall be construed as a waiver
thereof, and any such right, remedy or power may be exercised by such party from
time to time and as often as may be deemed expedient or necessary by such party
in such party’s sole discretion.

 
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(g)           Survivorship.  Notwithstanding anything in this Agreement to the
contrary, all terms and provisions of this Agreement that by their nature extend
beyond the termination of this Agreement shall survive such termination.
 
(h)           Entire Agreement.  This Agreement sets forth the entire agreement
of the parties hereto with respect to the subject matter contained herein and
supersedes all prior agreements, promises, covenants or arrangements, whether
oral or written, with respect thereto.
 
(i)           Counterparts.  This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which, when
taken together, shall constitute one document.
 
17.         No Contract of Employment.  Nothing contained in this Agreement will
be construed as a right of the Executive to be continued in the employment of
the Company, or as a limitation of the right of the Company to discharge the
Executive with or without Cause.
 
18.         Executive Acknowledgement.  The Executive hereby acknowledges that
he has read and understands the provisions of this Agreement, that he has been
given the opportunity for his legal counsel to review this Agreement, that the
provisions of this Agreement are reasonable and that he has received a copy of
this Agreement.

 
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IN WITNESS WHEREOF, the parties hereto have caused this Employment Agreement to
be executed as of the date first above written.
 
DISCOVERY LABORATORIES, INC.
     
By:
/s/ Robert J. Capetola, Ph.D.     
Name:    Robert J. Capetola, Ph.D.
   
Title:      President and CEO
      /s/ Thomas Miller, Ph.D.   
Thomas Miller, Ph.D.
 

 
 
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EXHIBIT A
 
(a)          “Beneficiary” means any individual, trust or other entity named by
the Executive to receive the payments and benefits payable hereunder in the
event of the death of the Executive.  The Executive may designate a Beneficiary
to receive such payments and benefits by completing a form provided by the
Company and delivering it to the General Counsel of the Company.  The Executive
may change his designated Beneficiary at any time (without the consent of any
prior Beneficiary) by completing and delivering to the Company a new beneficiary
designation form.  If a Beneficiary has not been designated by the Executive, or
if no designated Beneficiary survives the Executive, then the payment and
benefits provided under this Agreement, if any, will be paid to the Executive’s
estate, which shall be deemed to be the Executive’s Beneficiary.
 
(b)          “Cause” means: (i) the Executive’s willful and continued neglect of
the Executive’s duties with the Company (other than as a result of the
Executive’s incapacity due to physical or mental illness), after a written
demand for substantial performance is delivered to the Executive by the Company
which specifically identifies the manner in which the Company believes that the
Executive has neglected his duties; (ii) the final conviction of the Executive
of, or an entering of a guilty plea or a plea of no contest by the Executive to,
a felony; or (iii) the Executive’s willful engagement in illegal conduct or
gross misconduct which is materially and demonstrably injurious to the Company.
 
For purposes of this definition, no act or failure to act on the part of the
Executive shall be considered “willful” unless it is done, or omitted to be
done, by the Executive in bad faith or without a reasonable belief that the
action or omission was in the best interests of the Company.  Any act, or
failure to act, based on authority given pursuant to a resolution duly adopted
by the Board of Directors of the Company (the “Board”), or the advice of counsel
to the Company, will be conclusively presumed to be done, or omitted to be done,
by the Executive in good faith and in the best interests of the Company.
 
(c)          “Change of Control” means the occurrence of any one of the
following events:
 
(i)             any “person” (as defined in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934 (the “Exchange Act”)), other than the Company,
any trustee or other fiduciary holding securities under an employee benefit plan
of the Company, an underwriter temporarily holding securities pursuant to an
offering of such securities or any corporation owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportions as their
ownership of stock of the Company, directly or indirectly acquires “beneficial
ownership” (as defined in Rule 13d-3 under the Exchange Act) of securities
representing 35% of the combined voting power of the Company’s then outstanding
securities;
 
 
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(ii)            persons who, as of the date of this Agreement constitute the
Board (the “Incumbent Directors”) cease for any reason, including without
limitation, as a result of a tender offer, proxy contest, merger or similar
transaction, to constitute at least a majority thereof; provided, that any
person becoming a director of the Company subsequent to the date of this
Agreement shall be considered an Incumbent Director if such person’s election or
nomination for election was approved by a vote of at least two-thirds (2/3) of
the Incumbent Directors in an action taken by the Board or a Committee thereof;
provided, further, that any such person whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of members of the Board or other actual or threatened solicitation of
proxies or consents by or on behalf of a “person” (as defined in Section 13(d)
and 14(d) of the Exchange Act) other than the Board, including by reason of
agreement intended to avoid or settle any such actual or threatened contest or
solicitation, shall not be considered an Incumbent Director;
 
(iii)           the consummation of a reorganization, merger, statutory share
exchange, consolidation or similar corporate transaction (each, a “Business
Combination”) other than a Business Combination in which all or substantially
all of the individuals and entities who were the beneficial owners of the
Company’s voting securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 50% of the combined voting
power of the voting securities of the entity resulting from such Business
Combination (including, without limitation, an entity which as a result of the
Business Combination owns the Company or all or substantially all of the
Company’s assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership of the Company’s voting
securities immediately prior to such Business Combination; or
 
(iv)           the Company consummates a sale of all or substantially all of the
assets of the Company or the stockholders of the Company approve a plan of
complete liquidation of the Company.
 
(d)          “Change of Control Date” means any date after the date hereof on
which a Change of Control occurs; provided, however, that if a Change of Control
occurs and if the Executive’s employment with the Company is terminated or an
event constituting Good Reason (as defined below) occurs prior to the Change of
Control, and if it is reasonably demonstrated by the Executive that such
termination or event (i) was at the request of a third party who has taken steps
reasonably calculated to effect the Change of Control, or (ii) otherwise arose
in connection with or in anticipation of the Change of Control then, for all
purposes of this Agreement, the Change of Control Date shall mean the date
immediately prior to the date of such termination or event.
 
(e)          “Code” means the Internal Revenue Code of 1986, as amended and the
regulations promulgated thereunder.
 
(f)          “Date of Termination” means the date specified in a Notice of
Termination pursuant to Section 8 hereof, or the Executive’s last date as an
active employee of the Company before a termination of employment due to death,
Disability or other reason, as the case may be.
 
 
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(g)          “Disability” means a mental or physical condition that renders the
Executive substantially incapable of performing his duties and obligations under
this Agreement, after taking into account provisions for reasonable
accommodation, as determined by a medical doctor (such doctor to be mutually
determined in good faith by the parties) for three or more consecutive months or
for a total of six months during any 12 consecutive months; provided, that
during such period the Company shall give the Executive at least 30 days’
written notice that it considers the time period for disability to be running.
 
(h)          “Effective Period” means the period beginning on the Change of
Control Date and ending 24 months after the date of the related Change of
Control.
 
(i)          “Good Reason” means, unless the Executive has consented in writing
thereto, the occurrence of any of the following:  (i) the assignment to the
Executive of duties inconsistent with the Executive’s position, including any
change in status, level of authority or responsibility or any other action which
results in a material diminution in such status, level of authority or
responsibility (for the sake of clarity, a change resulting in an
interdepartmental re-assignment of the Executive that is substantively
consistent with Executive’s prior status and level of authority shall not
constitute Good Reason); provided, that the Executive shall faithfully and
competently perform such duties as the Chief Executive Officer may from time to
time reasonably direct, taking into account the Executive’s position and the
needs of the Company; (ii) a reduction in the Executive’s Base Salary by the
Company; (iii) the relocation of the Executive’s office to a location more than
30 miles from Doylestown, Pennsylvania; (iv) the failure of the Company to
comply with the provisions of Section 6(a); (v) following a Change of Control,
unless a plan providing a substantially similar position, compensation or
benefit is substituted, (A) the failure by the Company to continue the Executive
in the position that the Executive occupied prior to the Change of Control, with
substantially similar status, and level of authority and responsibility, or (B)
the failure by the Company to continue in effect any material fringe benefit or
compensation plan, retirement plan, life insurance plan, health and accident
plan or disability plan in which the Executive was participating prior to the
Change of Control, or (C) the taking of any action by the Company which would
adversely affect the Executive’s participation in or materially reduce his
benefits under any of such plans or deprive him of any material fringe benefit;
or (vi) the failure of the Company to obtain the assumption in writing of the
Company’s obligation to perform this Agreement by any successor to all or
substantially all of the assets of the Company within 15 days after a Business
Combination or a sale or other disposition of all or substantially all of the
assets of the Company.
 
(j)          “Highest Annual Bonus” means the largest annual cash bonus paid to
the Executive by the Company with respect to the three fiscal years of the
Company immediately preceding the year containing the Change of Control Date or
the Date of Termination, as applicable (annualized for any fiscal year
consisting of less than 12 full months); provided, however, that, solely in the
event of a Change of Control occurring prior to Executive’s receipt of an annual
cash bonus paid to the Executive by the Company, the Highest Annual Bonus shall
mean that amount which is equal to 25% of Executive’s then current base salary.
 
 
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