EXHIBIT 10.27


Execution Copy


SECURITY
AGREEMENT


          THIS
SECURITY AGREEMENT (as it may be amended or modified from time to time, this “Security
Agreement”) is entered into as of November 17, 2005 by and among Caraco
Pharmaceutical Laboratories, Ltd., a Michigan corporation (the “Borrower”)
and JPMorgan Chase Bank, N.A., a national banking association (the “Lender”).



PRELIMINARY
STATEMENTS


          A. The
Borrower and the Lender are parties to a Credit Agreement dated as of the date
hereof (as amended or modified from time to time, the “Credit Agreement”).



          B. The
Borrower has agreed grant a first-priority security interest (subject to Liens
permitted by the Credit Agreement) to the Lender in and to the collateral described
herein and to execute this Security Agreement. 


          C. The
Borrower has determined that it is to its benefit and in its financial interest
to execute this Security Agreement, and is entering into this
Security Agreement in order to induce the Lender to extend credit to the
Borrower and to secure the Secured Obligations.


          ACCORDINGLY,
the Borrower and the Lender hereby agree as follows:


ARTICLE I

DEFINITIONS


          1.1.  Terms
Defined in Credit Agreement. All capitalized terms used herein and not
otherwise defined shall have the meanings assigned to such terms in the Credit
Agreement.


          1.2.  Terms
Defined in UCC. Terms defined in the UCC which are not otherwise defined in
this Security Agreement are used herein as defined in the UCC.


          1.3.  Definitions
of Certain Terms Used Herein. As used in this Security Agreement, in
addition to the terms defined in the Preliminary Statement, the following terms
shall have the following meanings:


          “Account
Debtor” shall have the meaning set forth in Article 9 of the UCC.


          “Accounts”
shall have the meaning set forth in Article 9 of the UCC.


          “Article”
means a numbered article of this Security Agreement, unless another document is
specifically referenced.


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          “Collateral”
shall have the meaning set forth in Article II.


          “Collateral
Access Agreement” means any landlord waiver or other agreement between the
Lender and any third party (including any bailee, consignee, customs broker, or
other similar Person) in possession of any Collateral or any landlord of the
Borrower for any real property where any Collateral is located, which agreement
shall provide access rights, contain a waiver or subordination of all Liens or
claims that the landlord, bailee or consignee may assert against the Collateral
at that location, and shall otherwise be reasonably satisfactory in form and
substance to the Lender, as such landlord waiver or other agreement may be
amended, restated, or otherwise modified from time to time.


          “Control”
shall have the meaning set forth in Article 8 or, if applicable, in Section
9-104, 9-105, 9-106 or 9-107 of Article 9 of the UCC.


          “Control
Agreement” means a control agreement, in form and substance satisfactory to
the Lender, pursuant to which the Lender is granted Control over a Deposit
Account.


          “Control
Account” means a Deposit Account subject to a Control Agreement.


          “Default”
means an event described in Section 5.1.


          “Deposit
Accounts” shall have the meaning set forth in Article 9 of the UCC.


          “Exhibit”
refers to a specific exhibit to this Security Agreement, unless another
document is specifically referenced.


          “Inventory”
shall have the meaning set forth in Article 9 of the UCC.


          “Permitted
Liens” means Liens that are permitted by the Credit Agreement. 


          “Receivables”
means the Accounts and all proceeds of the Accounts and/or of Inventory,
including without limitation all proceeds that are cash, instruments, supporting
obligations and any other rights or claims to receive money which are general
intangibles or which are otherwise included as Collateral.


          “Section”
means a numbered section of this Security Agreement, unless another document is
specifically referenced.


          “Secured
Obligations” is defined in the Credit Agreement. 


          “UCC”
means the Uniform Commercial Code, as in effect from time to time, of the State
of Michigan or of any other state
the laws of which are required as a result thereof to be applied in connection
with the attachment, perfection or priority of, or remedies with respect to,
Lender’s Lien on any Collateral. 


          The
foregoing definitions shall be equally applicable to both the singular and
plural forms of the defined terms.


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ARTICLE II

GRANT OF SECURITY INTEREST


          The
Borrower hereby pledges, assigns and grants to the Lender a security interest
in all of its right, title and interest in, to and under all of the following
assets described in clauses (i), (ii) and (iii) below, whether now owned by or
owing to, or hereafter acquired by or arising in favor of the Borrower
(including under any trade name or derivations thereof), and whether owned or
consigned by or to, or leased from or to, the Borrower, and regardless of where
located (all of which will be collectively referred to as the “Collateral”):


          (i) all
Receivables; 


          (ii) all
Inventory; and


          (iii) all
proceeds, insurance proceeds and products of the foregoing, together with all
books and records, customer lists, credit files, computer files, programs,
printouts and other computer materials and records related thereto and all
Deposit Accounts in which any of the foregoing is deposited;


to secure the
prompt and complete payment and performance of the Secured Obligations. 


ARTICLE III

REPRESENTATIONS AND WARRANTIES


          The
Borrower represents and warrants to the Lender that:


          3.1.     Title,
Perfection and Priority. The Borrower has good and valid rights in or the
power to transfer the Collateral and title to the Collateral with respect to
which it has purported to grant a security interest hereunder, free and clear
of all Liens except for Liens permitted under Section 4.1(e), and has
full power and authority to grant to the Lender the security interest in such
Collateral pursuant hereto. When financing statements fulfilling the
requirement of the UCC and the applicable filing office have been filed in and
the applicable fees paid to the appropriate offices against the Borrower in the
locations listed on Exhibit C, the Lender will have a fully perfected
first priority security interest in that Collateral of the Borrower in which a
security interest may be perfected by filing, subject only to Liens permitted under
Section 4.1(e). 


          3.2.     Type
and Jurisdiction of Organization, Organizational and Identification Numbers.
The type of entity of The Borrower, its state of organization, the
organizational number issued to it by its state of organization and its federal
employer identification number are set forth on Exhibit A. 


          3.3.     Principal
Location. The Borrower’s mailing address and the location of its place of
business (if it has only one) or its chief executive office (if it has more
than one place of business), are disclosed
in Exhibit A; The Borrower has no other places of business except those
set forth in Exhibit A.


          3.4.     Collateral
Locations. All of the Borrower’s locations where Collateral is located are
listed on Exhibit A. All of said locations are owned by the Borrower
except for locations (i) which are 


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leased by the
Borrower as lessee and designated in Part VII(b) of Exhibit A and
(ii) at which Inventory is held in a public warehouse or is otherwise held by a
bailee or on consignment as designated in Part VII(c) of Exhibit A.


          3.5.     Deposit
Accounts. All of the Borrower’s Deposit Accounts are listed on Part I
of Exhibit B.


          3.6.     Exact
Names. The Borrower’s name in which it has executed this Security Agreement
is the exact name as it appears in the Borrower’s organizational documents, as
amended, as filed with the Borrower’s jurisdiction of organization. The
Borrower has not, during the past five years, been known by or used any other
corporate or fictitious name.


          3.7.     Accounts.
The names of the obligors, amounts owing, due dates and other information with
respect to its Accounts are and will be correctly stated in all records of the
Borrower relating thereto and in all invoices and reports with respect thereto
furnished to the Lender by the Borrower from time to time. As of the time when
each Account arises, the Borrower shall be deemed to have represented and
warranted that such Account and all records relating thereto, are genuine and
in all respects what they purport to be. 


          3.8.     Inventory.
With respect to any of its Inventory, (a) such Inventory (other than Inventory
in transit) is located at one of the locations set forth on Exhibit A
designated as a location of Collateral for the Borrower, (b) no Inventory
(other than Inventory in transit) is now, or shall at any time or times
hereafter be stored at any other location except as permitted by Section
4.1(g), and (c) the Borrower has good and indefeasible and merchantable
title to such Inventory and such Inventory is not subject to any Lien or
security interest or document whatsoever except for the Lien granted to the
Lender and except for Permitted Liens. 


          3.9.     No
Financing Statements, Security Agreements. No financing statement or
security agreement describing all or any portion of the Collateral which has
not lapsed or been terminated naming the Borrower as debtor has been filed or
is of record in any jurisdiction except (a) for financing statements or security
agreements naming the Lender as the secured party and (b) Permitted Liens. 


ARTICLE IV

COVENANTS


          From
the date of this Security Agreement, and thereafter until this Security
Agreement is terminated, the Borrower agrees that:


          4.1.     General.


                     (a) Collateral
Records. The Borrower will maintain complete and accurate books and records
with respect to the Collateral owned by it, and furnish to the Lender such
reports relating to such Collateral as the Lender shall from time to time
reasonably request. 


                     (b) Authorization
to File Financing Statements; Ratification. The Borrower hereby authorizes
the Lender to file, and if requested will deliver to the Lender, all financing
statements and other documents and take such other actions as may from time to
time be requested by the Lender in order to maintain a first perfected security
interest in and, if applicable, Control of, the Collateral 


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owned by the
Borrower. Any financing statement filed by the Lender may be filed in any
filing office in any UCC jurisdiction and may (i) indicate the Borrower’s
Collateral by any description which reasonably approximates the description
contained in this Security Agreement, and (ii) contain any other information
required by part 5 of Article 9 of the UCC for the sufficiency or filing office
acceptance of any financing statement or amendment, including whether the
Borrower is an organization, the type of organization and any organization
identification number issued to the Borrower. The Borrower also agrees to
furnish any such information to the Lender promptly upon request. The Borrower
also ratifies its authorization for the Lender to have filed in Michigan any
initial financing statements or amendments thereto if filed prior to the date
hereof. 


                     (c) Further
Assurances. The Borrower shall take such further actions, including the
execution and delivery of additional security agreements and collateral
assignments, as may be reasonably requested by the Lender from time to time to
more fully evidence and perfect the Lender’s interest in the Collateral. The
Borrower will, if so requested by the Lender, furnish to the Lender, statements
and schedules further identifying and describing the Collateral owned by it and
such other reports and information in connection with its Collateral as the
Lender may reasonably request, all in such detail as the Lender may specify.
The Borrower also agrees to take any and all actions reasonably necessary to
defend title to the Collateral owned by it against all persons and to defend
the security interest of the Lender in its Collateral and the priority thereof
against any Lien not expressly permitted hereunder. 


                     (d) Disposition
of Collateral. The Borrower will not sell, lease or otherwise dispose of
the Collateral owned by it except for dispositions specifically permitted
pursuant to the Loan Documents.


                     (e) Liens.
The Borrower will not create, incur, or suffer to exist any Lien on the
Collateral owned by it except (i) the security interest created by this
Security Agreement and (ii) other Permitted Liens. 


                     (f) Other
Financing Statements. The Borrower will not authorize the filing of any
financing statement naming it as debtor covering all or any portion of the
Collateral owned by it, except as permitted by Section 4.1(e). The
Borrower acknowledges that it is not authorized to file any financing statement
or amendment or termination statement with respect to any financing statement
without the prior written consent of the Lender, subject to the Borrower’s
rights under Section 9-509(4)(b) of the UCC.


                     (g) Locations,
Names, Etc. The Borrower shall not (a) change its name as it appears in official
filings in the state of its incorporation or organization, (b) change its chief
executive office, principal place of business, mailing address, corporate
offices or warehouses or locations at which Collateral is held or stored, or
the location of its records concerning the Collateral as set forth in this
Security Agreement, (c) change the type of entity that it is, (d) change its
organization identification number, if any, issued by its state of
incorporation or other organization, or (e) change its state of incorporation
or organization, in each case, unless the Lender shall have received at least
fifteen days prior written notice of such change and the Lender shall have
acknowledged in writing that either (1) such change will not adversely affect the
validity, perfection or priority of the Lender’s security interest in the
Collateral, or (2) any reasonable action requested by the Lender in connection
therewith has been completed or taken (including any action to continue the
perfection of any Liens in favor of the Lender in any Collateral), provided that, any new location shall be
in the continental U.S. 


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                     (h) Compliance
with Terms. The Borrower will perform and comply with all obligations in
respect of the Collateral owned by it and all agreements to which it is a party
or by which it is bound relating to such Collateral.


          4.2.     Receivables.


                     (a) Certain
Agreements on Receivables. The Borrower will not make or agree to make any
material discount, credit, rebate or other reduction in the original amount
owing on a Receivable or accept in satisfaction of a Receivable less than the
original amount thereof, except that, prior to the occurrence of a Default, the
Borrower may reduce the amount of Accounts arising from the sale of Inventory
in accordance with its present policies and in the ordinary course of business,
including without limitation any such reductions in accordance with industry
practice, including and not limited to trade and cash discounts, charge-backs,
vendor and state medicaid rebates, returned goods and other industry acceptable
deductions.


                     (b) Collection
of Receivables. Except as otherwise provided in this Security Agreement,
the Borrower will collect and enforce, at the Borrower’s sole expense, all
amounts due or hereafter due to the Borrower under the Receivables owned by it,
and will at all times (whether or not a Default then exists) promptly cause all
proceeds of Receivables to be deposited into a Control Account or an existing
bank or other deposit account with the Lender.


                     (c) Delivery
of Invoices. The Borrower will deliver to the Lender within two Business
Days of its request after the occurrence and during the continuation of a
Default duplicate invoices with respect to each Account owned by it bearing
such language of assignment as the Lender shall specify.


                     (d) Disclosure
of Counterclaims on Receivables. If any material (i) discount, credit or
agreement to make a rebate or to otherwise reduce the amount owing on any
Receivable not in the ordinary course owned by the Borrower exists or (ii) if,
to the knowledge of the Borrower, any material dispute, setoff, claim,
counterclaim or defense exists or has been asserted or threatened with respect
to any such Receivable, the Borrower will promptly disclose such fact to the
Lender in writing. 


          4.3.     Inventory.


                     (a) Maintenance
of Goods. The Borrower will do all things necessary to maintain, preserve,
protect and keep its Inventory in good repair and working and saleable
condition.


                     (b) Insurance.
The Borrower will (i) maintain fire and extended coverage insurance on the
Inventory containing a lender’s loss payable clause in favor of the Lender and
providing that said insurance will not be terminated except after at least 30
days’ written notice from the insurance company to the Lender, (ii) maintain
such other insurance on the Collateral for the benefit of the Lender as may be
required by law or as the Lender shall from time to time request, (iii) furnish
to the Lender upon the request of the Lender from time to time the originals of
all policies of insurance on the Collateral and certificates with respect to
such insurance and (iv) maintain general liability insurance. All insurance
policies required hereunder shall name the Lender as an additional insured or
as lender loss payee, as applicable, and shall contain lender loss payable
clauses or mortgagee clauses in form and substance satisfactory to the Lender.


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          4.4     Federal,
State or Municipal Claims. The Borrower will promptly notify the Lender of
any Collateral which constitutes a claim against the United States government
or any state or local government or any instrumentality or agency thereof, the
assignment of which claim is restricted by federal, state or municipal law.


          4.5.     Deposit
Accounts. The Borrower will (a) give prompt written notice to the Lender of
the opening or existence of any Deposit Account not disclosed on Exhibit B
hereto, and (b) upon the Lender’s request, after the occurrence and during the
continuance of a Default, take all commercially reasonable actions to cause
each bank or other financial institution in which it maintains (i) any Deposit
Account (other than accounts used exclusively for payroll (“Payroll Accounts”))
to enter into a Control Agreement with the Lender with respect such Deposit
Account or (ii) other deposits (whether general or special, time or demand,
provisional or final, but excluding Payroll Accounts) to be notified of the
security interest granted to the Lender hereunder and to acknowledge such
notification in writing. 


          4.6.     No
Interference. The Borrower agrees that it will not interfere with any
right, power and remedy of the Lender provided for in this Security Agreement
or now or hereafter existing at law or in equity or by statute or otherwise, or
the exercise or beginning of the exercise by the Lender of any one or more of
such rights, powers or remedies.


          4.7.     Collateral
Access Agreements. The Borrower shall use commercially reasonable efforts
to obtain a Collateral Access Agreement from the lessor of each leased
property, bailee or consignee with respect to any warehouse, processor or
converter facility or other location where Collateral is stored or located. The
Borrower shall timely and fully pay and perform its material obligations under
all leases and other agreements with respect to each leased location or third
party warehouse where any Collateral is or may be located. 


ARTICLE V

DEFAULTS AND REMEDIES


          5.1.     Defaults.
The occurrence of any one or more of the following events shall constitute a
Default hereunder:


                     (a) The
failure to pay when due (whether at stated maturity, by acceleration or
otherwise) any of the Secured Obligations. 


                     (b) The
occurrence of any “Event of Default” under, and as defined in, the Credit
Agreement.


          5.2.     Remedies.



                     (a) Upon
the occurrence and during the continuance of a Default, the Lender may exercise
any right or remedy available to it under applicable law, including, without
limitation, the following rights and remedies:


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  (i) those
  rights and remedies provided in this Security Agreement, the Credit
  Agreement, or any other Collateral Document; provided
  that, this Section 5.2(a) shall not be understood to limit
  any rights or remedies available to the Lender prior to a Default;

  
	
   

  	
   

  
	
   

  	
  (ii) those
  rights and remedies available to a secured party under the UCC or under any
  other applicable law (including, without limitation, any law governing the
  exercise of a bank’s right of setoff or bankers’ lien) when a debtor is in
  default under a security agreement;

  
	
   

  	
   

  
	
   

  	
  (iii) give
  notice of sole control or any other instruction permitted under any Control
  Agreement with respect to any Deposit Account or under any other control
  agreement with respect to any other Collateral and take any action therein
  with respect to such Collateral; and

  
	
   

  	
   

  
	
   

  	
  (iv) without
  notice (except as specifically provided in Section 8.1 or elsewhere
  herein), demand or advertisement of any kind to the Borrower or any other
  Person, enter the premises of the Borrower where any Collateral is located
  (through self-help and without judicial process) to collect, receive,
  assemble, process, appropriate, sell, lease, assign, grant an option or
  options to purchase or otherwise dispose of, deliver, or realize upon, the
  Collateral or any part thereof in one or more parcels at public or private
  sale or sales (which sales may be adjourned or continued from time to time
  with or without notice and may take place at the Borrower’s premises or
  elsewhere), for cash, on credit or for future delivery without assumption of any
  credit risk, and upon such other terms as the Lender may deem commercially
  reasonable.

  



                     (b) The
Lender may comply with any applicable state or federal law requirements in
connection with a disposition of the Collateral and compliance will not be
considered to adversely affect the commercial reasonableness of any sale of the
Collateral.


                     (c) The
Lender shall have the right upon any such public sale or sales and, to the
extent permitted by law, upon any such private sale or sales, to purchase for
the benefit of the Lender, the whole or any part of the Collateral so sold,
free of any right of equity redemption, which equity redemption the Borrower
hereby expressly releases.


                     (d) Until
the Lender is able to effect a sale, lease, or other disposition of Collateral,
the Lender shall have the right to hold or use Collateral, or any part thereof,
to the extent that it deems appropriate for the purpose of preserving
Collateral or its value or for any other purpose deemed appropriate by the
Lender. The Lender may, if it so elects, seek the appointment of a receiver or
keeper to take possession of Collateral and to enforce any of the Lender’s
remedies, with respect to such appointment without prior notice or hearing as
to such appointment.


                    (e) Notwithstanding
the foregoing, the Lender shall not be required to (i) make any demand upon, or
pursue or exhaust any of their rights or remedies against, the Borrower, any
other obligor, guarantor, pledgor or any other Person with respect to the
payment of the Secured Obligations or to pursue or exhaust any of their rights
or remedies with respect to any Collateral therefor or any direct or indirect
guarantee thereof, (ii) marshal the Collateral or any guarantee of the Secured 


8







Obligations or
to resort to the Collateral or any such guarantee in any particular order, or
(iii) effect a public sale of any Collateral.


          5.3.     Borrower’s
Obligations Upon Default. Upon the request of the Lender after the
occurrence and during the continuance of a Default, the Borrower will:


                     (a) assemble
and make available to the Lender the Collateral and all books and records
relating thereto at any place or places specified by the Lender, whether at a
Borrower’s premises or elsewhere;


                     (b) permit
the Lender, by the Lender’s representatives and agents, to enter any premises
where all or any part of the Collateral, or the books and records relating
thereto, or both, are located, to take possession of all or any part of the
Collateral or the books and records relating thereto, or both, to remove all or
any part of the Collateral or the books and records relating thereto, or both,
and to conduct sales of the Collateral; and


                    (c) at
its own expense, cause the independent certified public accountants then
engaged by the Borrower to prepare and deliver to the Lender, at any time and
from time to time, promptly upon the Lender’s request, the following reports with
respect to the applicable Borrower: (i) a reconciliation of all Accounts; (ii)
an aging of all Accounts; (iii) trial balances; and (iv) a test verification of
such Accounts. 


ARTICLE VI

ACCOUNT VERIFICATION; ATTORNEY IN FACT; PROXY


          6.1.     Account
Verification. The Lender may at any time, following and during the
continuance of a Default, in the Lender’s own name, in the name of a nominee of
the Lender, or in the name of the Borrower communicate (by mail, telephone,
facsimile or otherwise) with the Account Debtors of any the Borrower, parties
to contracts with any the Borrower and obligors in respect of Instruments of
any the Borrower to verify with such Persons, to the Lender’s satisfaction, the
existence, amount, terms of, and any other matter relating to the Receivables. 


          6.2.     Authorization
for Lender to Take Certain Action. 


                     (a) The
Borrower irrevocably authorizes the Lender, in the reasonable discretion of the
Lender and appoints the Lender as its attorney in fact (i) to endorse and
collect any cash proceeds of the Collateral, (ii) to apply the proceeds of any
Collateral received by the Lender to the Secured Obligations as provided in Section
7.3, (iii) to discharge past due taxes, assessments, charges, fees or Liens
on the Collateral (except for such Liens as are specifically permitted
hereunder), (iv) to contact Account Debtors for any reason, (v) to demand
payment or enforce payment of the Receivables in the name of the Lender or the
Borrower and to endorse any and all checks, drafts, and other instruments for
the payment of money relating to the Receivables, (vi) to sign the Borrower’s
name on any invoice or bill of lading relating to the Receivables, drafts
against any Account Debtor of the Borrower, assignments and verifications of
Receivables, (vii) to exercise all of the Borrower’s rights and remedies with
respect to the collection of the Receivables and any other Collateral, (viii)
to settle, adjust, compromise, extend or renew the Receivables, (ix) to settle,
adjust or compromise any legal proceedings brought to collect Receivables, (x)
to prepare, file
and sign the Borrower’s name on a proof of claim in bankruptcy or similar
document against any Account Debtor of the Borrower, (xi) to 


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prepare, file and
sign the Borrower’s name on any notice of Lien, assignment or satisfaction of
Lien or similar document in connection with the Receivables, (xii) to change
the address for delivery of mail addressed to the Borrower to such address as
the Lender may designate and to receive, open and dispose of all mail addressed
to the Borrower, and (xiii) to do all other acts and things necessary to carry
out this Security Agreement; and the Borrower agrees to reimburse the Lender on
demand for any payment made or any expense incurred by the Lender in connection
with any of the foregoing; provided that,
this authorization shall not relieve the Borrower of any of its obligations
under this Security Agreement or under any other Collateral Document. 


                     (b) All
acts of said attorney or designee are hereby ratified and approved. The powers
conferred on the Lender under this Section 6.2 are solely to protect the
Lender’s interests in the Collateral and shall not impose any duty upon the
Lender to exercise any such powers. The Lender agrees that, except for the
powers granted in Section 6.2(a)(iii), (iv) and (xiii), it shall not
exercise any power or authority granted to it unless a Default has occurred and
is continuing. 


ARTICLE
VII

COLLECTION AND APPLICATION OF COLLATERAL PROCEEDS; DEPOSIT 

ACCOUNTS


          7.1.     Lockboxes.
Upon request of the Lender after the occurrence and during the continuance of a
Default, the Borrower shall execute and deliver to the Lender irrevocable
lockbox agreements in the form provided by or otherwise acceptable to the
Lender, which agreements shall be accompanied by an acknowledgment by the bank
where the lockbox is located of the Lien of the Lender granted hereunder and of
irrevocable instructions to wire all amounts collected therein to a special
collateral account at the Lender.


          7.2.     Collection
of Receivables. The Lender may at any time after the occurrence and during
the continuance of a Default, by giving the Borrower written notice, elect to
require that the Receivables be paid directly to the Lender. In such event, the
Borrower shall, and shall permit the Lender to, promptly notify the account
debtors or obligors under the Receivables of the Lender’s interest therein and
direct such account debtors or obligors to make payment of all amounts then or
thereafter due under the Receivables directly to the Lender. Upon receipt of
any such notice from the Lender, the Borrower shall thereafter hold in trust
for the Lender all amounts and proceeds received by it with respect to the
Receivables and other Collateral and immediately and at all times thereafter
deliver to the Lender all such amounts and proceeds in the same form as so
received, whether by cash, check, draft or otherwise, with any necessary
endorsements. The Lender shall hold and apply funds so received as provided by
the terms of Sections 7.3 and 7.4.


          7.3.     Special
Collateral Account. The Lender may at any time after the occurrence and
during the continuance of a Default require all cash proceeds of the Collateral
to be deposited in a special non-interest bearing cash collateral account with
the Lender and held there as security for the Secured Obligations. The Borrower
shall have no control whatsoever over said cash collateral account. If no
Default has occurred and is continuing, the Lender shall, within one business
Day of receipt thereof, deposit the collected balances in said cash collateral
account into the Borrower’s general operating account with the Lender. If any
Default has occurred and is continuing, the Lender may, from time to time,
apply the collected balances in said cash collateral account to the payment of
the Secured Obligations whether or not the Secured Obligations shall then be
due.


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          7.4.     Application
of Proceeds. The proceeds of the Collateral to be applied to payment of the
Secured Obligations pursuant to Section 7.3 shall be applied by the Lender to
payment of the Secured Obligations in the order determined by the Lender. 


ARTICLE VIII

GENERAL PROVISIONS


          8.1.     Waivers.
The Borrower hereby waives notice of the time and place of any public sale or
the time after which any private sale or other disposition of all or any part
of the Collateral may be made. To the extent such notice may not be waived
under applicable law, any notice made shall be deemed reasonable if sent to the
Borrower, addressed as set forth in Article IX, at least ten days prior
to (i) the date of any such public sale or (ii) the time after which any such
private sale or other disposition may be made. To the maximum extent permitted
by applicable law, the Borrower waives all claims, damages, and demands against
the Lender arising out of the repossession, retention or sale of the
Collateral, except such as arise solely out of the gross negligence or willful
misconduct of the Lender as finally determined by a court of competent
jurisdiction. To the extent it may lawfully do so, the Borrower absolutely and
irrevocably waives and relinquishes the benefit and advantage of, and covenants
not to assert against the Lender, any valuation, stay, appraisal, extension,
moratorium, redemption or similar laws and any and all rights or defenses it
may have as a surety now or hereafter existing which, but for this provision,
might be applicable to the sale of any Collateral made under the judgment,
order or decree of any court, or privately under the power of sale conferred by
this Security Agreement, or otherwise. Except as otherwise specifically
provided herein, the Borrower hereby waives presentment, demand, protest or any
notice (to the maximum extent permitted by applicable law) of any kind in
connection with this Security Agreement or any Collateral.


          8.2.     Limitation
on Lender’s Duty with Respect to the Collateral. The Lender shall have no
obligation to clean-up or otherwise prepare the Collateral for sale. The Lender
shall use reasonable care with respect to the Collateral in its possession or
under its control. The Lender shall not have any other duty as to any
Collateral in its possession or control or in the possession or control of any
agent or nominee of the Lender, or any income thereon or as to the preservation
of rights against prior parties or any other rights pertaining thereto. To the
extent that applicable law imposes duties on the Lender to exercise remedies in
a commercially reasonable manner, the Borrower acknowledges and agrees that it
is commercially reasonable for the Lender (i) to fail to incur expenses
reasonably deemed significant by the Lender to prepare Collateral for
disposition or otherwise to transform raw material or work in process into
finished goods or other finished products for disposition, (ii) to fail to
obtain third party consents for access to Collateral to be disposed of, or to
obtain or, if not required by other law, to fail to obtain governmental or
third party consents for the collection or disposition of Collateral to be
collected or disposed of, (iii) to fail to exercise collection remedies against
Account Debtors or other Persons obligated on Collateral or to remove Liens on
or any adverse claims against Collateral, (iv) to exercise collection remedies
against Account Debtors and other Persons obligated on Collateral directly or
through the use of collection agencies and other collection specialists, (v) to
advertise dispositions of Collateral through publications or media of general
circulation, whether or not the Collateral is of a specialized nature, (vi) to
contact other Persons, whether or not in the same business as the Borrower, for
expressions of interest in acquiring all or any portion of such Collateral,
(vii) to hire one or more professional auctioneers to assist in the disposition
of Collateral, whether or not the Collateral is of a specialized nature, (viii)
to dispose of Collateral by utilizing internet sites that provide 


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for the
auction of assets of the types included in the Collateral or that have the
reasonable capacity of doing so, or that match buyers and sellers of assets,
(ix) to dispose of assets in wholesale rather than retail markets, (x) to
disclaim disposition warranties, such as title, possession or quiet enjoyment,
(xi) to purchase insurance or credit enhancements to insure the Lender against
risks of loss, collection or disposition of Collateral or to provide to the
Lender a guaranteed return from the collection or disposition of Collateral, or
(xii) to the extent reasonably deemed appropriate by the Lender, to obtain the
services of other brokers, investment bankers, consultants and other
professionals to assist the Lender in the collection or disposition of any of
the Collateral. The Borrower acknowledges that the purpose of this Section
8.2 is to provide non-exhaustive indications of what actions or omissions
by the Lender would be commercially reasonable in the Lender’s exercise of
remedies against the Collateral and that other actions or omissions by the
Lender shall not be deemed commercially unreasonable solely on account of not
being indicated in this Section 8.2. Without limitation upon the
foregoing, nothing contained in this Section 8.2 shall be construed to
grant any rights to the Borrower or to impose any duties on the Lender that
would not have been granted or imposed by this Security Agreement or by
applicable law in the absence of this Section 8.2.


          8.3.     Compromises
and Collection of Collateral. The Borrower and the Lender recognize that
setoffs, counterclaims, defenses and other claims may be asserted by obligors
with respect to certain of the Receivables, that certain of the Receivables may
be or become uncollectible in whole or in part and that the expense and
probability of success in litigating a disputed Receivable may exceed the
amount that reasonably may be expected to be recovered with respect to a
Receivable. In view of the foregoing, the Borrower agrees that the Lender may
at any time and from time to time, if a Default has occurred and is continuing,
compromise with the obligor on any Receivable, accept in full payment of any
Receivable such amount as the Lender in its sole discretion shall reasonably
determine or abandon any Receivable, and any such action by the Lender shall be
commercially reasonable so long as the Lender acts in good faith based on
information known to it at the time it takes any such action.


          8.4.     Lender
Performance of Debtor Obligations. Without having any obligation to do so,
the Lender may perform or pay any obligation which the Borrower has agreed to
perform or pay in this Security Agreement and the Borrower shall reimburse the
Lender for any amounts paid by the Lender pursuant to this Section 8.4.
The Borrower’s obligation to reimburse the Lender pursuant to the preceding
sentence shall be a Secured Obligation payable on demand.


          8.5.     Specific
Performance of Certain Covenants. The Borrower acknowledges and agrees that
a breach of any of the covenants contained in Sections 4.1(d), 4.1(e),
5.3, or 8.7 or in Article VII will cause irreparable
injury to the Lender, that the Lender has no adequate remedy at law in respect
of such breaches and therefore agrees, without limiting the right of the Lender
to seek and obtain specific performance of other obligations of the Borrower
contained in this Security Agreement, that the covenants of the Borrower
contained in the Sections referred to in this Section 8.5 shall be
specifically enforceable against the Borrower.


          8.6.     Use
and Possession of Certain Premises. Upon the occurrence and during the
continuance of a Default, the Lender shall be entitled to occupy and use any
premises owned or leased by the Borrower where any of the Collateral or any
records relating to the Collateral are located until the Secured Obligations
are paid or the Collateral is removed therefrom, whichever first occurs,
without any obligation to pay the Borrower for such use and occupancy.


12







          8.7.     Dispositions
Not Authorized. No Borrower is authorized to sell or otherwise dispose of
the Collateral except as set forth in Section 4.1(d) and notwithstanding
any course of dealing between the Borrower and the Lender or other conduct of
the Lender, no authorization to sell or otherwise dispose of the Collateral
(except as set forth in Section 4.1(d)) shall be binding upon the Lender
unless such authorization is in writing signed by the Lender.


          8.8.     No
Waiver; Amendments; Cumulative Remedies. No delay or omission of the Lender
to exercise any right or remedy granted under this Security Agreement shall
impair such right or remedy or be construed to be a waiver of any Default or an
acquiescence therein, and any single or partial exercise of any such right or
remedy shall not preclude any other or further exercise thereof or the exercise
of any other right or remedy. No waiver, amendment or other variation of the
terms, conditions or provisions of this Security Agreement whatsoever shall be
valid unless in writing signed by the Lender and then only to the extent in
such writing specifically set forth. All rights and remedies contained in this
Security Agreement or by law afforded shall be cumulative and all shall be
available to the Lender until the Secured Obligations have been paid in full. 


          8.9.     Limitation
by Law; Severability of Provisions. All rights, remedies and powers
provided in this Security Agreement may be exercised only to the extent that
the exercise thereof does not violate any applicable provision of law, and all
the provisions of this Security Agreement are intended to be subject to all
applicable mandatory provisions of law that may be controlling and to be limited
to the extent necessary so that they shall not render this Security Agreement
invalid, unenforceable or not entitled to be recorded or registered, in whole
or in part. Any provision in this Security Agreement that is held to be
inoperative, unenforceable, or invalid in any jurisdiction shall, as to that
jurisdiction, be inoperative, unenforceable, or invalid without affecting the
remaining provisions in that jurisdiction or the operation, enforceability, or
validity of that provision in any other jurisdiction, and to this end the
provisions of this Security Agreement are declared to be severable.


          8.10.   Reinstatement.
This Security Agreement shall remain in full force and effect and continue to
be effective should any petition be filed by or against the Borrower for
liquidation or reorganization, should the Borrower become insolvent or make an
assignment for the benefit of any creditor or creditors or should a receiver or
trustee be appointed for all or any significant part of the Borrower’s assets,
and shall continue to be effective or be reinstated, as the case may be, if at
any time payment and performance of the Secured Obligations, or any part
thereof, is, pursuant to applicable law, rescinded or reduced in amount, or
must otherwise be restored or returned by any obligee of the Secured
Obligations, whether as a “voidable preference,” “fraudulent conveyance,” or
otherwise, all as though such payment or performance had not been made. In the
event that any payment, or any part thereof, is rescinded, reduced, restored or
returned, the Secured Obligations shall be reinstated and deemed reduced only
by such amount paid and not so rescinded, reduced, restored or returned.


          8.11.   Benefit
of Agreement. The terms and provisions of this Security Agreement shall be
binding upon and inure to the benefit of the Borrower, the Lender and its
respective successors and assigns (including all persons who become bound as a
debtor to this Security Agreement), except that no Borrower shall have the right
to assign its rights or delegate its obligations under this Security Agreement
or any interest herein, without the prior written consent of the Lender. No
sales of participations, assignments, transfers, or other dispositions of any
agreement governing the Secured Obligations or any portion thereof or interest
therein shall in any manner impair the Lien granted to the Lender, for the
benefit of the Lender, hereunder.


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          8.12.   Survival
of Representations. All representations and warranties of the Borrower
contained in this Security Agreement shall survive the execution and delivery
of this Security Agreement.


          8.13.   Taxes
and Expenses. Any taxes (including income taxes) payable or ruled payable
by Federal or State authority in respect of this Security Agreement shall be
paid by the Borrower, together with interest and penalties, if any. The
Borrower shall reimburse the Lender for any and all out-of-pocket expenses and
internal charges (including reasonable attorneys’, auditors’ and accountants’
fees and reasonable time charges of attorneys, paralegals, auditors and
accountants who may be employees of the Lender) paid or incurred by the Lender
in connection with the preparation, execution, delivery, administration,
collection and enforcement of this Security Agreement and in the audit,
analysis, administration, collection, preservation or sale of the Collateral
(including the expenses and charges associated with any periodic or special
audit of the Collateral). Any and all costs and expenses incurred by the
Borrower in the performance of actions required pursuant to the terms hereof
shall be borne solely by the Borrower.


          8.14.   Headings.
The title of and section headings in this Security Agreement are for
convenience of reference only, and shall not govern the interpretation of any
of the terms and provisions of this Security Agreement.


          8.15.   Termination.
This Security Agreement shall continue in effect (notwithstanding the fact that
from time to time there may be no Secured Obligations outstanding) until (i)
the Credit Agreement has terminated pursuant to its express terms and (ii) all
of the Secured Obligations have been indefeasibly paid and performed in full
(or with respect to any outstanding letters of credit that are part of the
Secured Obligations, a cash deposit or supporting letter of credit acceptable
to the Lender has been delivered to the Lender) and no commitments of the
Lender which would give rise to any Secured Obligations are outstanding. Upon
the satisfaction in full of the conditions for termination of this Security
Agreement set forth above (i) this Security Agreement and the security interest
and Lien created hereby shall terminate and all rights to the Collateral shall
revert to the Borrower and (ii) the Lender will, upon the Borrower’s request
and at the Borrower’s expense, (A) return to the Borrower such of the
Collateral as shall not have been sold or otherwise disposed of or applied
pursuant to the terms hereof and (B) execute and deliver to the Borrower,
without recourse, representation or warranty, such documents as the Borrower
shall reasonably request to evidence such termination.


          8.16.   Entire
Agreement. This Security Agreement embodies the entire agreement and
understanding between the Borrower and the Lender relating to the Collateral
and supersedes all prior agreements and understandings between the Borrower and
the Lender relating to the Collateral.


          8.17.   CHOICE OF LAW. THIS SECURITY
AGREEMENT
SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS (AND
NOT THE LAW OF CONFLICTS) OF THE STATE OF MICHIGAN, BUT GIVING EFFECT TO
FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.


          8.18.   CONSENT TO JURISDICTION. THE
BORROWER
HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY U.S.
FEDERAL OR MICHIGAN STATE COURT IN ANY ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT AND THE BORROWER
HEREBY IRREVOCABLY AGREES THAT ALL 


14







CLAIMS IN RESPECT OF SUCH ACTION OR
PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES
ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT,
ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT
FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE LENDER TO BRING PROCEEDINGS
AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. ANY JUDICIAL
PROCEEDING BY THE BORROWER AGAINST THE LENDER OR ANY AFFILIATE OF THE LENDER
INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF,
RELATED TO, OR CONNECTED WITH THIS SECURITY AGREEMENT OR ANY OTHER LOAN
DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN MICHIGAN.


          8.19.   WAIVER OF JURY TRIAL.
THE BORROWER AND THE LENDER HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL
PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN
TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH THIS SECURITY AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE
RELATIONSHIP ESTABLISHED THEREUNDER.


          8.20.   Indemnity.
The Borrower hereby agrees to indemnify the Lender and its successors, assigns,
agents and employees, from and against any and all liabilities, damages,
penalties, suits, costs, and expenses of any kind and nature (including,
without limitation, all expenses of litigation or preparation therefor whether
or not the Lender is a party thereto) imposed on, incurred by or asserted
against the Lender, or its successors, assigns, agents and employees, in any
way relating to or arising out of this Security Agreement, or the manufacture,
purchase, acceptance, rejection, ownership, delivery, lease, possession, use,
operation, condition, sale, return or other disposition of any Collateral
(including, without limitation, latent and other defects, whether or not
discoverable by the Lender or the Borrower) except, claims, losses, damages,
liabilities or expenses of any kind and nature whatsoever resulting solely and
directly from the gross negligence or willful misconduct the Lender as
determined by a final judgment of a court of competent jurisdiction.


          8.21.   Counterparts.
This Security Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one agreement, and any of the parties
hereto may execute this Security Agreement by signing any such counterpart. 


ARTICLE IX

NOTICES


          9.1.     Sending
Notices. Any notice required or permitted to be given under this Security
Agreement shall be sent by United States mail, telecopier, personal delivery or
nationally established overnight courier service, and shall be deemed received
(a) when transmitted and confirmation of transmission received, if by hand or overnight
courier service, or mailed by certified or registered mail notices or (b) when
sent, if sent by telecopier (except that, if not given during normal business
hours for the recipient, shall be deemed to have been given at the opening of
business on the next Business Day for the recipient), in each case addressed to
the Borrower at the notice address set forth on Exhibit A, and to the
Lender at the address set forth next to its signature below or as otherwise
designated in writing by the Lender to the Borrower.


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          9.2.     Change
in Address for Notices. Each of the Borrower and the Lender may change the
address for service of notice upon it by a notice in writing to the other
parties.


[Signature Pages Follow]


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IN WITNESS WHEREOF, the Borrower and the Lender have executed this
Security Agreement as of the date first above written.


	
   

  	
   

  	
   

  
	
   

  	
  CARACO   PHARMACEUTICAL LABORATORIES, LTD.

  
	
   

  	
   

  
	
   

  	
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  JPMORGAN
  CHASE BANK, N.A.

  
	
   

  	
   

  
	
   

  	
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