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                                                                  EXHIBIT 10.17

                               SECURITY AGREEMENT

         THIS SECURITY AGREEMENT, dated as of August 26, 1999 (as amended and
modified, the "Security Agreement" or this "Agreement"), is made by and among
APPLIED ANALYTICAL INDUSTRIES, INC., a Delaware corporation (the "Company"),
the subsidiaries of the Company that are identified on the signature pages
attached hereto (the "Subsidiaries" and collectively with the Company, the
"Credit Parties"), and BANK OF AMERICA, N.A. (the "Lender").

                                   RECITALS:

         A.       Pursuant to that certain Loan Agreement, dated December 30,
1996, as amended February 13, 1998 and May 19, 1999 (the "Revolving Credit
Agreement"), the Lender has extended revolving credit loans (the "Revolving
Loans") to the Company in the amount of up to $20,000,000. The Company's
obligations to the Lender arising under the Revolving Credit Agreement,
including without limitation all principal, interest, fees, and other charges
in respect of the Revolving Loans, shall be referred to herein as the
"Revolving Loan Obligations".

         B.       Pursuant to (i) that certain promissory note dated December
31, 1997 made by the Company in favor of the Lender in the original principal
amount of $2,083,155.00 and having a maturity date of December 31, 2002, and
(ii) that certain promissory note dated March 28, 1996 made by the Company in
favor of the Lender in the original principal amount of $998,000.00 and having
a maturity date of December 31, 2000 (collectively, the "Term Notes" and each a
"Term Note"; the Lender's advances to or for the benefit of the Company as
evidenced by the Term Notes shall be referred to as the "Term Loans"). The
Company's obligations to the Lender arising under the Term Notes, including
without limitation all principal, interest, fees and other charges in respect
of the Term Loans shall be referred to as the "Term Loan Obligations".

         C.       The Lender has also issued, on the application and request of
the Company as account party, four letters of credit described as follows: (i)
letter of credit no. 919888 in the amount of DM 10,000,000 designating Deutsche
Bank as the beneficiary and having an expiry date of August 31, 1999 (the
"Deutsche Bank Letter of Credit"); (ii) letter of credit no. 919887 in the
amount of DM 2,100,000 designating Bayerishe Vereinsbank as the beneficiary and
having an expiry date of August 31, 1999 (the "Vereinsbank Letter of Credit");
(iii) letter of credit no. 972664 in the amount of U.S. $279,750 designating
North Brunswick II LLC as the beneficiary and having an expiry date of July 31,
2000; and (iv) that letter of credit issued by the Lender in connection with
certain industrial revenue bond financing of the Borrower (collectively, the
"Letters of Credit"). For purposes hereof, "LOC Obligations" shall mean, at any
time, the sum of (i) the maximum amount which is, or at any time thereafter
may become, available to be drawn under the Letters of Credit, as amended from
time to time, plus (ii) the aggregate amount of all drawings under the Letters
of Credit honored by the Lender but not therefore reimbursed by the Company,
and all fees, charges, expenses and related obligations of the Company to the
Lender arising under the applications for the Letters of Credit, any amendments
thereto, or under any documents delivered in connection therewith.


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         D.       The Lender has also enabled the establishment of a lease
financing facility in favor of the Company pursuant to the terms of (i) that
certain Participation Agreement, dated as of October 2, 1998 (the
"Participation Agreement", among the Company, First Security Bank, N.A., as
Owner Trustee (the "Owner Trustee") under the AAI Realty Trust 1998-1, the
lenders and holders identified therein and from time to time party thereto, and
NationsBank, N.A. (now known as Bank of America, N.A.) as Agent; (ii) that
certain Lease Agreement, dated as of October 2, 1998, between the Owner Trustee
as lessor and the Company as lessee; (iii) that certain Agency Agreement, dated
as of October 2, 1998, between the Company as construction agent and the Owner
Trustee as lessor; and (iv) each of the other Operative Agreements (as defined
in the Participation Agreement), in each case as amended, modified,
supplemented, extended or renewed from time to time. The foregoing documents,
instruments and agreements shall be referred to collectively as the "TROL
Transaction Documents" and the Company's obligations thereunder, in any
capacity, shall be referred to collectively as the "TROL Obligations". The
Revolving Credit Agreement, the Term Notes, the Letters of Credit, and the TROL
Transaction Documents shall be referred to collectively as the "Existing Credit
Documents".

         E.       The Company has failed to comply with the financial covenants
set forth in Section 6.01(p)(v) of the Revolving Credit Agreement for the
fiscal quarter ending June 30, 1999 (the "Existing Default"). The occurrence of
the Existing Default under the Revolving Credit Agreement causes a
cross-default under the terms of the TROL Transaction Documents and the Term
Notes.

         F.       The Company has requested that (i) the Lender forbear from
exercising its remedies with respect to the Existing Default, (ii) that the
Lender continue to make available to the Company the credit and related
facilities established by the Existing Credit Documents, and (iii) that the
Lender extend the expiry dates on the Deutsche Bank Letter of Credit and the
Vereinsbank Letter of Credit until November 30, 1999. The Lender has agreed to
do so upon the terms and subject to the conditions set forth in that certain
Amendment and Forbearance Agreement (the "Amendment Agreement") by and between
the Company and the Lender, dated as of even date herewith, including, without
limitation, the Credit Parties' execution and delivery of this Security
Agreement.

         NOW, THEREFORE, in consideration of the premises and to induce the
Lenders to make their respective loans and extensions of credit thereunder, the
Credit Parties hereby agree with the Lender as follows:

         1.       Defined Terms.

         1.1      Definitions. (a) Unless otherwise defined herein, terms
defined in the Amendment Agreement and used herein shall have the meanings
given to them in the Amendment Agreement and the Amended Credit Documents, and
the following terms which are defined in the Uniform Commercial Code in effect
in the State of North Carolina on the date hereof are used herein as so
defined: Accounts, Chattel Paper, Documents, Equipment, Farm


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Products, Fixtures, General Intangibles, Instruments, Inventory, Investment
Property and Proceeds.

         (b)      The following terms shall have the following meanings:

                  "Agency Agreement": such term as referenced and defined in
         Appendix A of the Participation Agreement.

                  "Collateral": as defined in Section 2 of this Agreement;
         provided, however that Collateral shall not include any property which
         is subject to a lien or security interest created pursuant to the TROL
         Transaction Documents.

                  "Collateral Account": any collateral account established by
         the Lender as provided in subsection 3.3 hereof or subsection 7.2
         hereof.

                  "Contracts": all other contracts and agreements to which a
         Credit Party is a party, as each may be amended, supplemented or
         otherwise modified from time to time, including, without limitation,
         (i) all rights of a Credit Party to receive moneys due and to become
         due to it thereunder or in connection therewith, (ii) all rights of a
         Credit Party to damages arising out of or for breach or default in
         respect thereof and (iii) all rights of a Credit Party to exercise all
         remedies thereunder.

                  "Copyright Licenses": any written agreement, naming any
         Credit Party as licensor, granting any right under any Copyright
         including, without limitation, any thereof referred to in Schedule 3
         hereto.

                  "Copyrights": (i) all United States copyrights in all Works,
         now existing or hereafter created or acquired, all registrations and
         recordings thereof, and all applications in connection therewith,
         including, without limitation, registrations, recordings and
         applications in the United States Copyright office including, without
         limitation, any thereof referred to in Schedule 3 hereto, and (ii) all
         renewals thereof including, without limitation, any thereof referred
         to in Schedule 3 hereto.

                  "Guarantors": the Persons which give a guaranty in respect of
         any of the Secured Obligations.

                  "Lease Agreement": such term as referenced and defined in
         Appendix A of the Participation Agreement.

                  "Operative Agreements": such term as referenced and defined
         in Appendix A of the Participation Agreement.

                  "Patent License": all agreements, whether written or oral,
         providing for the grant by or to a Credit Party of any right to
         manufacture, use or sell any invention covered by a Patent, including,
         without limitation, any thereof referred to in Schedule 4 hereto.


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                  "Patents": (a) all letters patent of the United States or any
         other country and all reissues and extensions thereof, including,
         without limitation, any thereof referred to in Schedule 4 hereto, and
         (b) all applications for letters patent of the United States or any
         other country and all divisions, continuations and
         continuations-in-part thereof, including, without limitation, any
         thereof referred to in Schedule 4 hereto.

                  "Secured Obligations": the collective reference to the
         following:

                           (i)      the Revolving Loan Obligations, including
         without limitation, all unpaid principal of and interest on (including
         interest accruing after maturity and after the commencement of
         bankruptcy or insolvency proceedings) the Revolving Loans and other
         obligations owing under the Revolving Credit Agreement, and all other
         indebtedness, liabilities and obligations owing thereunder, whether
         now existing or hereafter arising, and whether primary, secondary,
         direct, contingent, or joint and several;

                           (ii)     the Term Loan Obligations, including
         without limitation, all unpaid principal of and interest on (including
         interest accruing after the maturity and after the commencement of
         bankruptcy or insolvency proceedings) the Term Loans and other
         obligations owing under the Term Notes, or any other documents or
         instruments evidencing the Term Loans, whether now existing or
         hereafter arising, and whether primary, secondary, direct, contingent,
         or joint and several;

                           (iii)    the LOC Obligations;

                           (iv)     the TROL Obligations, including without
         limitation, any and all obligations now existing or hereafter arising,
         owing by the Company, the Guarantors and/or any of their affiliates
         under or pursuant to the TROL Transaction Documents, including
         specifically without limitation all obligations and liabilities of the
         Company, the Guarantors and their affiliates under or with respect to
         the Participation Agreement, the Lease Agreement, the Agency Agreement
         and each of the other Operative Agreements;

                           (v)      all indebtedness, liabilities and
         obligations of any kind or nature, now existing or hereafter arising,
         owing by the Credit Parties to the Lender, arising under this Security
         Agreement or any of the other Amended Credit Documents.

                  "Trademark License": any agreement, written or oral,
         providing for the grant by or to a Credit Party of any right to use
         any Trademark, including, without limitation, any thereof referred to
         in Schedule 5 hereto.

                  "Trademarks": (a) all trademarks, trade names, corporate
         names, company names, business names, fictitious business names, trade
         styles, service marks, logos and other source or business identifiers,
         and the goodwill associated therewith, now existing or hereafter
         adopted or acquired, all registrations and recordings thereof, and all


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         applications in connection therewith, whether in the United States
         Patent and Trademark Office or in any similar office or agency of the
         United States, any State thereof or any other country or any political
         subdivision thereof, or otherwise, including, without limitation, any
         thereof referred to in Schedule 5 hereto, and (b) all renewals thereof.

                  "Uniform Commercial Code": the Uniform Commercial Code as
         from time to time in effect in the State of North Carolina.

                  "Work": any work which is subject to copyright protection
         pursuant to Title 17 of the United States Code.

         1.2      Other Definitional Provisions. (a) The words "hereof,"
"herein" and "hereunder" and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement, and section and paragraph references are to this Agreement
unless otherwise specified.

         (b)      The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.

         2.       Grant of Security Interest. As collateral security for the
prompt and complete payment and performance when due (whether at the stated
maturity, by acceleration or otherwise) of the Secured Obligations, each of the
Credit Parties hereby grants to the Lender, a security interest in all of the
following property now owned or at any time hereafter acquired by such Credit
Party or in which such Credit Party now has or at any time in the future may
acquire any right, title or interest (collectively, the "Collateral"):

                  (a)      all Accounts;

                  (b)      all Chattel Paper;

                  (c)      all Contracts;

                  (d)      all Copyrights;

                  (e)      all Copyright Licenses;

                  (f)      all Documents;

                  (g)      all Equipment;

                  (h)      all Fixtures;

                  (i)      all General Intangibles, including Contracts;

                  (j)      all Instruments;


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                  (k)      all Inventory;

                  (1)      all Investment Property;

                  (m)      all Patents;

                  (n)      all Patent Licenses;

                  (o)      all Trademarks;

                  (p)      all Trademark Licenses;

                  (q)      all books, records, ledger cards, files,
                           correspondence, computer programs, tapes, disks, and
                           related data processing software (owned by such
                           Credit Party or in which it has an interest) that at
                           any time evidence or contain information relating to
                           any Collateral or are otherwise necessary or helpful
                           in the collection thereof or realization thereupon;
                           and

                  (r)      to the extent not otherwise included, all Proceeds
                           and products of any and all of the foregoing;

provided that this Agreement shall not constitute an assignment of, or a grant
of a security interest in or lien on, any fixtures, contract, lease or other
agreement to which any Credit Party is a party if such assignment or grant of a
security interest or lien is prohibited by the terms of such contract, lease or
agreement.

         This Agreement shall create a continuing security interest in the
Collateral which shall remain in effect until all the Secured Obligations
(other than unasserted indemnity claims), now existing or hereafter arising,
have been paid in full, the commitments relating thereto have been terminated
and the Amended Credit Documents shall no longer be in effect.

         3.       Provisions Relating to Accounts.

         3.1      Credit Parties Remain Liable under Accounts. Anything herein
to the contrary notwithstanding, each of the Credit Parties shall remain liable
under each of the Accounts to observe and perform all the conditions and
obligations to be observed and performed by it thereunder, all in accordance
with the terms of any agreement giving rise to each such Account. The Lender
shall not have any obligation or liability under any Account (or any agreement
giving rise thereto) by reason of or arising out of this Agreement or the
receipt by the Lender of any payment relating to such Account pursuant hereto,
nor shall the Lender be obligated in any manner to perform any of the
obligations of a Credit Party under or pursuant to any Account (or any
agreement giving rise thereto), to make any payment, to make any inquiry as to
the nature or the sufficiency of any payment received by it or as to the
sufficiency of any performance by any party under any Account (or any agreement
giving rise thereto), to present or file any claim, to


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take any action to enforce any performance or to collect the payment of any
amounts which may have been assigned to it or to which it may be entitled at any
time or times.

         3.2      Analysis of Accounts. The Lender shall have the right, from
time to time or at any time after the occurrence of an Event of Default, to
make test verifications of the Accounts in any manner and through any medium
that it reasonably considers advisable, and the Credit Parties shall furnish
all such assistance and information as the Lender may require in connection
with such test verifications. At any time after the occurrence, and during the
continuance of, an Event of Default, upon the Lender's request and at the
expense of the Credit Parties, the Credit Parties shall cause independent
public accountants or others satisfactory to the Lender to furnish to the
Lender reports showing reconciliations, aging and test verifications of, and
trial balances for, the Accounts. The Lender in its own name or in the name of
others may communicate with account debtors on the Accounts to verify with them
to the Lender's satisfaction the existence, amount and terms of any Accounts.

         3.3      Collections on Accounts. (a) The Lender hereby authorizes the
Credit Parties to collect the Accounts, provided that the Lender may curtail or
terminate said authority at any time after the occurrence of an Event of
Default. If required by the Lender at any time after the occurrence of an Event
of Default, any payments of Accounts, when collected by the Credit Parties, (i)
shall be forthwith (and, in any event, within two Business Days) deposited by
the Credit Parties in a Collateral Account maintained under the sole dominion
and control of the Lender, subject to withdrawal by the Lender only as provided
in Section 7.3 hereof, and (ii) until so turned over, shall be held by the
Credit Parties in trust for the Lender, segregated from other funds of the
Credit Parties.

         (b)      Each such deposit of Proceeds of Accounts shall be
accompanied by a report identifying in reasonable detail the nature and source
of the payments included in the deposit.

         (c)      At the Lender's request after the occurrence of an Event of
Default, the Credit Parties shall deliver to the Lender copies of documents in
its possession or control (or as to which they have a right or ability to get)
evidencing, and relating to, the agreements and transactions which gave rise to
the Accounts which are necessary for collection of such Accounts by the Lender.

         4.       Provisions Relating to Contracts.

         4.1      Credit Parties Remain Liable under Contracts. Anything herein
to the contrary notwithstanding, each of the Credit Parties shall remain liable
under each of the Contracts to observe and perform all the conditions and
obligations to be observed and performed by it thereunder, all in accordance
with and pursuant to the terms, and provisions of each Contract. The Lender
shall not have any obligation or liability under any Contract by reason of or
arising out of this Agreement or the receipt by the Lender of any payment
relating to such Contract pursuant hereto, nor shall the Lender be obligated in
any manner to perform any of the obligations of a Credit Party under or
pursuant to any Contract, to make any payment, to make any inquiry as to the
nature or the sufficiency of any payment received by it or as to the


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sufficiency of any performance by any party under any Contract, to present or
file any claim, to take any action to enforce any performance or to collect the
payment of any amounts which may have been assigned to it or to which it may be
entitled at any time or times.

         4.2      Communication with Contracting Parties. The Lender in its own
name or in the name of others, at any time after the occurrence of an Event of
Default or in connection with any audit of a Contract by the Lender or any
other Person designated by the Lender, may communicate with parties to the
Contracts to verify with them to the Lender's satisfaction the existence,
amount and terms of any Contract.

         5.       Representations and Warranties. Each Credit Party hereby
represents and warrants that:

         5.1      Title; No Other Liens. Except for liens permitted
specifically under the terms of the Amended Credit Documents (hereinafter
referred to as "Permitted Liens"), the Credit Party owns each item of the
Collateral free and clear of any and all Liens or claims of others. No security
agreement, financing statement or other public notice with respect to all or
any part of the Collateral is on file or of record in any public office, except
such as have been filed in favor of the Lender, pursuant to this Agreement or
as are permitted pursuant to the TROL Transaction Documents.

         5.2      Perfected First Priority Liens. Except as otherwise expressly
provided in this Agreement, the security interests granted pursuant to this
Agreement (a) upon completion of the filings and other actions specified on
Schedule 2 attached hereto, and possession of such Collateral with respect to
which perfection is acquired by possession, will constitute perfected security
interests in the Collateral in favor of the Lender, (b) are prior to all other
Liens on the Collateral in existence on the date hereof except for Permitted
Liens and (c) are enforceable as such against (i) all creditors of and
purchasers from the Credit Party (except purchasers of Inventory in the
ordinary course of business) and (ii) any Person having any interest in the
real property where any of the Equipment is located.

         5.3      Inventory and Equipment. The Inventory and the Equipment of
the Credit Party are kept at the locations listed on Schedule 1 hereto.

         5.4      Chief Executive Office. Each Credit Party's chief executive
office and chief place of business, and the place where it keeps its books and
records, is located at the address shown on Schedule I hereto.

         5.5      Farm Products. None of the Collateral constitutes, or is the
Proceeds of, Farm Products.

         5.6      Representations and Warranties Relating to Contracts. (a) No
consent of any party (other than the Credit Party) to any Contract is required,
or purports to be required, in connection with the execution, delivery and
performance of this Agreement.


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         (b)      Each Contract is in full force and effect and constitutes a
valid and legally enforceable obligation of the parties thereto, except as
affected by bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and other similar laws relating to or affecting creditors' rights
generally, general equitable principles (whether considered in a proceeding in
equity or at law) and an implied covenant of good faith and fair dealing.

         (c)      No consent or authorization of, filing with or other act by
or in respect of any Governmental Authority is required in connection with the
execution, delivery, performance, validity or enforceability of any of the
Contracts by any party thereto other than those which have been duly obtained,
made or performed, are in full force and effect and do not subject the scope of
any such Contract to any material adverse limitation, either specific or
general in nature.

         (d)      Neither the Credit Party nor (to the best of the Credit
Party's knowledge) any other party to any Contract is in default or is likely
to become in default in any material respects in the performance or observance
of any of the terms thereof.

         (e)      The Credit Party has fully performed in all material respects
all its obligations under each Contract.

         (f)      The right, title and interest of the Credit Party in, to and
under each Contract are not subject to any defense, offset, counterclaim or
claim which would materially adversely affect the value of such Contract as
Collateral, nor have any of the foregoing been asserted or alleged against the
Credit Party as to any Contract which would materially adversely affect the
value of such Contract.

         (g)      No amount payable to any Credit Party under or in connection
with any Contract is evidenced by any Instrument or Chattel Paper which has not
been delivered to the Lender.

         (h)      Except as set forth on Schedule 6 hereto, none of the parties
to any Contracts is a Governmental Authority.

         5.7      Copyrights, Patents and Trademarks. (a) Schedule 3 hereto
includes all Copyrights and Copyright Licenses owned by each Credit Party in
its own name as of the date hereof. Schedule 4 hereto includes all Patents and
Patent Licenses owned by each Credit Party in its own name as of the date
hereof. Schedule 5 hereto includes all Trademarks and Trademark Licenses owned
by each Credit Party in its own name as of the date hereof.

         (b)      To the best of each Credit Party's knowledge, each Copyright
registration, issued Patent and Trademark registration of the Credit Party is
valid, subsisting, unexpired, enforceable and has not been abandoned.

         (c)      Except as set forth in either Schedule 4 hereto or Schedule 5
hereto, no Copyright registration, issued Patent and Trademark registration of
any Credit Party is the subject of any licensing or franchise agreement.


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         (d)      No holding, decision or judgment has been rendered by any
Governmental Authority which would limit, cancel or question the validity of
any Copyright registration, issued Patent or Trademark registration of any
Credit Party.

         (e)      No action or proceeding is pending seeking to limit, cancel
or question the validity of any Copyright registration, issued Patent or
Trademark registration of any Credit Party, or which, if adversely determined,
would have a material adverse effect on the value of any Copyright
registration, issued Patent or Trademark registration.

         6.       Covenants. Each Credit Party covenants and agrees with the
Lender that, from and after the date of this Agreement until the Secured
Obligations (other than unasserted indemnity claims) have been satisfied in
full and the Commitments have been terminated:

         6.1      Delivery of Instruments and Chattel Paper. If any amount
payable under or in connection with any of the Collateral shall be or become
evidenced by any Instrument or Chattel Paper, such Instrument or Chattel Paper
shall be immediately delivered to the Lender, duly indorsed in a manner
satisfactory to the Lender, to be held as Collateral pursuant to this
Agreement.

         6.2      Marking of Records. Each Credit Party will mark its books and
records pertaining to the Collateral to evidence this Agreement and the
security interests created hereby.

         6.3      Maintenance of Perfected Security Interest; Further
Documentation. (a) Each Credit Party shall maintain the security interest
created by this Agreement as a perfected security interest subject only to
Permitted Liens and shall defend such security interest against claims and
demands of all Persons whomsoever.

         (b)      At any time and from time to time, upon the written request
of the Lender, and at the sole expense of the Credit Parties, the Credit Party
will promptly and duly execute and deliver such further instruments and
documents and take such further action (including without limitation all
actions required under the Federal Assignment of Claims Act or any similar
state statute) as the Lender may reasonably request for the purpose of
obtaining or preserving the full benefits of this Agreement and of the rights
and powers herein granted, including, without limitation, the filing of any
financing or continuation statements under the Uniform Commercial Code in
effect in any jurisdiction with respect to the security interests created
hereby.

         6.4      Changes in Locations, Name, etc. No Credit Party will:

                  (a)      permit any of the Inventory or Equipment to be kept
         at a location other than those listed on Schedule 1 hereto, unless it
         shall have given the Lender at least 30 days' prior written notice of
         such change and any filings required under the Uniform Commercial Code
         in effect in the affected jurisdiction to maintain the perfected
         security interest granted pursuant to this Agreement shall have been
         made, except that Equipment may be moved from such location for a
         reasonable period of time for purposes of repair of such Equipment or
         for testing in the ordinary cause of business;


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                  (b)      change the location of its chief executive office
         and chief place of business or the location at which it maintains its
         books and records from that specified on Schedule 1 hereto, unless it
         shall have given the Lender at least 30 days' prior written notice of
         such change and any filings required under the Uniform Commercial Code
         in effect in the affected jurisdiction to maintain the perfected
         security interest granted pursuant to this Agreement shall have been
         made; or

                  (c)      change its name, identity or corporate structure to
         such an extent that any financing statement filed by the Lender in
         connection with this Agreement would become seriously misleading,
         unless it shall have given the Lender at least 30 days' prior written
         notice of such change and any filings required under the Uniform
         Commercial Code in effect in the affected jurisdiction to maintain the
         perfected security interest granted pursuant to this Agreement shall
         have been made.

         6.5      Further Identification of Collateral. Each Credit Party will
furnish to the Lender from time to time upon request, but prior to the
occurrence and during the continuance of an Event of Default, not more than
once in any calendar year, statements and schedules further identifying and
describing the Collateral and such other reports in connection with the
Collateral as the Lender may reasonably request, all in reasonable detail.

         6.6      Indemnification. The Credit Parties agree to pay, and to save
the Lender harmless from, any and all liabilities, costs and expenses
(including, without limitation, reasonable legal fees and expenses) (i) with
respect to, or resulting from any delay in paying, any and all excise, sales or
other taxes which may be payable or determined to be payable with respect to
any of the Collateral, (ii) with respect to, or resulting from, any delay in
complying with any requirement of law applicable to any of the Collateral and
(iii) in connection with any of the transactions contemplated by this
Agreement, except for any such liabilities which result from the gross
negligence or willful misconduct of the Lender. In any suit, proceeding or
action brought by the Lender under any Account for any sum owing thereunder,
the Credit Parties will save, indemnify and keep the Lender harmless from and
against all expense, loss or damage suffered by reason of any defense, setoff,
counterclaim, recoupment or reduction or liability whatsoever of the account
debtor thereunder, arising out of a breach by any Credit Party of any
obligation thereunder or arising out of any other agreement, indebtedness or
liability at any time owing to or in favor of such account debtor or its
successors from any Credit Parties.

         6.7      Covenants Relating to Accounts Upon Default. At any time
after the occurrence of an Event of Default:

                  (a)      the amount represented by each Credit Party to the
         Lender from time to time as owing by each account debtor or by all
         account debtors in respect of the Accounts will at such time be the
         correct amount and believed by such Credit Party to be actually owing
         by such account debtor or debtors thereunder;


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                  (b)      each Credit Party will not amend, modify, terminate
         or waive any agreement giving rise to an Account in any manner which
         would reasonably be expected to materially adversely affect the value
         of the Accounts as Collateral;

                  (c)      each Credit Party will not fail to exercise promptly
         and diligently each and every material right which it may have under
         each agreement giving rise to an Account (other than any right of
         termination);

                  (d)      each Credit Party will not fail to deliver to the
         Lender a copy of each material demand, notice or document received by
         it relating in any way to any agreement giving rise to an Account; and

                  (e)      other than in the ordinary course of business as
         generally conducted by each Credit Party, each Credit Party will not
         grant any extension of the time of payment of any of the Accounts,
         compromise, compound or settle the same for less than the full amount
         thereof, release, wholly or partially, any Person liable for the
         payment thereof, or allow any credit or discount whatsoever thereon.

         6.8      Covenants Relating to Contracts. (a) Each Credit Party will
perform and comply in all material respects with all its obligations under the
Contracts and all its other Contractual Obligations relating to the Collateral.

         (b)      Each Credit Party will promptly provide upon request to the
Lender copies of particular Contracts and each material demand, notice or
document relating thereto.

         (c)      In any suit, proceeding or action brought by the Lender under
any Contract for any sum owing thereunder, or to enforce any provisions of any
Contract, each Credit Party will save, indemnify and keep the Lender harmless
from and against all expense, loss or damage suffered by reason of any defense,
setoff, counterclaim, recoupment or reduction or liability whatsoever of the
Credit Party thereunder, arising out of a breach by the Credit Party of any
obligation thereunder or arising out of any other agreement, indebtedness or
liability at any time owing to or in favor of such obligor or its successors
from the Credit Party except for any such expense, loss or damage which results
from the gross negligence of the willful misconduct of the Lender.

         6.9      Covenants Relating to Copyrights. (a) Each Credit Party will
employ the Copyright for each Work with such notice of copyright as may be
required by law to secure copyright protection.

         (b)      Each Credit Party will not do any act or knowingly omit to do
any act whereby any material Copyright may become invalidated and (i) will not
do any act, or omit to do any act, whereby any material Copyright may become
injected into the public domain; (ii) shall notify the Lender immediately if it
knows, or has reason to know, that any material Copyright may become injected
into the public domain or of any adverse determination or development
(including, without limitation, the institution of, or any such determination
or development in, any court or


                                      12
<PAGE>   13

tribunal in the United States or any other country) regarding the Credit
Party's ownership of any such Copyright or its validity; (iii) will take all
necessary steps as it shall deem appropriate under the circumstances, to
maintain and pursue each application (and to obtain the relevant registration)
and to maintain each registration of each material Copyright owned by the
Credit Party including, without limitation, filing of applications for renewal
where necessary; and (iv) will promptly notify the Lender of any material
infringement of any material Copyright of the Credit Party of which it becomes
aware and will take such actions as it shall reasonably deem appropriate under
the circumstances to protect such Copyright, including, where appropriate, the
bringing of suit for infringement, seeking injunctive relief and seeking to
recover any and all damages for such infringement.

         6.10     Covenants Relating to Patents and Trademarks. (a) Each Credit
Party (either itself or through licensees) will, except with respect to any
Trademark that the Credit Party shall reasonably determine is of negligible
economic value to it, (i) continue to use each Trademark on each and every
trademark class of goods applicable to its current line as reflected in its
current catalogs, brochures and price lists in order to maintain such Trademark
in full force free from any claim of abandonment for non-use, (ii) maintain as
in the past the quality of products and services offered under such Trademark,
(iii) employ such Trademark with the appropriate notice of registration, (iv)
not adopt or use any mark which is confusingly similar or a colorable imitation
of such Trademark unless the Lender, shall obtain a perfected security interest
in such mark pursuant to this Agreement, and (v) not (and not permit any
licensee or sublicensee thereof to) do any act or knowingly omit to do any act
whereby any Trademark may become invalidated.

         (b)      Each Credit Party will not, except with respect to any Patent
that the Credit Party shall reasonably determine is of negligible economic
value to it, do any act, or omit to do any act, whereby any Patent may become
abandoned or dedicated.

         (c)      The Credit Party will notify the Lender immediately if it
knows, or has reason to know, that any application or registration relating to
any Patent or Trademark may become abandoned or dedicated, or of any adverse
determination or development (including, without limitation, the institution
of, or any such determination or development in, any proceeding in the United
States Patent and Trademark Office or any court or tribunal in any country)
regarding the Credit Party's ownership of any Patent or Trademark or its right
to register the same or to keep and maintain the same.

         (d)      Whenever the Credit Party, either by itself or through the
Lender, employee, licensee or designee, shall file an application for the
registration of any Patent or Trademark with the United States Patent and
Trademark Office or any similar office or agency in any other country or any
political subdivision thereof, the Credit Party shall report such filing to the
Lender within five Business Days after the last day of the fiscal quarter in
which such filing occurs. Upon request of the Lender, the Credit Party shall
execute and deliver any and all agreements, instruments, documents and papers
as the Lender may request to evidence the Lender's security interest in any
Patent or Trademark and the goodwill and general intangibles of the Credit
Party relating thereto or represented thereby.


                                      13
<PAGE>   14

         (e)      Each Credit Party will take all reasonable and necessary
steps, including, without limitation, in any proceeding before the United
States Patent and Trademark Office, or any similar office or agency in any
other country or any political subdivision thereof, to maintain and pursue each
application (and to obtain the relevant registration) and to maintain each
registration of the Patents and Trademarks, including, without limitation,
filing of applications for renewal, affidavits of use and affidavits of
incontestability.

         (f)      In the event that any Patent or Trademark included in the
Collateral is infringed, misappropriated or diluted by a third party, the
Credit Party shall promptly notify the Lender after it learns thereof and
shall, unless the Credit Party shall reasonably determine that such Patent or
Trademark is of negligible economic value to the Credit Party which
determination the Credit Party shall promptly report to the Lender, promptly
sue for infringement, misappropriation or dilution, to seek injunctive relief
where appropriate and to recover any and all damages for such infringement,
misappropriation or dilution, or take such other actions as the Credit Party
shall reasonably deem appropriate under the circumstances to protect such
Patent or Trademark.

         6.11     Covenants Relating to Inventory and Equipment

         (a)      Each Credit Party will, upon ten (10) days' written notice
from the Lender, provide a physical history of Inventory and/or Equipment on a
quarterly basis or, after the occurrence of an Event of Default, more
frequently.

         (b)      The Credit Party shall, at its own expense, maintain
insurance with respect to the Equipment and Inventory in such amounts, against
such risks, in such form and with such insurers, as shall be reasonably
satisfactory to the Lender from time to time. Each policy for liability
insurance shall provide for all losses to be paid on behalf of the Lender and
the Credit Party as their interests may appear, and each policy for property
damage insurance shall provide for all losses (except for losses of less than
$100,000 per occurrence) to be paid directly to the Lender. Each such policy
shall in addition (i) name the Credit Party and the Lender as insured parties
thereunder (without any representation or warranty by or obligation upon the
Lender) as their interests may appear, (ii) contain the agreement by the
insurer that any loss thereunder shall be payable to the Lender notwithstanding
any action, inaction or breach of representation or warranty by the Credit
Party, (iii) provide that there shall be no recourse against the Lender for
payment of premiums or other amounts with respect thereto and (iv) provide that
at least thirty (30) days' prior written notice of cancellation or lapse shall
be given to the Lender by the insurer. The Credit Party shall, if so requested
by the Lender, deliver to the Lender original or duplicate policies of such
insurance and, as often as the Lender may reasonably request, a report of a
reputable insurance broker with respect to such insurance. Further, the Credit
Party shall, at the request of the Lender, duly exercise and deliver
instruments of assignment of such insurance policies to comply with the
requirements of Section 6.3 hereof and cause the insurers to acknowledge notice
of such assignment.

         (c)      In the case of any loss involving damage to Equipment or
Inventory of the Credit Party, the Credit Party shall make or cause to be made
the necessary repairs to or replacements of


                                      14
<PAGE>   15

such Equipment or Inventory, and any proceeds of insurance properly received by
or released to the Credit Party shall be used by the Credit Party, except as
otherwise required or permitted hereunder or by the Credit Agreement, to pay or
as reimbursement for the costs of such repairs or replacements.

         (d)      So long as no Event of Default shall have occurred, all
insurance payments received by the Lender in connection with any loss, damage
or destruction of any Inventory or Equipment shall be released by the Lender to
the Credit Party for the repair, replacement or restoration thereof. To the
extent that (i) the amount of any such insurance payments exceeds the cost of
any such repair, replacement or restoration, or (ii) such insurance payments
are not otherwise required by the Credit Party to complete any such repair,
replacement or restoration required hereunder, the Lender shall not be required
to release the amount thereof to the Credit Party and may hold or continue to
hold such amount in a Collateral Account as additional security for the Secured
Obligations (except that any such amount shall be released by the Lender to the
Credit Party if no Event of Default has occurred). If an Event of Default has
occurred, the Lender may elect, in its sole and absolute discretion, to release
any such insurance payments for the purposes set forth in the first sentence of
this Section 6.11(d), or to hold such insurance payments as additional
Collateral hereunder or apply the same in reduction of the Secured Obligations
in such order or manner as the Lender may determine in its sole and absolute
discretion.

         7.       Remedies.

         7.1      Notice to Account Debtors and Contract Parties. Upon the
request of the Lender at any time after the occurrence of an Event of Default,
the Credit Parties shall notify account debtors on the Accounts and parties to
the Contracts that the Accounts and the Contracts have been assigned to the
Lender and that payments in respect thereof shall be made directly to the
Lender.

         7.2      Proceeds to be Turned Over To Lender. In addition to the
rights of the Lender specified in Section 3.3 hereof with respect to payments
of Accounts, after the occurrence of an Event of Default all Proceeds received
by the Credit Parties consisting of cash, checks and other near-cash items
shall be held by the Credit Parties in trust for the Lender, segregated from
other funds of the Credit Parties, and shall, forthwith upon receipt by the
Credit Parties, be turned over to the Lender in the exact form received by the
Credit Parties (duly indorsed by the Credit Parties to the Lender in a manner
satisfactory to the Lender, if required by the Lender) and held by the Lender
in a Collateral Account maintained under the sole dominion and control of the
Lender. All Proceeds while held by the Lender in a Collateral Account (or by
the Credit Parties in trust for the Lender) shall continue to be held as
collateral security for all the Secured Obligations and shall not constitute
payment thereof until applied as provided in subsection 7.3 hereof.

         7.3      Application of Proceeds. At such intervals as may be agreed
upon by the Credit Parties and the Lender or at any time after an Event of
Default shall have occurred, at the Lender's election, the Lender may apply all
or any part of Proceeds held in any Collateral Account in ratable payment of
the Secured Obligations, and any part of such funds which the


                                      15
<PAGE>   16
Lender elects not so to apply and deems not required as collateral security for
the Secured Obligations shall be paid over from time to time by the Lender to
the Credit Parties or to whomsoever may be lawfully entitled to receive the
same. Any balance of such Proceeds remaining after the Secured Obligations shall
have been satisfied in full and the Commitments shall have been terminated shall
be paid over to the Credit Parties or to whomsoever may be lawfully entitled to
receive the same.

         7.4      Code Remedies. At any time after an Event of Default shall
have occurred, the Lender, may exercise, in addition to all other rights and
remedies granted in this Agreement and in any other instrument or agreement
securing, evidencing or relating to the Secured Obligations, all rights and
remedies of a secured party under the Uniform Commercial Code. Without limiting
the generality of the foregoing, the Lender, without demand of performance or
other demand, presentment, protest, advertisement or notice of any kind (except
any notice required by law referred to below) to or upon the Credit Parties or
any other Person (all and each of which demands, defenses, advertisements and
notices are hereby waived), may in such circumstances forthwith collect,
receive, appropriate and realize upon the Collateral, or any part thereof,
and/or may forthwith sell, lease, assign, give option or options to purchase, or
otherwise dispose of and deliver the Collateral or any part thereof (or contract
to do any of the foregoing), in one or more parcels at public or private sale or
sales, at any exchange, broker's board or office of the Lender or elsewhere upon
such terms and conditions as it may deem advisable and at such prices as it may
deem best, for cash or on credit or for future delivery without assumption of
any credit risk. 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 the whole or any part of the Collateral so sold, free of any right
or equity of redemption in a Credit Party, which right or equity is hereby
waived and released. The Credit Parties further agree, at the Lender's request,
to assemble the Collateral and make it available to the Lender at places which
the Lender shall reasonably select, whether at the respective Credit Party's
premises or elsewhere. The Lender shall apply the net proceeds of any such
collection, recovery, receipt, appropriation, realization or sale, after
deducting all reasonable costs and expenses of every kind incurred therein or
incidental to the care or safekeeping of any of the Collateral or in any way
relating to the Collateral or the rights of the Lender hereunder, including,
without limitation, reasonable attorneys' fees and disbursements, to the payment
in whole or in part of the Secured Obligations, in the order and manner
determined by the Lender in its sole and absolute discretion, and only after
such application and after the payment by the Lender of any other amount
required by any provision of law, including, without limitation, Section
9-504(1)(c) of the Uniform Commercial Code, need the Lender account for the
surplus, if any, to each of the Credit Parties. To the extent permitted by
applicable law, each Credit Party waives all claims, damages and demands it may
acquire against the Lender arising out of the exercise of any rights hereunder.
If any notice of a proposed sale or other disposition of Collateral shall be
required by law, such notice shall be deemed reasonable and proper if received
by the Credit Parties at least 20 days before such sale or other disposition.

         7.5      Deficiency. The Credit Parties shall remain liable for any
deficiency if the proceeds of any sale or other disposition of the Collateral
are insufficient to pay the Secured



                                      16
<PAGE>   17

Obligations and the fees and disbursements of any attorneys employed by the
Lender to collect such deficiency.

         8.       Lender's Appointment as Attorney-in-Fact; Lender's
Performance of Credit Parties' Obligations.

         8.1      Powers. Each Credit Party hereby irrevocably constitutes and
appoints the Lender and any officer of the Lender, with full power of
substitution, as its true and lawful attorney-in-fact with fully irrevocable
power and authority in the place and stead of such Credit Party and in the name
of such Credit Party or in the name of the Lender, from time to time in the
Lender's discretion, for the purpose of carrying out the terms of this
Agreement, to take any and all appropriate action and to execute any and all
documents and instruments which may be necessary or desirable to secure the
Secured Obligations and grant security interests in the Collateral as
contemplated by this Agreement, and, without limiting the generality of the
foregoing, each Credit Party hereby gives the Lender the power and right, on
behalf of such Credit Party, without notice to or assent by such Credit Party,
to do the following:

                  (a)      in the case of any Account, at any time when the
         authority of such Credit Party to collect the Accounts has been
         curtailed or terminated pursuant to Section 3.3(a) hereof, or in the
         case of any other Collateral, at any time after an Event of Default has
         occurred, in the name of such Credit Party or in the name of the
         Lender, or otherwise, to take possession of and indorse and collect any
         checks, drafts, notes, acceptances or other instruments for the payment
         of moneys due under any Account, Instrument or General Intangible or
         with respect to any other Collateral and to file any claim or to take
         any other action or proceeding in any court of law or equity or
         otherwise deemed appropriate by the Lender for the purpose of
         collecting any and all such moneys due under any Account, Instrument or
         General Intangible or with respect to any other Collateral whenever
         payable;

                  (b)      in the case of any Copyrights, Patents or
         Trademarks, at any time after an Event of Default has occurred, to
         execute and deliver any and all agreements, instruments, documents,
         and papers as the Lender may request to evidence the Lender's security
         interest in any Copyright, Patent or Trademark and the goodwill and
         general intangibles of such Credit Party relating thereto or
         represented thereby;

                  (c)      at any time after an Event of Default has occurred,
         to pay or discharge taxes and Liens levied or placed on or threatened
         against the Collateral, to effect, any repairs or any insurance called
         for by the terms all or any part of the premiums therefor and the
         costs thereof;

                  (d)      to execute, in connection with the sale provided for
         in Section 7.4 hereof, any endorsements, assignments or other
         instruments of conveyance or transfer with respect to the Collateral;
         and


                                      17
<PAGE>   18

                  (e)      at any time after an Event of Default has occurred,
         (i) to direct any party liable for any payment under any of the
         Collateral to make payment of any and all moneys due or to become due
         thereunder directly to the Lender shall direct; (ii) to ask or demand
         for, collect, receive payment of and receipt for, any and all moneys,
         claims and other amounts due or to become due at any time in respect
         of or arising out of any Collateral; (iii) to sign and indorse any
         invoices, freight or express bills, bills of lading, storage or
         warehouse receipts, drafts against debtors, assignments,
         verifications, notices and other documents in connection with any of
         the Collateral; (iv) to commence and prosecute any suits, actions or
         proceedings at law or in equity in any court of competent jurisdiction
         to collect the Collateral or any thereof and to enforce any other
         right in respect of any Collateral; (v) to defend any suit, action or
         proceeding brought against the Credit Party with respect to any
         Collateral; (vi) to settle, compromise or adjust any such suit, action
         or proceeding and, in connection therewith, to give such discharges or
         releases as the Lender may deem appropriate; (vii) to assign or grant
         licenses, any Copyright, Patent or Trademark (along with the goodwill
         of the business to which any such Copyright, Patent or Trademark
         pertains), throughout the world for such term or terms, on such
         conditions, and in such manner, as the Lender shall in its sole
         discretion determine; and (viii) generally, to sell, transfer, pledge
         and make any agreement with respect to or otherwise deal with any of
         the Collateral as fully and completely as though the Lender were the
         absolute owner thereof for all purposes, and to do, at the Lender's
         option and such Credit Party's expense, at any time, or from time to
         time, all reasonable acts and things which the Lender deems necessary
         to protect, preserve or realize upon the Collateral and the Lender's
         security interests therein and to effect the intent of this Agreement,
         all as fully and effectively as such Credit Party might do.

The Lender agrees that, except after the occurrence of an Event of Default, it
will forbear from exercising the power of attorney or any rights granted to the
Lender pursuant to this Section 8.1.

         8.2      Performance by Lender of Credit Parties' Obligations. If the
Credit Parties fail to perform or comply with any of their agreements contained
herein, the Lender, at its option, but without any obligation to do so, may
perform or comply, or otherwise cause performance or compliance, with such
agreement.

         8.3      Credit Parties' Reimbursement Obligation. The expenses of the
Lender incurred in connection with actions undertaken as provided in this
Section 8, together with interest thereon at the post-default rate per annum
set forth in the Revolving Credit Agreement from the date of payment by the
Lender to the date reimbursed by the Credit Parties, shall be payable by the
Credit Parties to the Lender on demand.

         8.4      Ratification; Power Coupled With An Interest. The Credit
Parties hereby ratify all that said attorneys shall lawfully do or cause to be
done by virtue hereof. All powers, authorizations and agencies contained in this
Agreement are coupled with an interest and are irrevocable until the Secured
Obligations have been satisfied in full and the Commitments have been
terminated.


                                      18
<PAGE>   19


         9.       Duty of Lender. The Lender's sole duty with respect to the
custody, safekeeping and physical preservation of the Collateral in its
possession, under Section 9-207 of the Uniform Commercial Code or otherwise,
shall be to deal with it in the same manner as the Lender deals with similar
property for its own account, except that the Lender shall have no obligation
to invest funds held in any Collateral Account and may hold the same as demand
deposits. Neither the Lender, nor any of its directors, officers, employees or
agents shall be liable for failure to demand, collect or realize upon any of
the Collateral or for any delay in doing so or shall be under any obligation to
sell or otherwise dispose of any Collateral upon the request of any Credit
Party or any other Person or to take any other action whatsoever with regard to
the Collateral or any part thereof. The powers conferred on the Lender
hereunder 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 shall be accountable only for amounts that they actually receive as a
result of the exercise of such powers, and neither it nor any of its officers,
directors, employees or agents shall be responsible to the Credit Parties for
any act or failure to act hereunder, except for their own gross negligence or
willful misconduct.

         10.      Execution of Financing Statements. Pursuant to Section 9-402
of the Uniform Commercial Code, each Credit Party authorizes the Lender to file
financing statements with respect to the Collateral without the signature of
such Credit Party in such form and in such filing offices as the Lender
reasonably determines appropriate to perfect the security interests of the
Lender under this Agreement. A carbon, photographic or other reproduction of
this Agreement shall be sufficient as a financing statement for filing in any
jurisdiction.

         11.      Notices. All notices shall be given or made in accordance
with the terms of the Revolving Credit Agreement.

         12.      Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

         13.      Amendments in Writing; No Waiver; Cumulative Remedies.

         13.1     Amendments in Writing. None of the terms or provisions of
this Agreement may be waived, amended, supplemented or otherwise modified
except by a written instrument executed by the Lender and the Credit Parties
directly affected thereby; provided that any provision of this Agreement may be
waived by the Lender in a letter or agreement executed by the Lender or by
facsimile transmission from the Lender.

         13.2     No Waiver by Course of Conduct. The Lender shall not by any
act (except by a written instrument pursuant to Section 13.1 hereof), delay,
indulgence, omission or otherwise be deemed to have waived any right or remedy
hereunder or to have acquiesced in any Default or Event of Default or in any
breach of any of the terms and conditions hereof. No failure to exercise, nor
any delay in exercising, on the part of the Lender, any right, power or
privilege


                                      19
<PAGE>   20

hereunder shall operate as a waiver thereof. No single or partial exercise of
any right, power or privilege hereunder shall preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. A
waiver by the Lender of any right or remedy hereunder on any one occasion shall
not be construed as a bar to any right or remedy which the Lender would
otherwise have on any future occasion.

         13.3     Remedies Cumulative. The rights and remedies herein provided
are cumulative, may be exercised singly or concurrently and are not exclusive
of any other rights or remedies provided by law.

         14.      Section Headings. The section and subsection headings used in
this Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation
hereof.

         15.      Successors and Assigns. This Agreement shall be binding upon
the successors and assigns of the Credit Parties and shall inure to the benefit
of the Lender and its successors and assigns, provided that the Credit Parties
may not assign any of their rights or obligations under this Agreement without
the prior written consent of the Lender and any such purported assignment
without such prior written consent shall be null and void.

         16.      Term of Agreement. This Agreement and the security interests
granted hereunder shall remain in full force and effect until the Secured
Obligations have been satisfied in full and the Commitments have been
terminated, at which time the Lender shall release and terminate the security
interests granted to it hereunder. Upon such release and termination, (i) the
Credit Parties shall be entitled to the return, at the Credit Parties' expense,
of any and all funds in the Collateral Account and such of the Collateral held
by the Lender as shall not have been sold or otherwise applied pursuant to the
terms hereof and (ii) the Lender will, at the Credit Parties' expense, execute
and deliver to the Credit Parties such UCC termination statements and other
documents as the Credit Parties shall reasonably request to evidence such
release and termination.

         17.      GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NORTH CAROLINA.

                 [Remainder of Page Intentionally Left Blank]


                                      20
<PAGE>   21

         IN WITNESS WHEREOF, the undersigned have caused this Security
Agreement to be duly executed and delivered as of the date first above written.

CREDIT PARTIES:                          APPLIED ANALYTICAL INDUSTRIES, INC.
                                         AAI LEARNING CENTER INC.
                                         AAI TECHNOLOGIES, INC.
                                         AAI PROPERTIES, INC.
                                         KANSAS CITY ANALYTICAL SERVICES, INC.
                                         MEDICAL AND TECHNICAL RESEARCH
                                            ASSOCIATES, INC.

                                             /s/ Eugene T. Haley
                                             ---------------------------------
                                             Eugene T. Haley
                                             Executive Vice President,
                                             Applied Analytical Industries, Inc.

Attest:


By: /s/  Albert N. Cavagnaro             By: /s/  Frederick D. Sancilio
   ---------------------------------        ---------------------------------
      Name: Albert N. Cavagnaro               Name: Frederick D. Sancilio
      Title: Assistant Secretary              Title: Chairman of the Board


LENDER:                                  BANK OF AMERICA, N.A.

                                         By: /s/ David C. Houston
                                            ---------------------------------
                                         Name: David C. Houston
                                         Title: Vice President

<PAGE>   22
                                   Schedule 1

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------------
Credit Party                  Chief Executive Office       Locations of Collateral                  Record Owner (if
                                                                                                 other than Credit Party)
-------------------------------------------------------------------------------------------------------------------------
<S>                           <C>                          <C>                                   <C>
Applied Analytical            1206 N. 23rd St.             1206 N. 23rd St.
Industries, Inc.              Wilmington, NC 28405         Wilmington, NC 28405
-------------------------------------------------------------------------------------------------------------------------
AAI Learning Center Inc.      1206 N. 23rd St.             1206 N. 23rd St.
                              Wilmington, NC 28405         Wilmington, NC 28405
-------------------------------------------------------------------------------------------------------------------------
AAI Technologies, Inc.        300 Delaware Avenue,         300 Delaware Avenue,
                              Suite 1704                   Suite 1704
                              Wilmington, Delaware         Wilmington, Delaware
                              19801-1612                   19801-1612
-------------------------------------------------------------------------------------------------------------------------
AAI Properties, Inc.          300 Delaware Avenue,         300 Delaware Avenue,
                              Suite 1704                   Suite 1704
                              Wilmington, Delaware         Wilmington, Delaware
                              19801-1612                   19801-1612
-------------------------------------------------------------------------------------------------------------------------
Applied Analytical            Viale Sarca, 223             Viale Sarca, 223
Industries Italy, S.r.l.      20126 Milano, Italy          20126 Milano, Italy
-------------------------------------------------------------------------------------------------------------------------
AAI UK Ltd.
-------------------------------------------------------------------------------------------------------------------------
AAI Japan, Inc.               11th Floor Suzuwa            11th Floor Suzuwa
                              Building                     Building
                              4-7-10, Nihonbashi           4-7-10, Nihonbashi
                              Honcho, Chuo-ku              Honcho, Chuo-ku
                              Tokyo 103-0023 Japan         Tokyo 103-0023 Japan
-------------------------------------------------------------------------------------------------------------------------
Kansas City Analytical        12700 Johnson Drive          12700 Johnson Drive
Services, Inc.                Shawnee, Kansas 66216        Shawnee, Kansas 66216
-------------------------------------------------------------------------------------------------------------------------
Medical and Technical         Two Vision Drive             Two Vision Drive
Research Associates, Inc.     Natick, Massachusetts        Natick, Massachusetts
                              01760                        01760
-------------------------------------------------------------------------------------------------------------------------
AAI Vermogensver-             Wegenerstr, 13               Wegenerstr, 13
waltungsgesellschaft mgH      D-89231 Neu-Ulm,             D-89231 Neu-Ulm,
                              Germany                      Germany
-------------------------------------------------------------------------------------------------------------------------
L.A.B. Verwaltungs-           Wegenerstr, 13               Wegenerstr, 13
gesellschaft mbH              D-89231 Neu-Ulm,             D-89231 Neu-Ulm,
                              Germany                      Germany
-------------------------------------------------------------------------------------------------------------------------
Applied Analytical            Wegenerstr, 13               Wegenerstr, 13
Industries Deutschland        D-89231 Neu-Ulm,             D-89231 Neu-Ulm,
GmbH                          Germany                      Germany
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>   23

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------------
Credit Party                 Chief Executive Office       Locations of Collateral                  Record Owner (if
                                                                                                other than Credit Party)
-------------------------------------------------------------------------------------------------------------------------
<S>                          <C>                          <C>                                   <C>

AAI Applied Analytical       Wegenerstr, 13               Wegenerstr, 13
Industries Deutschland       D-89231 Neu-Ulm,             D-89231 Neu-Ulm,
GmbH & Co, KG                Germany                      Germany
-------------------------------------------------------------------------------------------------------------------------
L.A.B. Benelux B.V.          Eusebiusplein 42             Eusebiusplein 42
                             NL-6811 HG Arnheim,          NL-6811 HG Arnheim,
                             Netherlands                  Netherlands
-------------------------------------------------------------------------------------------------------------------------
Applied Analytical           40 Rue Charles Duflos        40 Rue Charles Duflos
Industries France S.A.R.L.   F-92270 Bois Colombes,       F-92270 Bois Colombes,
                             France                       France
-------------------------------------------------------------------------------------------------------------------------
Neosan Arzneimittel-         Wegenerstr, 13               Wegenerstr, 13
Vertriebsgesellschaft mbH    D-89231 Neu-Ulm,             D-89231 Neu-Ulm,
                             Germany                      Germany
-------------------------------------------------------------------------------------------------------------------------
I.P.A.-Internationale        Wegenerstr, 13               Wegenerstr, 13
Pharma Agentur GmbH          D-89231 Neu-Ulm,             D-89231 Neu-Ulm,
                             Germany                      Germany
-------------------------------------------------------------------------------------------------------------------------
Inpharmco, Gesellschaft      Munich, Germany              Munich, Germany
zur Vermarktung von
Arzneimitteln mbH
-------------------------------------------------------------------------------------------------------------------------
LAB (Great Brittan)
Limited
-------------------------------------------------------------------------------------------------------------------------
Proscientia Holding AG       Zurich, Switzerland         Zurich, Switzerland
-------------------------------------------------------------------------------------------------------------------------
Technopharm S.A.             Zurich, Switzerland         Zurich, Switzerland
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>   24

                                   Schedule 2

           Filings and Actions required to Perfect Security Interests

The filing of UCC Financing Statements in the locations listed below:

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------
             Debtor                                               Filing Jurisdiction
--------------------------------------------------------------------------------------------------
<S>                                                    <C>
Applied Analytical Industries, Inc.                    North Carolina Secretary of State
                                                       New Hanover County, North Carolina
                                                       Durham County, North Carolina
                                                       Delaware Secretary of State
                                                       Kansas Secretary of State
                                                       New Jersey Secretary of State
                                                       California Secretary of State
                                                       Massachusetts Secretary of the Commonwealth
                                                       Natick, Massachusetts Town Clerk
--------------------------------------------------------------------------------------------------
AAI Learning Center Inc.                               North Carolina Secretary of State
                                                       New Hanover County, North Carolina
                                                       Durham County, North Carolina
                                                       Delaware Secretary of State
                                                       Kansas Secretary of State
                                                       New Jersey Secretary of State
                                                       California Secretary of State
--------------------------------------------------------------------------------------------------
AAI Technologies, Inc.                                 North Carolina Secretary of State
                                                       New Hanover County, North Carolina
                                                       Durham County, North Carolina
                                                       Delaware Secretary of State
                                                       Kansas Secretary of State
                                                       New Jersey Secretary of State
                                                       California Secretary of State
--------------------------------------------------------------------------------------------------
AAI Properties, Inc.                                   North Carolina Secretary of State
                                                       New Hanover County, North Carolina
                                                       Durham County, North Carolina
                                                       Delaware Secretary of State
                                                       Kansas Secretary of State
                                                       New Jersey Secretary of State
                                                       California Secretary of State
--------------------------------------------------------------------------------------------------
</TABLE>


<PAGE>   25

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------
               Debtor                                            Filing Jurisdiction
--------------------------------------------------------------------------------------------------
<S>                                                    <C>
Kansas City Analytical Services, Inc.                  North Carolina Secretary of State
                                                       New Hanover County, North Carolina
                                                       Durham County, North Carolina
                                                       Delaware Secretary of State
                                                       Kansas Secretary of State
                                                       New Jersey Secretary of State
                                                       California Secretary of State
--------------------------------------------------------------------------------------------------
Medical and Technical Research Associates,             North Carolina Secretary of State
Inc.                                                   New Hanover County, North Carolina
                                                       Durham County, North Carolina
                                                       Delaware Secretary of State
                                                       Kansas Secretary of State
                                                       New Jersey Secretary of State
                                                       California Secretary of State
                                                       Massachusetts Secretary of the Commonwealth
                                                       Natick, Massachusetts Town Clerk
--------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>   26

                                   Schedule 3

                       Copyrights and Copyright Licenses

                                     None.


<PAGE>   27

                                   Schedule 4

                          Patents and Patent Licenses

TITLE:                     LIQUID ORAL PHARMACEUTICAL COMPOSITIONS OF NON-
                           STEROIDAL ANTI-INFLAMMATORY DRUGS (AAI 2)

PRIORITY FILING:           United States

PRIORITY DATE:             July 25, 1988

PATENT DATE:               April 17, 1990

PATENT NUMBER:             4,918,103

BREADTH OF FILING:         U.S. Only

ABSTRACT:                  A pharmaceutically elegant, one phase, liquid
                           composition for oral administration comprises a
                           NSAID such as ibuprofen plus a di- or triglyceride
                           of a medium chain fatty acid edible oil which has
                           the characteristics of a pharmaceutical solvent
                           carrier as known to those skilled in the art. Other
                           pharmaceutical additives may be optionally added. An
                           additional stipulation is that ethanol or other
                           monohydric alcohol solvents should not be present.

PRODUCTS:                  NSAIDs which have a reactive carboxylic acid moiety
                           in their chemical structures, providing esters of
                           NSAIDs.

                           Forms oral solutions, primarily of ibuprofen.


<PAGE>   28


TITLE:                     ORAL LIQUID PHARMACEUTICAL COMPOSITIONS OF
                           SULINDAC (AAI 4)

PRIORITY FILING:           United States

PRIORITY DATE:             November 3, 1988

PATENT DATE:               November 15, 1989

PATENT NUMBER:             4,880,835

BREADTH OF FILING:         United States Only

ABSTRACT:                  Pharmaceutically elegant oral liquid compositions
                           of sulindac are prepared using calcium sulindac in a
                           vehicle comprising a glycol, a polyol, optional
                           ethanol and pharmaceutical additives.

PRODUCT:                   Calcium sulindac


<PAGE>   29

TITLE:                     LIQUID ORAL PHARMACEUTICAL COMPOSITIONS OF NON-
                           STEROIDAL ANTI-INFLAMMATORY DRUGS (AAI 2-9)

PRIORITY FILING:           United States

PRIORITY DATE:             March 6, 1990

PATENT DATE:               April 30, 1991

PATENT NUMBER:             5,011,852

BREADTH OF FILING:         U.S. Only

ABSTRACT:                  A one phase, liquid composition for oral
                           administration comprises a NSAID such as an
                           indoleacetic acid derivative or a pyrroleacetic acid
                           derivative plus a di- or triglyceride of a medium
                           chain fatty acid edible oil which has the
                           characteristics of a pharmaceutical solvent carrier
                           as known to those skilled in the art. Other
                           pharmaceutical additives may be optionally added. An
                           additional stipulation is that ethanol or other
                           monohydric alcohol solvents should not be present.

PRODUCTS:                  NSAIDs which have a reactive carboxylic acid moiety
                           in their chemical structures.

                           Forms oral solutions, primarily of ibuprofen.


<PAGE>   30


TITLE:                     LIQUID ORAL PHARMACEUTICAL COMPOSITIONS OF NON-
                           STEROIDAL ANTI-INFLAMMATORY DRUGS (AAI 2-9-10)

PRIORITY FILING:           United States

PRIORITY DATE:             January 30, 1991

PATENT DATE:               October 22, 1992

PATENT NUMBER:             5,059,626

BREADTH OF FILING:         U.S. Only

ABSTRACT:                  A one phase, liquid composition for oral
                           administration comprises a NSAID such as an
                           anthranilic acid derivative plus a di- or
                           triglyceride of a medium chain fatty acid edible oil
                           which has the characteristics of a pharmaceutical
                           solvent carrier as known to those skilled in the
                           art. Other pharmaceutical additives may be
                           optionally added. An additional stipulation is that
                           ethanol or other monohydric alcohol solvents should
                           not be present.

PRODUCTS:                  NSAIDs which have a reactive carboxylic acid moiety
                           in their chemical structures, providing esters of
                           NSAIDs.

                           Forms non-aqueous oral solution, primarily of
                           ibuprofen.


<PAGE>   31

TITLE:                     LIQUID ORAL PHARMACEUTICAL COMPOSITIONS OF NON-
                           STEROIDAL ANTI-INFLAMMATORY DRUGS (AAI 11)

PRIORITY FILING:           United States

PRIORITY DATE:             September 27, 1991

PATENT DATE:               February 2, 1993

PATENT NUMBER:             5,183,829

BREADTH OF FILING:         U.S. Only

ABSTRACT:                  Pharmaceutically elegant oral compositions of
                           non-steroidal anti-inflammatory drugs or their salts
                           are prepared by adding selected dispersing agents
                           such as a polyvinylpyrrolidone, hydroxypropyl-
                           methylcellulose or hydroxypropylcellulose to the
                           NSAIDs in a medium of polyol-glycol-alcohol. The
                           compositions offer the formation of finely dispersed
                           active ingredients upon dispersion in gastric juice.

                           Note: This patent is the basis Of AAI's PROSORB
                           TECHNOLOGY.

PRODUCTS:                  NSAIDs which have a reactive carboxylic acid moiety
                           in their chemical structure.

                           Forms oral solutions, primarily of diclofenac,
                           fenoprofen, flurbiprofen, ibuprofen indomethacin,
                           ketoprofen, naproxen, etodolac and sulindac.


<PAGE>   32

TITLE:                     ORAL COMPOSITIONS OF PROTEINACEOUS MEDICAMENTS
                           (AAI-12)

PRIORITY FILING:           United States

PRIORITY DATE:             November 25, 1991

PATENT DATE:               April 27, 1993

PATENT NUMBER:             5,206,219

BREADTH OF FILING:         U.S. Only

ABSTRACT:                  Proteinaceous medicaments such as erythropoetin,
                           insulin and calcitonin are formulated in a medium
                           comprising a polyol pharmaceutical solvent combined
                           as a co-solvent with a lipid pharmaceutical solvent.
                           The formulation is adapted for oral administration
                           as a liquid as well as a filled hard or soft gelatin
                           capsule. The preferred polyol solvent is
                           polyethylene glycol/propylene glycol; the preferred
                           lipid solvent is oleic acid.

PRODUCTS:                  Enteric coated oral composition having a protease
                           inhibitor and a proteinaceous medicament selected
                           from erythropoietin, insulin, a growth hormone,
                           calcitonin, growth colony stimulating factor,
                           cyclosporin, vasopressin, a vasopressin agonist,
                           +-PA, vampire bat plasminogen amplifier, urokinase,
                           streptokinase, interferon, and interleukin.


<PAGE>   33


TITLE:                     ORAL COMPOSITIONS OF H2-ANTAGONISTS (AAI 18)

PRIORITY FILING:           United States

PRIORITY DATE:             November 30, 1994

PATENT DATE:               July 23, 1996

PATENT NUMBER:             5,538,737

BREADTH OF FILING:         PCT/US95/15256        Date: November 25, 1995
                           All Countries

ABSTRACT:                  The present invention provides pharmaceutical
                           capsule compositions of the oral administration of
                           an H2-antagonist. The composition includes a capsule
                           containing an emulsion having a water portion and an
                           oil portion. A pharmaceutically acceptable sale of
                           an H2-antagonist is dissolved in the water portion.
                           The composition delivers a therapeutically effective
                           amount of the H2-antagonist to a patient in need
                           thereof. The present invention also provides methods
                           of making the capsule composition.

Products:                  H2-antagonists such as ranitidine, cimetidine,
                           nizatidine, famotidine, sufotidine, roxatidine,
                           bisfentidine, tiotidine, lamtidine, niperotidine,
                           mifentidine, zaltidine, and loxtidine.


<PAGE>   34

TITLE:                     ORAL COMPOSITIONS OF H2-ANTAGONISTS (AAI 14-16-19)

PRIORITY FILING:           United States

PRIORITY DATE:             February 2, 1995

PATENT DATE:               April 22, 1997

PATENT NUMBER:             5,622,980

BREADTH OF FILING:         PCT/US96/00712        Date: January 18, 1996
                           All Countries

ABSTRACT:                  The present invention provides a pharmaceutical
                           composition for the oral administration of an
                           H2-antagonist. The composition includes an H2-
                           antagonist and a silicate TASTE-MAKING AGENT capable
                           of forming an absorbable complex with the
                           H2-antagonist wherein the complex exhibits a
                           non-bitter taste. The complex inhibits the release
                           of the H2-antagonist in the oral cavity.

PRODUCTS:                  H2-antagonists such as ranitidine, cimetidine,
                           nizatidine, famotidine, sufotidine, roxatidine,
                           bisfentidine, tiotidine, lamtidine, niperotidine,
                           mifentidine, zaltidine, and loxtidine.


<PAGE>   35

TITLE:                     PHARMACEUTICAL GRINDING APPARATUS AND METHOD FOR
                           USING SAME

PRIORITY FILING:           United States

PRIORITY DATE:             February 29, 1996

PATENT DATE:               March 31, 1998

PATENT NUMBER:             5,733,173

BREADTH OF FILING:         United States

ABSTRACT:                  An apparatus for grinding a solid material into a
                           granulated powder formed of particles of generally
                           uniform size includes: a mounting frame; a grinding
                           vessel mounted on the mounting frame which has a
                           grinding cavity defined by a substantially planar
                           floor, a substantially planar ceiling parallel and
                           opposed to the vessel floor, and a substantially
                           circular internal wall; a circular grinding disk
                           positioned within the grinding cavity; and a drive
                           motor or other revolving means for revolving the
                           grinding vessel along an essentially circular path.
                           The revolving motion of the grinding cavity should
                           cause the grinding disk to contact and roll a solid
                           material against the cavity internal wall and
                           thereby grind a solid material contained therein
                           into granules of substantially uniform size.


<PAGE>   36

TITLE:                     CONTROLLED RELEASE DELIVERY COATING FORMULATION FOR
                           BIOACTIVE SUBSTANCES (PROCORE)

PRIORITY FILING:           United States

PRIORITY DATE:             September 3, 1987

PATENT DATE:               January 2, 1990

PATENT NUMBER:             4,891,223

BREADTH OF FILING:         Belgium, Canada, Denmark, France, Germany, Great
                           Britain, Italy, Netherlands, Norway, Republic of
                           Korea, Spain, South Africa, Switzerland, Taiwan

ABSTRACT:                  The present invention relates to a bioactive
                           composition having a controlled, sustained release
                           delivery pattern when contacted with a suitable
                           surrounding media. The composition comprises a
                           pharmaceutically, insecticidally, herbicidally or
                           fertilizing bioactive material core, soluble in a
                           given surrounding media, the core present in an
                           amount at least sufficient for a total dosage during
                           a specified treatment period; a first coating
                           enveloping the bioactive material core comprising a
                           polymer or a blend of polymers, said polymer or
                           blend of polymers being swellable upon penetration
                           by the surrounding media; and a second coating
                           enveloping the first coating, the second coating
                           comprising a polymer or a blend of polymers being
                           water-insoluble and forming a semipermeable barrier
                           to the inward diffusion of the surrounding media and
                           the outward diffusion of the bioactive material
                           dissolved in the surrounding media.

PRODUCTS:                  Any medicament requiring a sustained release
                           delivery pattern including zero-order and bi-phasic
                           release patterns.

This patent was assigned to AAI by Air Products and Chemicals, Inc. on November
1, 1996.


<PAGE>   37


                                  Schedule 5

                       Trademarks and Trademark Licenses

                                     None.


<PAGE>   38


                                  Schedule 6

                    Contracts with Governmental Authorities

                                     None.