EXHIBIT 10.5

                               SECURITY AGREEMENT

THIS SECURITY AGREEMENT (this "Agreement") is dated and entered into as of
December 10, 2001, by and between DISCOVERY LABORATORIES, INC., a Delaware
corporation ("Borrower"), and PHARMABIO DEVELOPMENT INC., a North Carolina
corporation ("Lender").

                                   WITNESSETH:

      WHEREAS, Borrower and Lender are parties to a Loan Agreement (as amended,
modified or supplemented from time to time, the "Loan Agreement") dated as of
the same date hereof, pursuant to which, among other things, Borrower is
delivering to Lender the Note (as defined in the Loan Agreement); and

      WHEREAS, it is a condition precedent to the performance of Lender under
the Loan Agreement that Borrower enter into this Agreement;

      NOW, THEREFORE, in consideration of the benefits to Borrower, the receipt
and legal sufficiency of which are hereby acknowledged, Borrower hereby makes
the following representations and warranties to Lender and hereby covenants and
agrees with Lender as follows:

      1. Definitions. The following terms, as used in this Agreement, shall have
the following meanings:

      "Collateral" shall mean (but only to the extent the following elements of
the Collateral relate to or arise out of or in connection with the sale, lease,
license, conveyance, transfer or disposition of any right, title or interest in,
to or under the Product, the Product Intellectual Property, or the Product
Agreements in the Territory) all right, title and interest of Borrower in, to
and under any and all of the following, whether now existing or hereafter
existing or acquired from time to time, in the Territory: (a) all Accounts,
Chattel Paper, Contract Rights, Contracts, Commercial Tort Claims, Deposit
Accounts, Documents, General Intangibles, Instruments, monies, Payment
Intangibles, Promissory Notes and Receivables, relating to, arising out of or in
connection with any sale, lease, license, conveyance, transfer or disposition of
any right, title or interest in, to or under the Product, the Product
Intellectual Property, or the Product Agreements; (b) all regulatory
applications, filings or similar items related to the Product, including without
limitation the NDA for the Product and all supplements, records, and reports
that are required to be maintained under applicable FDA regulations and all
related correspondence to and from the FDA, and all clinical data related to any
such regulatory applications, filings or similar items; (c) all books, records,
computer information, files, documents, data or other materials related to or
arising out of or in connection with any and all of the foregoing; and (d) all
Proceeds of any and all of the foregoing; provided, however, that the Collateral
shall not include the Product Intellectual Property or Product Agreements
themselves; provided, further, that the Collateral
<PAGE>

shall not include Proceeds derived from or in connection with the sale, lease,
license, conveyance, transfer or disposition of any right, title or interest in
Intellectual Property of the Borrower to the extent, and only to the extent,
that such Proceeds relate to the sale, lease, license, conveyance, transfer or
disposition of any right, title or interest in products other than the Product.

      "Contracts" shall mean all contracts, agreements and licenses between
Borrower and one or more other parties, or under or with respect to which
Borrower has rights.

      "Contract Rights" shall mean all rights of Borrower (including, without
limitation, all rights to payment) under each Contract.

      "FDA" shall mean the United States Food and Drug Administration.

      "Intellectual Property" shall mean all: trade, business and product names;
trademarks; service marks; copyrights; patents; discoveries; trade secrets;
business and technical information; proprietary compilations of data or
information; know-how; inventions; formulas and techniques; methods; regulatory
filings; computer software; all intellectual property rights, registrations,
licenses and applications pertaining to any of the foregoing; and all related
documentation and goodwill.

      "License Agreement" shall mean the Sublicense Agreement dated October 28,
1996 between Johnson & Johnson and Ortho Pharmaceutical Corporation, as
licensors, and the Company (formerly known as Acute Therapeutics, Inc.), as
licensee (including any amendment, restatement, replacement, etc. thereof).

      "Liens" shall mean any lien, security interest, mortgage, pledge or
encumbrance.

      "NDA" shall mean a "new drug application" as such term is used under the
United States Federal Food, Drug and Cosmetic Act and regulations promulgated
thereunder.

      "Obligations" shall mean all indebtedness, obligations and liabilities of
Borrower to Lender arising under or in connection with the Note (as defined in
the Loan Agreement) and under or in connection with each of the Loan Agreement
and this Agreement.

      "Permitted Liens" shall mean any of the following: (a) liens for taxes,
assessments or other governmental charges incurred in the ordinary course of
business and for which no interest, late charge or penalty is attaching or which
are being contested in good faith by appropriate proceedings; (b) liens, not
delinquent, created by statute in connection with worker's compensation,
unemployment insurance, social security and similar statutory obligations; and
(c) liens of mechanics, materialmen, carriers, warehousemen or other like
statutory or common law liens securing obligations incurred in good faith in the
ordinary course of business that are not due and payable.

      "Product" shall mean the product currently known as Surfaxin, as such name
may change from time to time, for any and all formulations and delivery
mechanisms for the indications of


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<PAGE>

idiopathic respiratory distress syndrome ("IRDS"), meconium aspiration syndrome
("MAS"), and acute respiratory distress syndrome ("ARDS"); provided, however,
that upon the occurrence of the First Milestone (as defined in the Investment
and Commission Agreement referred to in the Loan Agreement), the Product shall
not include the indication of ARDS.

      "Product Intellectual Property" shall mean all Intellectual Property which
is embodied, used or included in, or which otherwise comprises or constitutes
the Product.

      "Product Agreements" shall mean the License Agreement and the Research
Agreement.

      "Receivable" shall mean any "account" as such term is defined in the
Uniform Commercial Code as in effect on the date hereof and as in effect from
time to time in the State of Delaware, and, in any event, shall include, but
shall not be limited to, all of Borrower's rights to payment for goods sold,
leased or licensed or services performed by Borrower, whether now in existence
or arising from time to time hereafter, including, without limitation, rights
evidenced by an account, note, contract, security agreement, chattel paper or
other evidence of indebtedness or security, together with (a) all security
pledged, assigned, hypothecated or granted to or held by Borrower to secure the
foregoing, (b) all of Borrower's right, title and interest in and to any goods,
the sale of which gave rise thereto, (c) all guarantees, endorsements and
indemnifications on, or of, any of the foregoing, (d) all powers of attorney for
the execution of any evidence of indebtedness or security or other writing in
connection therewith, (e) all books, records, ledger cards, and invoices
relating thereto, (f) all evidences of the filing of financing statements and
other statements and the registration of other instruments in connection
therewith and amendments thereto, notices to other creditors or secured parties,
and certificates from filing or other registration officers, (g) all credit
information, reports and memoranda relating thereto and (h) all other writings
related in any way to the foregoing.

      "Research Agreement" shall mean the Research Funding and Option Agreement
dated March 1, 2000 between the Scripps Research Institute and the Company
(including any amendment, restatement, replacement, etc. thereof).

      "Territory" shall mean the United States (including Puerto Rico).

      All capitalized terms not expressly defined herein are used as such terms
are defined in the Uniform Commercial Code as in effect on the date hereof and
as in effect from time to time in the State of Delaware.

      2. Grant of Security Interests. As security for the prompt and complete
payment and performance of all of the Obligations, Borrower does hereby assign,
transfer, pledge, and hypothecate unto Lender, and does hereby grant to Lender,
subject to Permitted Liens, a continuing security interest of first priority in,
all of the right, title, and interest of Borrower in, to, and under the
Collateral.

      3. Representations and Warranties of Borrower. Borrower represents and
warrants to Lender as follows:


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<PAGE>

            (a) The execution and delivery by Borrower of this Agreement and the
financing statements described herein (collectively, the "Security Documents"),
and the performance of the terms and obligations therein, are within Borrower's
corporate powers and have been duly authorized by all necessary corporate action
on the part of Borrower. The Security Documents have been duly executed and
delivered by Borrower and constitute valid and legally binding obligations of
Borrower enforceable against Borrower in accordance with their terms except as
such enforceability may be limited by bankruptcy, insolvency, moratorium,
reorganization or other similar laws affecting the enforcement of creditors'
rights generally and as to limitations on the enforcement of the remedy of
specific performance and other equitable remedies.

            (b) Borrower is the owner of the Collateral and has good, valid and
marketable title to the Collateral, free and clear of all Liens except for those
in favor of Lender and Permitted Liens.

            (c) Except for the filing of financing statements with the State of
Delaware and, only in the case of any patent and trademark matters, filings with
the United States Patent and Trademark Office and, only in the case of any
copyright matters, filings with the United States Copyright Office, necessary to
perfect the security interests created hereunder, no authorization, approval, or
other action by, and no notice to or filing with, any governmental authority or
regulatory body is required either for the grant by Borrower of the security
interest hereunder or for the execution, delivery, or performance of this
Agreement by Borrower or for the perfection of such security interest or the
exercise by Lender of its rights hereunder to the Collateral, except for those
elements of Collateral that constitute monies or Deposit Accounts. Upon the
execution of this Agreement and the completion of such filings in compliance
with all applicable legal requirements, Lender will have a perfected, first
priority security interest in the Collateral (other than those elements of
Collateral that constitute monies or Deposit Accounts).

            (d) Neither the execution or delivery by Borrower of the Security
Documents, nor the performance of their respective terms and obligations, will
(i) violate Borrower's charter or bylaws, (ii) constitute a material breach or
default under any agreement or instrument to which Borrower is a party or by
which Borrower is bound; (iii) violate any applicable law, rule or regulation,
or (iv) violate any order, writ, injunction, decree or judgment of any court or
governmental authority applicable to or binding upon Borrower.

      4. Transfer of Collateral and Other Liens. The provisions of Sections 5.02
and 5.04 of the Loan Agreement are hereby incorporated herein by reference.

      5. Other Financing Statements. Borrower represents, warrants and covenants
to and with Lender that: there exists no financing statement (or similar
statement or instrument of registration under the law of any jurisdiction)
covering or purporting to cover any security interest of any kind in the
Collateral, and Borrower will not execute or authorize to be filed in any public
office any financing statement (or similar statement or instrument of
registration under the law of any jurisdiction) relating to the Collateral, as
applicable, except financing statements (or similar statements or instruments of
registration under the law of any jurisdiction)


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<PAGE>

filed or to be filed in respect of and covering the security interests granted
to Lender by Borrower.

      6. Further Assurances.

            (a) Borrower, upon reasonable request of Lender, will promptly
deliver and execute or cause to be delivered and executed, in form and content
satisfactory to Lender, any financing, continuation, termination, or security
interest filing statements, security agreement, assignment, or other document or
instrument as Lender may reasonably request in order to perfect, preserve,
maintain, or continue the perfection of Lender's security interest in the
Collateral, or its priority, including without limitation any document or
instrument necessary to record Lender's security interest in any state or county
of any state, the United States Patent and Trademark Office or the United States
Copyright Office. Borrower will pay the reasonable costs of filing any
financing, continuation, termination, or security interest filing statement,
assignment or other document or instrument as well as any recordation or
transfer tax required by law to be paid in connection with the filing or
recording thereof.

            (b) Borrower will, at its own expense, make, execute, endorse,
acknowledge, file and/or deliver to Lender from time to time such lists,
descriptions and designations of its Collateral, documents of title, vouchers,
invoices, schedules, confirmatory assignments, conveyances, financing
statements, transfer endorsements, powers of attorney, certificates, reports and
other assurances or instruments and take such further steps relating to the
Collateral and other property or rights covered by the security interest hereby
granted, as reasonably requested by Lender or which is necessary to perfect,
preserve or protect its security interest in the Collateral.

            (c) Upon the occurrence of the First Milestone (as defined in the
Investment and Commission Agreement referred to in the Loan Agreement), Lender
shall, at the request of Borrower, promptly, and in no event later than ten (10)
Business Days thereafter, make, execute, endorse, acknowledge, file and/or
deliver to Borrower and all agreements, certificates, instruments or other
documents, and take all other action, as reasonably requested by Borrower, to
release the Collateral and terminate the security interests granted, pledged or
secured hereunder to the extent that the Collateral or any security interest
granted, pledged or secured hereunder arises out, under or in connection with
solely the ARDS indication for the Product.

            (d) Upon the irrevocable payment in full of all Advances and accrued
interest thereon and the termination or expiration of the Commitment, Lender
shall, at the request of Borrower, promptly, and in no event later than ten (10)
Business Days thereafter, make, execute, endorse, acknowledge, file and/or
deliver to Borrower any and all agreements, certificates, instrument or other
documents, and take all other action, as reasonably requested by Borrower, to
release all of the Collateral and effectuate the termination of all of the
security interests granted, pledged or secured hereunder.


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<PAGE>

      7. Additional Agreements.

            (a) Insurance. Borrower shall maintain insurance on the Collateral
with financially sound and reputable insurance companies and in such amounts as
are customary in Borrower's industry, to the extent that it is customary in
Borrower's industry to insure a particular item of Collateral.

            (b) Ownership and Maintenance of the Collateral. Borrower shall,
subject to normal wear and tear, keep all tangible Collateral, if any, in good
condition. Borrower shall defend the Collateral against all claims and demands
of all persons at any time claiming any interest therein adverse to Lender.

            (c) Taxes. Borrower shall pay as and when due and payable all taxes,
levies, license fees, assessments, and other impositions levied on the
Collateral or any part thereof for its use and operations, except for all taxes,
levies, license fees, assessments, and other impositions levied on the
Collateral which are being contested by the Borrower in good faith.

            (d) Litigation and Proceedings. Borrower shall commence and
diligently prosecute in its own name, as the real party in interest, for its own
benefit, and at its own expense, such suits, administrative proceedings, or
other actions for infringement or other damages as are necessary to protect the
Collateral. Borrower shall provide to Lender any information with respect
thereto reasonably requested by Lender.

      8. Power of Attorney. Borrower hereby appoints Lender as Borrower's true
and lawful attorney, with full power of substitution, to do any or all of the
following, in the name, place, and stead of Borrower, as the case may be: (a)
file this Agreement (or an abstract hereof) or any other document describing
Lender's interest in the Collateral with any appropriate governmental office
(including, without limitation, the State of Delaware or any political
subdivision thereof and the United States Patent and Trademark Office or the
United States Copyright Office); and (b) following an Event of Default that has
occurred and is continuing and not cured prior to the expiration of any
applicable cure or grace periods set forth in the Loan Agreement, (i) endorse
Borrower's name on all applications, documents, papers, and instruments
necessary for Lender to use or maintain the Collateral, as applicable; (ii) ask,
demand, collect, sue for, recover, impound, receive, and give acquittance and
receipts for money due or to become due under or in respect of any of the
Collateral; (iii) file any claims or take any action or institute any
proceedings that Lender may deem necessary or desirable for the collection of
any of the Collateral, or otherwise enforce Lender's rights with respect to any
of the Collateral; (iv) assign, pledge, convey, or otherwise transfer title in
or dispose of the Collateral, to any person; and (v) take any action and execute
any instrument that Lender may deem necessary or advisable to accomplish the
purposes of this Agreement.

      9. Right to Inspect. Subject to (i) all applicable legal requirements,
including without limitation, those requirements of the FDA and (ii) the
agreement of Lender, on its behalf and on behalf of its employees, to ensure
that the Lender and its employees comply with all of the confidentiality
obligations set forth in any confidentiality agreement between the parties,
Borrower grants to Lender and its employees and agents the right to visit
Borrower's plants,


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<PAGE>

corporate offices, and facilities to inspect the Collateral at reasonable times
during regular business hours with prior written notice to Borrower.

      10. Name of Borrower, Place of Business, and Location of Collateral.
Borrower represents and warrants that its correct legal name is as specified on
the signature lines of this Agreement, and each legal or trade name of Borrower
for the previous seven (7) years (if different from Borrower's current legal
name) is as specified below the signature lines of this Agreement. Without the
prior written notice to Lender of at least forty-five (45) days, Borrower will
not change its name, change its state of incorporation, dissolve, merge, or
consolidate with any other person. Borrower represents and warrants that its
state of incorporation is as specified in the preamble to this Agreement and
that the address of its chief executive office is as specified below the
signature lines of this Agreement. The Collateral and all books and records
pertaining thereto will be located at Borrower's chief executive office
specified below. Borrower may establish a new location for the Collateral or any
part thereof, or the books and records concerning the Collateral or any part
thereof, only if (a) it shall have given to Lender prior written notice of its
intention so to do, clearly describing such new location and providing such
other information in connection therewith as Lender may reasonably request, and
(b) with respect to such new location, it shall have taken all action necessary
to maintain the security interest of Lender in the Collateral intended to be
granted hereby at all times fully perfected and in full force and effect.

      11. Rights and Remedies upon Default.

            (a) Borrower agrees that, if any Event of Default (as defined in the
Loan Agreement) shall have occurred and is continuing and not cured prior to the
expiration of any applicable cure or grace periods set forth in the Loan
Agreement, then and in every such case, Lender, in addition to any rights now or
hereafter existing under applicable law, and upon written notice to Borrower,
shall have all rights as a secured creditor under the Uniform Commercial Code in
all relevant jurisdictions and may:

                  (i) personally, or by agents or attorneys, immediately take or
            retake possession of the Collateral or any part thereof;

                  (ii) instruct the obligor or obligors on any agreement,
            instrument or other obligation constituting the Collateral to make
            any payment required by the terms of such agreement, instrument or
            obligation directly to Lender;

                  (iii) sell, assign or otherwise liquidate, or direct Borrower
            to sell, assign or otherwise liquidate, any or all of the Collateral
            or any part thereof, and take possession of the proceeds of any such
            sale or liquidation; and

                  (iv) take possession of the Collateral or any part thereof by
            directing Borrower in writing to deliver the same to Lender at any
            place or places designated by Lender; it being understood that
            Borrower's obligation so to deliver the Collateral is of the essence
            of this Agreement and that, accordingly, upon


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<PAGE>

            application to a court of equity having jurisdiction, Lender shall
            be entitled to a decree requiring specific performance by Lender of
            said obligation.

            (b) In the event that an Event of Default has occurred and is
continuing and not cured prior to the expiration of any applicable cure or grace
periods set forth in the Loan Agreement, Borrower shall pay on demand all costs
and expenses, including, without limitation, reasonable attorneys' fees and
expenses, incurred by or on behalf of Lender (i) in enforcing the Obligations,
and (ii) in connection with the taking, holding, preparing for sale or other
disposition, selling, managing, collecting, or otherwise disposing of the
Collateral. All of such costs and expenses (collectively, the "Liquidation
Costs") together with interest thereon at the interest rate specified in the
Note, from the date of payment until repaid in full, shall be paid by Borrower
to Lender on demand and shall constitute and become a part of the Obligations
secured hereby. Any proceeds of sale or other disposition of the Collateral will
be applied by Lender to the payment of Liquidation Costs, and any balance of
such proceeds will be applied by Lender to the payment of the remaining
Obligations in such order and manner of application as Lender may determine.
Borrower hereby grants to Lender, as security for the full and punctual payment
and performance of the Obligations, a continuing security interest in and lien
on all now or hereafter existing balances, credits, accounts, deposits, and all
other sums credited by, maintained with, or due from Lender or any affiliate of
Lender to Borrower; and regardless of the adequacy of any Collateral or other
means of obtaining repayment of the Obligations, Lender may at any time and
without notice to Borrower set off the whole or any portion or portions of any
or all such balances, credits, accounts, deposits, and other sums against any
and all of the Obligations.

            (c) If the sale or other disposition of the Collateral fails to
satisfy in full the Obligations, Borrower shall remain liable to Lender for any
deficiency.

      12. Remedies Cumulative. Each right, power, and remedy of Lender as
provided for in this Agreement or now or hereafter existing at law or in equity
or by statute or otherwise shall be cumulative and concurrent and shall be in
addition to every other right, power, or remedy provided for in this Agreement
or now or hereafter existing at law or in equity or by statute or otherwise, and
the exercise or beginning of the exercise by Lender of any one or more of such
rights, powers, or remedies shall not preclude the simultaneous or later
exercise by Lender of any or all such other rights, powers, or remedies.

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

      14. Notices. All notices and other communications provided for hereunder
shall be in writing, shall specifically refer to this Agreement, shall be
addressed to the receiving party's address set forth below or to such other
address as a party may designate by notice hereunder and shall be deemed to have
been sufficiently given for all purposes if (i) mailed by first class certified
or registered mail, postage prepaid, (ii) sent by nationally recognized


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<PAGE>

overnight courier for next business day delivery, (iii) personally delivered, or
(iv) made by telecopy or facsimile transmission with confirmed receipt.

         If to Lender:

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

         with a copy to:

         Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P.
         2500 First Union Capitol Center
         Raleigh, NC 27601
         Attention: Christopher B. Capel
         Facsimile: (919) 821-6800

         If to Borrower:

         Discovery Laboratories, Inc.
         350 Main Street, Suite 307
         Doylestown, PA 18901-4874
         Attention: President and General Counsel
         Facsimile: (215) 340-3940

         with a copy to:

         Roberts Sheridan & Kotel
         The New York Practice of Dickstein Shapiro's
           Corporate & Finance Group
         1177 Avenue of the Americas
         New York, NY 10036-2714
         Attention: Ira L. Kotel
         Facsimile: (212) 835-1400

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

      16. Binding Effect; Assignment. This Agreement shall be binding upon and
inure to the benefit of Borrower and Lender and their respective successors and
assigns, provided that


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<PAGE>

neither Borrower nor Lender may assign or transfer any or all of its rights or
obligations under the Security Documents without the prior written consent of
the other party and any attempted assignment without consent shall be null and
void; provided, however, that Lender may at any time assign or transfer any of
its rights or obligations under the Security Documents to an Affiliate of Lender
so long as such Affiliate agrees in an enforceable written instrument to be
bound by all the terms and conditions of the Security Documents as if it were
Lender and a party hereto, which instrument shall be delivered a reasonably
practicable time prior to such an assignment.

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

      18. Entire Agreement. This Agreement and the other Loan Documents and
Security Documents embody the entire agreement and understanding between the
parties hereto and supersede all prior oral or written agreements and
understandings relating to the subject matter hereof. No statement,
representation, warranty, covenant or agreement of any kind not expressly set
forth in the Loan Documents and Security Documents shall affect, or be used to
interpret, change or restrict, the express terms and provisions of the Loan
Documents and Security Documents.

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

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

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

      22. Internal Review. In the event that a dispute, difference, claim,
action, demand, request, investigation, controversy, threat, discovery request
or request for testimony or information or other question arises pertaining to
any matters which arise under, out of, in connection with, or in relation to
this Agreement (a "Dispute") and either party so requests in writing, prior to
the initiation of any formal legal action, the Dispute will be submitted to the
JCC (as defined in the Commercialization Agreement), which will use its good
faith efforts to resolve the Dispute within ten (10) days. If the JCC is unable
to resolve the Dispute in such period, the JCC will refer the Dispute to the
Chief Executive Officers of Borrower and Lender. For all Disputes referred to
the Chief Executive Officers, the Chief Executive Officers shall use


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<PAGE>

their good faith efforts to meet at least two times in person and to resolve the
Dispute within ten (10) days after such referral.

      23. Arbitration. (a) If the parties are unable to resolve any Dispute
under Section 22, then either party may require the matter to be settled by
final and binding arbitration by sending written notice of such election to the
other party clearly marked "Arbitration Demand". Thereupon such Dispute shall be
arbitrated in accordance with the terms and conditions of this Section 23.
Notwithstanding the foregoing, either party may apply to a court of competent
jurisdiction for a temporary restraining order, a preliminary injunction, or
other equitable relief to preserve the status quo or prevent irreparable harm.

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

      (c) Nothing contained herein shall operate to prevent either party from
asserting counterclaim(s) in any arbitration commenced in accordance with this
agreement, and any such party need not comply with the procedural provisions of
this Section 23 in order to assert such counterclaim(s).

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

      (e) The arbitrators shall have the sole authority to decide whether or not
any Dispute between the parties is arbitrable and whether the party presenting
the issues to be arbitrated has satisfied the conditions precedent to such
party's right to commence arbitration as required by this Section 23.

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


                                       11
<PAGE>

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

      (h) The parties shall bear their own costs in preparing for and
participating in the resolution of any Dispute pursuant to this Section 23, and
the costs of the arbitrator(s) shall be equally divided between the parties;
provided, however, that each party shall bear the costs incurred in connection
with any Dispute brought by such party that the arbitrators determine to have
been brought in bad faith.

      (i) Except as provided in the last sentence of Section 23(a), the
provisions of this Section 23 shall be a complete defense to any suit, action or
proceeding instituted in any federal, state or local court or before any
administrative tribunal with respect to any Dispute arising with regard to this
Agreement. Any party commencing a lawsuit in violation of this Section 23 shall
pay the costs of the other party, including, without limitation, reasonable
attorney's fees and defense costs.

              [THE REMAINDER OF THE PAGE IS INTENTIONAL LEFT BLANK;
                          SIGNATURES ON FOLLOWING PAGE]


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<PAGE>

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

                                       BORROWER:

                                       DISCOVERY LABORATORIES, INC.


                                       By: /s/ David L. Lopez
                                          --------------------------------------
                                       Name: David L. Lopez
                                       Title: Vice President and General Counsel

Legal or tradename of Borrower for the previous seven (7) years

1.    Ansan Pharmaceuticals, Inc.

2.    Ansan, Inc.

Address of chief executive office of Borrower

Discovery Laboratories, Inc.
350 Main Street, Suite 307
Doylestown, PA 18901-4874

                                       LENDER:

                                       PHARMABIO DEVELOPMENT INC.


                                       By: /s/ Thomas C. Perkins
                                          --------------------------------------
                                       Name: Thomas C. Perkins
                                       Title: Vice President and General Counsel


                                       13