Document:

Unassociated Document

    Exhibit
      4.10
      February
        24, 2005

      

      

      InSite
        Vision Incorporated

      S.
        Kumar
        Chandrasekaran, Ph.D.

      President
        and Chief Executive Officer

      965
        Atlantic Avenue

      Alameda,
        CA 94501

      Placement
        Agent Agreement

      

      Dear
        Dr.
        Chandrasekaran:

      

      

      Reference
        is made to our recent discussions relating to the proposed private placement
        by
        InSite Vision Incorporated (the “Company”), of certain of its securities
        pursuant to Rule 506 of Regulation D of the Securities Act of 1933 (the “Act”),
        as hereinafter described. Based upon our discussions, your representations
        to us
        and our investigation of the Company and its principals, the present and
        proposed business activities of the Company and the Company's operations
        and
        financial condition, Paramount BioCapital, Inc. (“Paramount”) hereby agrees to
        act as exclusive placement agent for the Company, on a “best efforts” basis, to
        introduce the Company to qualified investors (“Investors”) in connection with a
        private placement offering (the “Offering”) of the Company's securities, upon
        the following basic terms and conditions:

      

      1.The
        Offering. The
        Company will offer to sell debt or equity securities ( the “Securities”)
        representing or convertible into the Company’s common stock, par value $0.01 per
        share (the “Common Stock”), to persons who qualify as “accredited investors” as
        defined in Rule 501 of Regulation D promulgated under the Act upon terms
        to be
        agreed upon by such Investors and the Company (the “Offering”) yielding
        aggregate gross proceeds to the Company of up to $10 Million (the “Maximum
        Offering”). The terms and conditions of the purchase and sale of the Securities
        in the Offering will be evidenced by a written subscription agreement between
        the Company and each investor in the Offering (the “Subscription Agreement”).
        For purposes of this letter agreement, the term “Offering Documents” shall mean
        the Subscription Agreements and related transaction documents to be drafted
        subsequent to the date hereof but prior to the offering of any of the Company’s
        Securities and any other document prepared or approved by the Company and
        provided to investors in connection with the Offering, if any (collectively
        the
“Offering Documents”).

      

      2. Closing. Subject
        to agreement between the Investors and the Company with respect to the Offering
        Documents, the Company intends to conduct one or more closings (each a
“Closing”) of the Offering on or before March 31, 2005 subject to extension at
        the Company’s discretion without notice to investors for up to an additional 90
        days (the “Final Closing Date”), until the date on which the Maximum Offering is
        met. Prior to any Closing, all subscription amounts will be deposited in
        a
        segregated escrow account with an escrow agent reasonably acceptable to the
        Company and Paramount. Unless terminated earlier in either the Company’s or
        Paramount’s sole discretion, the offering period (the “Offering Period”) will
        expire on the earlier of (i) the Final Closing Date; (ii) the date on which
        the
        Maximum Offering has been sold (iii) and March 31, 2005 (only if no Closing
        shall occur) (the “Termination Date”).

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      4. Placement
        Fees. Subject
        to the reduced Cash Commissions in the case of Affiliated Investments, as
        set
        forth below, (a) upon (i) each Closing and (ii) the closing of any Investment
        (as defined below), the Company will (x) pay to Paramount or its designees
        placement fees, in cash, equal to seven percent (7%) of the proceeds received
        by
        the Company at such Closing or at the closing of such Investment, as applicable
        (the “Cash Commissions”) and (y) issue to Paramount or its designees warrants
        (the “Placement Warrants”) to purchase a number of shares of the Securities (the
“Placement Warrant Shares”) equal to 5% of the number of Securities actually
        sold (not including warrants or other securities for which no cash consideration
        was received upon issuance) at each Closing or at the closing of each Investment
        (as applicable) (the Cash Commissions and Placement Warrants are referred
        to
        collectively herein as the “Placement Fees”). The Placement Warrants, a form of
        which shall be agreed to in good faith by the parties and based substantially
        on
        the form of placement warrant previously issued by the Company to Paramount,
        shall have a purchase price of $0.02 per Placement Warrant (payable by Paramount
        to the Company upon issuance of each such Placement Warrant) and shall have
        an
        exercise price per share equal to 110% of the per share price at which the
        Securities are sold at the Closing or in the Investment (as applicable),
        adjust
        for stock splits, reverse stock splits, re-organizations, etc., have a cashless
        exercise feature, and be exercisable for 5 years from the Final Closing Date.
        For purposes of this Agreement, an “Investment” shall mean any original issuance
        of securities of the Company which is made during the 12-month period following
        the Termination Date or earlier termination or expiration of the Offering
        to an
        investor first introduced to the Company by or through Paramount (each an
        “Investor”). Investors will include any person or entity that participates in
        the Offering. Additionally, Paramount will provide the Company with a list
        of
        the Investors introduced to the Company on the date of the Termination Date
        or
        earlier termination or expiration of this Agreement that did not participate
        in
        any Offering, but were nevertheless introduced to the Company by Paramount.
        Such
        list will include (i) Proquest and Proquest’s affiliated funds specifically
        named in the schedule attached hereto; (ii) any person or entity for which
        the
        Company had a face to face meeting or a conference call arranged by Paramount
        during which the Company was able give a presentation to such entity or person
        concerning the Offering and (iii) any other person or entity that was introduced
        to the Company by Paramount provided the Company agrees, based on its sole
        reasonable determination in good faith, such person or entity was introduced
        to
        the Company by Paramount. Paramount, its employees and affiliates shall have
        the
        right to invest in the Offering provided they are accredited investors (each
        an
        "Affiliated Investment"). Cash Commissions with respect to any Affiliated
        Investment shall be three and a half percent (3.5%) of the proceeds received
        by
        the Company from such Affiliated Investment and no other Cash Commissions
        will
        be paid with respect to such Affiliated Investment. 

      

      (b) In
        consideration for the Company’s inclusion of the Placement Warrant Shares in the
        Registration Statement, Paramount agrees that it shall be deemed a “Holder”
        under the Subscription Agreement or other document granting the investors
        registration rights in the Offering and, accordingly, it shall abide by all
        of
        the terms, conditions and limitations set forth in such documents. Accordingly,
        the Company agrees that the shares underlying the Placement Warrants shall
        be
        afforded equivalent registration rights as the Securities sold in the Offering
        or in the Investment pursuant to which the Placement Warrants are issued,
        as
        applicable.

      

      
        
          
          

        

        
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       5. Expense
        Allowance.
        At the
        Closing, the Company shall reimburse Paramount for its reasonable, documented
        expenses actually incurred up to a maximum of $30,000 (the “Expense Allowance”)
        to cover Paramount’s reasonable and verifiable out-of-pocket expenses incurred
        in connection with the Offering. Legal fees in connection with blue sky matters
        will be the responsibility of the Company. 

      

      6. Confidentiality.
        Unless
        required by applicable law or the rules of a regulatory body (which shall
        be
        determined by the Company in its sole discretion upon advice of its legal
        counsel), any services and advice rendered by Paramount pursuant to this
        Agreement (and the existence of this Agreement) shall not be disclosed publicly
        in any manner without Paramount’s prior written approval and shall be treated by
        the Company as confidential information. All material non-public information
        given to Paramount by the Company shall be treated by Paramount as confidential
        information and shall not be disclosed in any manner without Company’s prior
        written approval and shall not be used by Paramount except in rendering its
        services pursuant to this Agreement. 

      

      7.  Conditions
        to Paramount's Obligations.
        The
        obligations of Paramount hereunder are subject to (i) (A) the accuracy of
        the
        representations and warranties of the Company herein contained as of the
        date
        hereof and as of the date of each Closing; and (B) in each of the Offering
        Documents as of the date of each Closing; (ii) to the performance by the
        Company
        of its obligations hereunder; and (iii) to the following additional
        conditions:

      

      (a) Due
        Qualification or Exemption.
        (1) The
        Offering contemplated by this Agreement shall become qualified or be exempt
        from
        qualification under the securities laws of the jurisdictions in which the
        Securities are contemplated to be offered not later than the Final Closing
        Date,
        subject to any filings to be made thereafter and (2) at the Final Closing
        Date
        no stop order suspending the sale of the Securities shall have been issued,
        and
        no proceeding for that purpose shall have been initiated or
        threatened;

      

      (b) Compliance
        with Agreements.
        Except
        for such agreements and conditions that expressly may be performed or satisfied
        after the Final Closing Date, the Company shall have complied with all
        agreements and satisfied all conditions that the Company is required to perform
        or satisfy hereunder and under the Offering Documents at or prior to each
        Closing or the Final Closing, as applicable;

      

      (c)
         Corporate
        Action.
        The
        Company shall have taken all corporate action necessary in order to permit
        the
        valid execution, delivery and performance of the Offering Documents by the
        Company, including, without limitation, obtaining the approval of the Company's
        board of directors, for the execution and delivery of the Offering Documents,
        the performance by the Company of its obligations hereunder and the Offering
        contemplated hereby;

      

      
        
          
          

        

        
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      (d) Opinion
        of Counsel to the Company.
        Paramount shall have received an opinion of counsel to the Company reasonably
        satisfactory to Paramount and its counsel in the form mutually agreed to
        in good
        faith by the parties; 

      

      (e) Officer's
        Certificate.
        Paramount shall receive an Officer's Certificate, signed by the appropriate
        parties and dated as of the Closing Date in the form mutually agreed to in
        good
        faith by the parties . The certificate shall state, among other things, that
        the
        representations and warranties contained herein and in the Offering Documents
        are true and accurate in all material respects at such Closing Date with
        the
        same effect as though expressly made at such Closing Date and Paramount shall
        be
        entitled to rely on such representations of the Company in the Offering
        Documents as if they were made directly to Paramount;

      

      (f) Escrow
        Agreement.
        The
        Company, Paramount and an escrow agent reasonably acceptable to the parties
        shall execute an Escrow Agreement for the purpose of holding funds until
        each
        Closing;

      

      (g) No
        Adverse Changes.
        There
        shall not have occurred, at any time prior to each Closing: (i) any domestic
        or
        international event, act or other similar occurrence which has disrupted,
        or in
        Paramount’s sole determination, will materially disrupt, the securities markets;
        (ii) a general suspension of, or a general limitation on prices for, trading
        in
        securities on the principal market or exchange on which the Common Stock
        is then
        traded for more than one-trading day; (iii) any outbreak of major hostilities
        or
        other national or international calamity having a material effect on the
        performance of this Agreement; (iv) any banking moratorium declared by a
        state
        or federal authority; (v) any material interruption in the mail service or
        other
        means of communication within the United States; (vi) any materially adverse
        change in the business, properties, assets, results of operations, prospects
        or
        financial condition of the Company; or (vii) any change in the market for
        securities in general or in political, financial or economic conditions which,
        in Paramount’s reasonable judgment, makes it inadvisable to proceed with the
        offering, sale, and delivery of the Securities.

      

      8. Covenants
        of the Company. 

      

      (a) Notification.
        The
        Company shall notify Paramount immediately, and in writing, when any event
        shall
        have occurred during the period commencing on the date hereof and ending
        on the
        Closing Date as a result of which the Offering Documents would include any
        untrue statement of a material fact or omit to state any material fact required
        to be stated therein or necessary to make the statements therein not misleading
        in light of the circumstances under which they were made. 

      

      
        
          
          

        

        
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      (b) Blue
        Sky.
        The
        Company shall use its reasonable commercial efforts to qualify the Securities
        for offering and sale under exemptions from qualification or registration
        requirements under the securities or “blue sky” laws of such jurisdictions, as
        Paramount may reasonably request; provided however, that the Company will
        not be
        obligated to qualify as a dealer in securities in any jurisdiction in which
        it
        is not so qualified or to subject itself to the jurisdiction of any jurisdiction
        where it is not already subject. The Company will not consummate any sale
        of
        Securities in any jurisdiction in which it is not so qualified or in any
        manner
        in which such sale may not be lawfully made.

      

      (c) Form
        D
        Filing.
        The
        Company shall file five copies of a Notice of Sales of Securities on Form
        D with
        the SEC no later than 15 days after the date of the first Closing. The Company
        shall promptly file such amendments to such Notices on Form D as shall become
        necessary and shall also comply with any filing requirement imposed by the
        laws
        of any state or jurisdiction in which offers and sales are made. 

      

      (d) Press
        Releases, Etc.
        Except
        as otherwise required by applicable law or the rules of a regulatory body
        (which
        shall be determined by the Company in its sole discretion upon advice of
        its
        legal counsel), the Company shall not, during the period commencing on the
        date
        hereof and ending 30 days after the Closing Date, issue any press release
        or
        other communication (other than its year-end earnings release and conference
        call or other releases or communications made in the ordinary course of the
        Company’s business consistent with past practice, provided, however, the
        placement agent is provided a reasonable opportunity to review and comment
        on
        such release or other written communication), make any written or oral statement
        to any media organization or publication or hold any press conference,
        presentation or seminar, or engage in any other publicity with respect to
        the
        Company, its financial condition, results of operations, business, properties,
        assets, or liabilities, or the Offering, without the prior consent of Paramount,
        which consent shall not be unreasonably withheld, conditioned or delayed.
        

      

      (e) No
        Statements.
        Except
        as otherwise required by applicable law or the rules of a regulatory body
        (which
        shall be determined by the Company in its sole discretion upon advice of
        its
        legal counsel), the Company shall not use the name of Paramount or any officer,
        director, employee or shareholder thereof without the express consent of
        such
        party and such person.

      

      (f) Expenses.
        The
        Company is liable for, and will pay, its own expenses incurred in connection
        with the negotiation, preparation, execution and delivery of this Agreement,
        including, without limitation, its attorneys’ fees.

      

      (h) Right
        of First Refusal:
        In the
        event that a Closing occurs pursuant to this letter, the Company hereby grants
        Paramount a right of first refusal (the “Right of First Refusal”) to act as the
        Company's placement agent in connection with any offering by the Company
        of its
        debt or equity securities to be conducted, with the assistance of a placement
        agent, during the period commencing on the Final Closing Date and ending
        on the
        close of business on December 31, 2005. Prior to engaging another placement
        agent in connection with such an offering (an “Alternative Engagement”), the
        Company shall provide notice to Paramount setting forth in reasonable detail
        the
        terms and conditions of such proposed Alternative Engagement, which notice
        shall
        be deemed to be an offer by the Company to enter into a comparable engagement
        with Paramount on the terms and subject to the conditions set forth in the
        notice (the “Alternative Engagement Notice”). Paramount shall have 10 days
        following the day it receives the Alternative Engagement Notice to elect,
        in
        writing, to accept the engagement pursuant to the terms and conditions set
        forth
        in the Alternative Engagement Notice. Paramount shall notify the Company
        in
        writing of its decision to accept or reject the engagement terms set forth
        in
        the Alternative Engagement Notice before the expiration of such 10 day period,
        and failure by Paramount to provide the 

       

      
        
          
          

        

        
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      Company
        with such notice shall be deemed to be a rejection by Paramount. In the event
        Paramount elects to reject or fails to respond to the Alternative Engagement
        Notice, the Company shall have the right to consummate the proposed Alternative
        Engagement substantially in accordance with the terms described in the
        Alternative Engagement Notice (with such other terms and conditions which
        are
        customary and appropriate for such transactions to be agreed upon by the
        parties); provided that an Alternative Engagement not substantially in
        accordance with the terms described in the Alternative Engagement Notice
        will
        again become subject to the Right of First Refusal

      

      (i) No
        Material Misstatements.
        Neither
        the Blue Sky qualification materials, the "Offering Documents" nor any
        attachment or supplement thereto, or any filing the Company has made with
        the
        SEC since March 1, 2004 contains an untrue statement of a material fact or
        omits
        to state a material fact which is required to be stated therein or is necessary
        to make the statements therein, in light of the circumstances under which
        they
        are made, not misleading and the Company has made all SEC filings required
        by
        the SEC from March 1, 2004 through the date of this Agreement. 

       

      (j) Use
        of
        Proceeds.
        The net
        proceeds from the Offering will be used for research and development fees
        and
        expenses, including pre-clinical and clinical studies, and for working capital
        and general corporate purposes. The Company may also use a portion of the
        net
        proceeds for the acquisition of businesses, products and technologies that
        the
        Company believes are complementary to those of the Company, although no portion
        of the net proceeds has been specifically allocated for any specific
        acquisition. Other than accounts payable and accrued expenses incurred in
        the
        ordinary course of business, the Company shall not, until the earlier to
        occur
        of (i) March 31, 2007 and (ii) the successful completion of a pivotal Phase
        III
        clinical trial with respect to the Company’s AzaSite product candidate, use any
        proceeds from the Offering to repay any indebtedness of the Company including,
        but not limited to, any indebtedness to current executive officers or principal
        stockholders of the Company; provided,
        however,
        following the Closing the Company may repay up to an aggregate of $200,000
        in
        outstanding principal and accrued but unpaid interest with respect to
        outstanding indebtedness of the Company. 

      

      (k) Expenses
        of Offering.
        The
        Company shall be responsible for and shall bear all Company Expenses (as
        defined
        below). For the purposes of this Agreement, the “Company Expenses” shall
        include: the costs of preparing and duplicating the Offering Documents and
        all
        exhibits thereto; the costs of preparing, printing and filing with the SEC
        any
        registration statement described in the Subscription Agreement (a “Registration
        Statement”) and any amendments, post-effective amendments and supplements
        thereto; preparing, duplicating and delivering exhibits thereto and copies
        of
        the preliminary, final and supplemental prospectus; preparing, duplicating
        and
        delivering (including by facsimile) all selling documents, including but
        not
        limited to the SEC Documents, this Agreement, the Subscription Agreements,
        blue
        sky memoranda and stock certificates; blue sky fees, filing fees; fees and
        disbursements of the Company’s transfer agent (collectively, the “Company
        Expenses”). The Company shall also be responsible for reimbursement of the
        Placement Agent for any costs incurred in connection with the preparation
        of the
        Offering Documents (including, without limitation, reasonable attorney’s fees,
        expenses and disbursements). In no event shall the Company reimburse the
        Placement Agent for an amount greater than the Expense Allowance. 

      

      
        
          
          

        

        
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      (l) Restrictions
        on Securities.
        Except
        as a result of any stock splits and reverse stock splits and except as otherwise
        contemplated hereby, or required by a pre-existing legal or contractual
        obligation, during the period commencing on the Final Closing Date and ending
        on
        the close of business on June 14, 2005, the Company will not extend the
        expiration date or lower the exercise or the conversion price of any options,
        warrants, convertible securities or other security purchase rights without
        the
        prior written consent of the Placement Agent, which such consent will not
        be
        unreasonably withheld, conditioned or delayed.

       

      (m) Paramount
        shall be entitled to rely on the Company’s representations and warranties given
        to each investor in the Offering in the Subscription Agreement as if such
        representation and warranty was given by the Company to Paramount.

      

        (n) The
        Company represents and warrants that it has all requisite corporate power
        and
        authority to execute and deliver this Agreement and to carry out the
        transactions contemplated by this Agreement. The Company is not in violation
        of
        or default under, nor will the execution and delivery of this Agreement and
        consummation of the transactions contemplated herein will not result in a
        violation of, or constitute a default in the performance or observance of
        any
        law, obligation under its certificate of incorporation, as amended, or its
        by-laws, or any indenture, contract, material purchase order or other agreement
        or instrument to which the Company is a party or by which it or its property
        is
        bound or affected. 

      

      9.
         Indemnification. In
        consideration for Paramount’s services on behalf of the Company in connection
        with the Offering, the Company agrees to indemnify and hold harmless Paramount
        and each of its affiliates, stockholders, directors, officers, employees,
        agents
        and controlling persons (within the meaning of Section 15 of the Act or Section
        20 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) to
        the extent set forth, and as provided for, in the indemnification and
        contribution provisions (the “Indemnification Provisions”) attached hereto as
Exhibit
        D
        and
        incorporated herein in their entirety. Paramount shall indemnify and hold
        harmless the Company and each of its affiliates, stockholders, directors,
        officers, employees, agents and controlling persons within the meaning of
        the
        Act and Exchange Act to the same extent as set forth in the indemnity from
        the
        Company to Paramount in Exhibit
        D,
        but
        only in connection with (i) information relating to Paramount furnished in
        writing to the Company by Paramount for the specific purpose of including
        such
        information in the Offering Documents or any Securities and Exchange Commission
        filing, (ii) material breaches of the representations and warranties of
        Paramount set forth in Section 10 hereof, and (iii) any and all losses, claims,
        expenses, damages and liabilities arise out of the bad faith, gross negligence
        or willful misconduct of Paramount.

       

      10. Representations
        and Warranties of Placement Agent. Paramount
        represents and warrants to the Company, as of the date hereof, and as of
        the
        date of each Closing as follows:

      

      
        
          
          

        

        
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      (a) it
        is a
        member of the National Association of Securities Dealers, Inc. (“NASD”) and it
        has, and at all times while taking any actions constituting an offer or sale
        of
        the Securities had, all governmental licenses (including both federal and
        state
        broker dealer licenses) required to act as placement agent for the
        Securities.

      

      (b) it
        has
        not used any general solicitation or general advertising in its offering
        of the
        Securities or used any offering materials not approved by the Company in
        writing.

      

      (c) it
        reasonably believes that the subscribers contacted by Paramount satisfy the
        investor suitability standards set forth in Regulation D.

      

      

      11. Termination;
        Survival. Either
        the Company or Paramount may terminate this Agreement at any time prior to
        any
        Closing in their respective sole discretion, with or without cause, and without
        liability whatsoever. Sections 4, 5, 6, 9, 11 through 15 of this Agreement
        shall
        remain operative and in full force and effect regardless of any expiration
        of
        this Agreement or termination of this Agreement by the Company. Sections
        6, 9,
        10, 11 through 15 of this agreement shall remain operative and in full force
        and
        effect regardless of any termination of this Agreement by
        Paramount.

      

      12. Governing
        Law. This
        Agreement shall be governed by and construed in accordance with the laws
        of the
        State of New York without regard to principles of conflicts of law. The parties
        hereby irrevocably submit to the exclusive jurisdiction of the courts of
        the
        State of New York.

      

      13. Binding
        Agreement; Non-Assignability. This
        Agreement shall be binding upon and inure to the benefit of Paramount and
        the
        Company and each of their successors and assigns. This Agreement may not
        be
        assigned by either party without the prior written consent of the
        other.

      

      14. Other
        Services.
        Subject
        to Section 6 of this Agreement, nothing herein shall restrict or otherwise
        limit
        Paramount from performing similar or dissimilar services for any other party
        or
        for its own account. The provisions of this paragraph 14 shall be enforceable
        to
        the fullest extent permitted by law.

      

      15. Miscellaneous.
        This
        Agreement embodies the entire agreement and understanding between the parties
        hereto and supersedes any prior agreements or understandings, oral or written,
        relating to the subject matter hereof, including that certain letter agreement
        between Paramount and the Company dated as of February 12, 2004. If any
        provision of this Agreement is determined to be invalid or unenforceable
        in any
        respect, such determination will not affect such provision in any other respect
        or any other provision of this Agreement, which will remain in full force
        and
        effect. This Agreement may not be amended or otherwise modified or waived
        except
        by an instrument in writing signed by both the Company and
        Paramount.

      

      Remainder
        of page left intentionally blank.

      Signature
        page follows.

      
        
          
          

        

        
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      If
        the
        foregoing conforms to your understanding, please sign and return to us the
        enclosed copy of this letter.

      

      

      Very
        truly yours,

      

      PARAMOUNT
        BIOCAPITAL, INC.

      

      By:
        /s/Lindsay A. Rosenwald

      Name: Lindsay
        A. Rosenwald, M.D. 

      Title: Chairman
        and Chief
        Executive Officer

      

      

      

      INSITE
        VISION, INC.

      

      By:
        /s/S. Kumar Chandrasekaran

      Name:
        S.
        Kumar Chandrasekaran, Ph.D.

      Title: President
        & Chief Executive Officer

      

      
        
          
          

        

        
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      Exhibit
        A

      

      INDEMNIFICATION
        PROVISIONS

      

      In
        connection with (i) the engagement of Paramount BioCapital, Inc. (the “Placement
        Agent”), by InSite Vision Incorporated (the “Company”), pursuant to that certain
        letter agreement dated February 24, 2005, between the Company and the Placement
        Agent, as it may be amended from time to time (the “Agreement”), and (ii) the
        offering set forth in the Agreement (the “Offering”), the Placement Agent and
        the Company (each, a “Party” and collectively the “Parties”) hereby agree as
        follows:

      

      To
        the
        extent permitted by law, the Company will indemnify the Placement Agent and
        its
        affiliates, and the directors, officers, partners, shareholders, agents and
        employees of the Placement Agent (collectively the “Indemnified Persons”),
        harmless from and against any and all claims, actions, suits, proceedings
        (including those of shareholders), damages, liabilities and expenses incurred
        by
        any of them (including, but not limited to, fees and expenses of counsel)
        which
        are related to or arise out of (i) any actions taken or omitted to be taken
        (including any untrue statements made or any statements omitted to be made)
        by
        the Company in connection with the Offering, or (ii) any actions taken or
        omitted to be taken by any Indemnified Person in connection with the Company’s
        engagement of the Placement Agent pursuant to this Agreement and the Company
        shall reimburse any Indemnified Person for all expenses (including, but not
        limited to, reasonable fees and expenses of counsel) incurred by such
        Indemnified Person in connection with investigating, preparing or defending
        any
        such claim, action, suit or proceeding (collectively a “Claim”), whether or not
        in connection with pending or threatened litigation in which any Indemnified
        Person is a party. The Company will not, however, be responsible for any
        Claim
        which is finally judicially determined to have resulted primarily from the
        gross
        negligence, bad faith or willful misconduct of any person seeking
        indemnification hereunder or a breach by the Placement Agent of the
        representations and warranties set forth in Section 10 of the Agreement.
        The
        Company further agrees that no Indemnified Person shall have any liability
        to
        the Company for or in connection with the Placement Agent's engagement under
        the
        Agreement, except for any Claim incurred by the Company solely as a direct
        result of any Indemnified Person's gross negligence, bad faith or willful
        misconduct.

      

      The
        Company further agrees that the Company will not, without the prior written
        consent of the Placement Agent (which consent shall not be unreasonably withheld
        or delayed), settle, compromise or consent to the entry of any judgment in
        any
        pending or threatened Claim in respect of which indemnification may be sought
        hereunder (whether or not any Indemnified Person is an actual or potential
        party
        to such Claim), unless such settlement, compromise or consent includes a
        legally
        binding, unconditional and irrevocable release of each Indemnified Person
        hereunder from any and all liability arising out of such Claim.

      

      Promptly
        upon receipt by an Indemnified Person of notice of any complaint or the
        assertion or institution of any Claim with respect to which indemnification
        is
        being sought hereunder, such Indemnified Person shall notify the Company
        in
        writing of such complaint or of such assertion or institution, but failure
        to so
        notify the Company shall not relieve the Company from any obligation the
        Company
        may have hereunder, unless, and only to the extent that, such failure results
        in
        the forfeiture by the Company of substantial rights and defenses, and such
        failure to so notify the Company will not in 

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      any
        event
        relieve the Company from any other obligation or liability the Company may
        have
        to any Indemnified Person otherwise than under this Agreement. If the Company
        so
        elects, the Company will assume the defense of such Claim, including the
        employment of counsel reasonably satisfactory to such Indemnified Person
        and the
        payment of the fees and expenses of such counsel. In the event, however,
        that
        if, in the opinion of counsel to the Indemnified Person (such counsel and
        opinion being satisfactory to the Company and its counsel), that (i) there
        would
        be a conflict of interest if the Indemnified Person has counsel common to
        the
        Company or any other Indemnified Person or (ii) there may be legal defenses
        available to it or other Indemnified Persons that are different from or in
        addition to those available to the Company, then such Indemnified Person
        may
        employ its own separate counsel to represent or defend it in any such Claim,
        and
        the Company shall pay the reasonable fees and expenses of such counsel.
        Notwithstanding anything herein to the contrary, if the Company fails timely
        or
        diligently to defend, contest, or otherwise protect against any Claim, the
        relevant Indemnified Party shall have the right, but not the obligation,
        to
        defend, contest, compromise, settle, assert cross claims or counterclaims,
        or
        otherwise protect against the same, and shall be fully indemnified by the
        Company therefor, including, but not limited to, for the reasonable fees
        and
        expenses of its counsel and all amounts paid as a result of such Claim or
        the
        compromise or settlement thereof. In any Claim in which the Company assumes
        the
        defense, the Indemnified Person shall have the right to participate in such
        defense and to retain its own counsel therefor at its own expense.

      

      The
        Company agrees that if any indemnity sought by an Indemnified Person hereunder
        is held by a court to be unavailable for any reason, then (whether or not
        the
        Placement Agent is the Indemnified Person) the Company and the Placement
        Agent
        shall contribute to the Claim for which such indemnity is held unavailable
        in
        such proportion as is appropriate to reflect the relative benefits to the
        Company, on the one hand, and the Placement Agent, on the other, in connection
        with the Placement Agent's engagement by the Company under the Agreement,
        subject to the limitation that in no event shall the amount of the Placement
        Agent's contribution to such Claim exceed the amount of fees actually received
        by the Placement Agent from the Company pursuant to the Placement Agent's
        engagement under the Agreement. The Company hereby agrees that the relative
        benefits to the Company, on the one hand, and the Placement Agent, on the
        other,
        with respect to the Placement Agent's engagement under the Agreement shall
        be
        deemed to be in the same proportion as (a) the total value paid or proposed
        to
        be paid or received by the Company or the Company's shareholders as the case
        may
        be, pursuant to the transaction (whether or not consummated) for which the
        Placement Agent is engaged to render services bears to (b) the fee paid or
        proposed to be paid to the Placement Agent in connection with such
        engagement.

      

      The
        Company’s indemnity, reimbursement and contribution obligations hereunder shall
        be in addition to, and shall in no way limit or otherwise adversely affect
        any
        rights that any Indemnified Party may have at law or at equity.

      

      Should
        the Placement Agent, or any of its directors, officers, partners, shareholders,
        agents or employees, be required or be requested by us to provide documentary
        evidence or testimony in connection with any proceeding arising from or relating
        to the Placement Agent's engagement under the Agreement the Company agrees
        to
        pay all reasonable expenses (including, but not limited to, reasonable fees
        and
        expenses of counsel) in complying therewith, payable in advance.

      It
        is
        understood that, in connection with the Placement Agent's engagement under
        the
        Agreement, the Placement Agent may be engaged to act in one or more additional
        capacities and that the terms of the original engagement or any such additional
        engagement may be embodied in one or more separate written agreements. The
        provisions of this Agreement shall apply to the original engagement and any
        such
        additional engagement and shall remain in full force and effect following
        the
        completion or termination of the Placement Agent's engagement(s).LOAN
        AGREEMENT

       

      This
        Loan
        Agreement (“Agreement”)
        is
        made as of June 22, 2005 by and among (i) Acura Pharmaceuticals, Inc., a
        New
        York corporation (“Company”),
        (ii)
        Essex Woodlands Health Ventures V, L.P. (“Essex”),
        (iii)
        Care Capital Investments II, L.P. and Care Capital Offshore Investments II,
        L.P.
        (collectively “Care
        Capital”)
        and
        (iv) Galen Partners III, L.P., Galen Partners International III, L.P. and
        Galen
        Employee Fund III, L.P. (collectively
        “Galen
        and,
        together with Essex and Care Capital, the “Lenders”).
        In
        consideration of the mutual covenants contained in this Agreement and other
        good
        and valuable consideration, the receipt and sufficiency of which are hereby
        acknowledged, the parties hereby agree as follows:

       

      ARTICLE
        I

      LOAN;
        SECURITY DOCUMENTS

       

      1.1.  TERM
        LOAN

       

      On
        the
        terms and subject to the conditions of this Agreement, each Lender severally
        agrees to make to the Company on the Closing Date a term loan (each, a
“Loan”)
        in a
        principal amount equal to such Lender’s Commitment. No amounts paid or prepaid
        with respect to any Loan may be reborrowed. 

       

      1.2.  NOTES

       

      The
        Company’s unconditional and absolute obligation to repay to the Lenders the
        principal of the Loans and interest thereon shall be evidenced by a promissory
        note (each, as the same may be amended, supplemented or otherwise modified
        from
        time to time in accordance with the terms hereof, and together with any renewals
        thereof or substitutions therefor, a “Note”),
        in
        the form of Exhibit
        A
        hereto
        with appropriate insertions, dated the Closing Date. The date and amount
        of each
        repayment and prepayment of principal thereon received by a Lender shall
        be
        recorded by the Lender in its records or, at its option, on the schedule
        attached to the Note. The aggregate unpaid principal amount so recorded shall
        be
        prima facie evidence of the principal amount owing and unpaid on the Note
        to the
        Lender absent manifest error. The failure to so record any such amount or
        any
        error in so recording any such amount, however, shall not limit or otherwise
        affect the Company’s obligations hereunder or under the Note to repay the
        principal amount of the Loan together with all interest accruing
        thereon.

       

      1.3.  CLOSING

       

      The
        closing (the “Closing”)
        at
        which the Loans shall be disbursed to the Company will take place at the
        offices
        of St. John & Wayne, L.L.C., Two Penn Plaza East, Newark, New Jersey 07105
        upon the satisfaction of the conditions to Closing set forth in this Agreement
        on the date hereof, or such other place, time and date as shall be mutually
        agreed to by the Company and the Lenders. On the date of the Closing (the
        “Closing
        Date”),
        the
        Company shall deliver to each Lender a Note, dated the Closing Date, in the
        principal amount equal to such Lender’s Commitment. The Company shall deliver
        the foregoing Notes against receipt by the Company from each Lender of an
        amount
        equal to the Commitment of such Lender, in each case by wire transfer in
        immediately available funds in U.S. dollars to an account designated by the
        Company.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      1.4.  USE
        OF PROCEEDS

       

      The
        Company shall apply the proceeds of the Loans to general corporate purposes.
        The
        Company shall not use any proceeds of the Loans to purchase or carry any
“margin
        stock” (as defined in Regulation U promulgated by the Board of Governors of the
        Federal Reserve System).

       

      1.5.  COMPANY
        SECURITY DOCUMENTS

       

      All
        of
        the obligations of the Company under the Transaction Documents to or for
        the
        benefit of the Lenders (or their agents and representatives) shall be secured
        by
        the following items (collectively, the “Company
        Collateral”),
        each
        of which shall be senior and superior to all other liens: (a) a lien on all
        the
        personal property and assets of the Company now existing or hereinafter acquired
        granted pursuant to the Company General Security Agreement, including, without
        limitation, a lien on and security interest in all of the issued and outstanding
        shares of common stock of the Guarantors pursuant to a separate Stock Pledge
        Agreement; and (b) collateral assignments of all leases, contracts, patents,
        copyrights, trademarks and service marks of the Company.

       

      1.6.  GUARANTIES;
        GUARANTOR SECURITY

       

      All
        of
        the obligations of the Company under the Notes and this Agreement shall be
        guaranteed pursuant to the Guaranties by the Guarantors. All of the obligations
        of the Guarantors under the Guaranties shall be secured by the following
        (collectively, the “Guarantor
        Collateral”)
        each
        of which shall be a lien ranking senior and superior to all other liens:
        (a) a
        lien on all of the personal property and assets of the respective Guarantors
        now
        existing or hereinafter acquired, granted pursuant to the Guarantors General
        Security Agreement; and (b) collateral assignments of all leases, contracts,
        patents, copyrights, trademarks and service marks of the
        Guarantors.

       

      ARTICLE
        II  

      REPAYMENT;
        PREPAYMENTS; INTEREST

       

      2.1.  REPAYMENT
        OF THE LOANS

       

      The
        Company shall repay the aggregate outstanding principal amount of the Loans,
        together with all accrued but unpaid interest thereon, in full on the earlier
        of
        June 1, 2006 (the “Maturity
        Date”),
        or
        the date upon which the Loans become or are declared due and payable pursuant
        to
        Article VII of this Agreement. 

       

      2.2.  PREPAYMENTS

       

      The
        Company shall have the right to prepay the principal amount of a Loan, in
        whole
        or in part, at any time without penalty or premium. Any prepayment of principal
        shall be accompanied by a payment of all interest accrued and unpaid on the
        portion of the principal amount being prepaid.  In
        addition the Company shall, unless the Lenders shall otherwise agree in writing,
        prepay the Loans from time to time in an amount equal to the net amounts
        received (after satisfaction of associated expenses) by the Company in
        connection with any Funding Event immediately upon the Company’s receipt
        thereof.

       

      2.3.  INTEREST

       

      (a) The
        Loans
        shall bear interest on the outstanding principal amount thereof at a rate
        of ten
        percent (10%) per annum from the Closing Date. All accrued interest on each
        Loan
        shall be payable in arrears on the last day of each calendar quarter; provided
        that (i) interest accrued pursuant to Section 2.3(b) shall be payable on
        demand,
        and (ii) in the event of any repayment or prepayment of any Loan, accrued
        interest on the principal amount repaid or prepaid shall be payable on the
        date
        of such repayment or prepayment. All computations of interest shall be made
        on
        the basis of a year of 360 days, and actual days elapsed. 

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (b) Notwithstanding
        the rate of interest specified above, after an Event of Default and during
        the
        continuance thereof (regardless of whether the Loans have been accelerated),
        the
        Company agrees to pay interest (after as well as before judgment to the extent
        permitted by applicable law) on all unpaid principal, interest or other amounts
        owing under the Transaction Documents, at a rate of thirteen percent (13%)
        per
        annum. Unpaid interest on such amounts will continue to accrue and will (to
        the
        extent permitted by applicable law) be compounded daily.

       

      2.4.  USURY

       

       

      Notwithstanding
        anything herein to the contrary, if at any time the interest rate applicable
        to
        a Loan, together with all fees, charges and other amounts which are treated
        as
        interest on the Loan under applicable law shall exceed the maximum lawful
        rate
        (the “Maximum
        Rate”)
        which
        may be contracted for, charged, taken, received or reserved by the Lenders
        in
        accordance with applicable law, the rate of interest payable in respect of
        such
        Loan hereunder, together with all charges payable in respect thereof, shall
        be
        limited to the Maximum Rate.

       

      ARTICLE
        III

      CONDITIONS
        TO CLOSING

       

      The
        obligation of each Lender to make its Loan at the Closing is subject to the
        fulfillment to such Lender’s satisfaction on or prior to the Closing Date of
        each of the following conditions, unless otherwise waived by such
        Lender:

       

      3.1.  REPRESENTATIONS
        AND WARRANTIES CORRECT; NO DEFAULT

       

      The
        representations and warranties of the Company set forth in Article IV hereof
        shall be true and correct when made, and shall be true and correct on the
        Closing Date with the same force and effect as if they had been made on and
        as
        of the Closing Date. No Event of Default, or any other event which, with
        the
        giving of notice, the lapse of time, or both, would constitute an Event of
        Default, shall have occurred and be continuing on the date of this Agreement
        or
        on the Closing Date. 

       

      3.2.  PERFORMANCE

       

       

      All
        covenants, agreements and conditions contained in this Agreement to be performed
        or complied with by the Company on or prior to the Closing Date shall have
        been
        performed or complied with by the Company. 

       

      3.3.  NO
        IMPEDIMENTS

       

      None
        of
        the Company, or any of the Guarantors, or any Lender shall be subject to
        any
        order, decree or injunction of a court or administrative or governmental
        body or
        agency of competent jurisdiction directing that the transactions provided
        for in
        the Transaction Documents or any material aspect thereof not be consummated
        as
        contemplated by the Transaction Documents. There shall not be any action,
        suit,
        proceeding, complaint, charge, hearing, inquiry or investigation before or
        by
        any court or administrative or governmental body or agency pending or, to
        the
        Company’s best knowledge, threatened, wherein an unfavorable order, decree or
        injunction would prevent the performance of any of the Transaction Documents
        or
        the consummation of any material aspect of the transactions or events
        contemplated thereby, declare unlawful any aspect of the transactions or
        events
        contemplated by the Transaction Documents, cause any material aspect of the
        transactions contemplated by the Transaction Documents to be rescinded or
        have a
        Material Adverse Effect. 

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      3.4.  OTHER
        AGREEMENTS AND DOCUMENTS

       

      The
        Company shall have executed and delivered to each Lender this Agreement,
        issued
        to such Lender its Note, and the Company and each of the Guarantors, as
        applicable, shall have executed and delivered the following agreements and
        documents: 

       

      	(a)  	
              the
                Company General Security Agreement;

            

       

      	(b)  	
              the
                Guaranties;

            

       

      	(c)  	
              the
                Guarantors Security Agreement;

            

       

      	(d)  	
              the
                Stock Pledge Agreement;

            

       

      	(e)  	
              a
                secretary’s certificate of the Company, (i) attaching a certified copy of
                the Certificate of Incorporation and current bylaws of the Company
                and
                certifying the same as not having been amended and as being in being
                in
                full force and effect, (ii) attaching and certifying resolutions
                by the
                Board of Directors approving the execution, delivery and performance
                of
                the Transaction Documents and the transactions contemplated thereby,
                and
                (iii) certifying as to the incumbency, and attaching specimen signatures
                of, the officers or representatives of the Company signing the Transaction
                Documents to which the Company is a
                party;

            

       

      	(f)  	
              a
                secretary’s certificate of each of the Guarantors, (i) attaching a
                certified copy of the certificate of incorporation and current bylaws
                of
                such Guarantor and certifying the same as not having been amended
                and as
                being in being in full force and effect, (ii) attaching and certifying
                resolutions by the board of directors of such Guarantor approving
                the
                execution, delivery and performance of the Transaction Documents
                and the
                transactions contemplated thereby, and (iii) certifying as to the
                incumbency, and attaching specimen signatures of, the officers or
                representatives of such Guarantor signing the Transaction Documents
                to
                which such Guarantor is a party; 

            

       

      	(g)  	
              a
                Certificate of Good Standing and Tax Status from the state of
                incorporation of the Company and each Guarantor and from every state
                in
                which any of them is qualified to do business;
                

            

       

      	(h)  	
              the
                IP Collateral Assignments; and

            

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      	(i)  	
              Financing
                Statements with respect to all personal property and assets of the
                Company
                and each Guarantor.

            

       

      3.5.  CONSENTS

       

      The
        Company shall have obtained all necessary consents or waivers, if any, from
        all
        parties governmental and private to any other material agreements to which
        the
        Company is a party or by which it is bound immediately prior to the Closing
        in
        order that the transactions contemplated by the Transaction Documents may
        be
        consummated. 

       

      3.6.  PROCEEDINGS
        AND OTHER DOCUMENTS

       

      All
        corporate and other proceedings taken or required to be taken by the Company
        and
        any Guarantor in connection with the transactions contemplated by this Agreement
        and the other Transaction Documents to be consummated prior to the Closing
        shall
        have been taken, and the Lenders shall have received such other documents,
        in
        form and substance reasonably satisfactory to the Lenders and their counsel,
        as
        to such other matters incident to the transactions contemplated hereby as
        the
        Lenders may reasonably request. 

       

      3.7.  OPINION
        OF COUNSEL

       

      The
        Lenders shall have received the opinion of St. John & Wayne, L.L.C., counsel
        to the Company, dated the Closing Date, substantially in the form of
Exhibit
        B
        attached
        hereto. 

       

      3.8.  INDEPENDENT
        COMMITTEE OF BOARD OF DIRECTORS

       

      The
        Company’s independent committee of the Board of Directors (the “Independent
        Committee”)
        shall
        deliver to each of the Lenders the Independent Committee’s resolutions approving
        the execution, delivery and performance of the Transaction Documents to which
        the Company is a party and the transactions contemplated thereby, each in
        form
        and substance reasonably acceptable to the Lenders.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      3.9.  SUBORDINATION
        AGREEMENT

       

      The
        holders of the Senior Note shall have entered into a subordination agreement,
        in
        form and substance acceptable to the Lenders, pursuant to which all liens
        (and
        all other interests in collateral) securing the Company’s obligations under the
        Senior Note and the Watson Term Loan shall be fully subordinated to the liens
        (and other interests in collateral) securing the Loans.

       

      ARTICLE
        IV  

      REPRESENTATIONS
        AND WARRANTIES OF THE COMPANY

       

      As
        a
        material inducement to each Lender to enter into and perform its obligations
        under this Agreement, except as set forth in the Schedule of Exceptions,
        the
        Company hereby represents and warrants to each Lender as follows:

       

      4.1.  ORGANIZATION
        AND EXISTENCE

       

      The
        Company is a corporation duly organized, validly existing and in good standing
        under the laws of New York and is qualified to do business in such other
        jurisdictions as the nature or conduct of its operations or the ownership
        of its
        properties require such qualification. The Company does not own or lease
        any
        property or engage in any activity in any jurisdiction that might require
        qualification to do business as a foreign corporation in such jurisdiction
        and
        where the failure to so qualify could reasonably be expected to have a Material
        Adverse Effect or subject the Company to a material liability. The Company
        has
        furnished the Lenders with true, correct and complete copies of its Certificate
        of Incorporation, By-Laws and all amendments thereto, as of the date
        hereof.

       

      4.2.  SUBSIDIARIES
        AND AFFILIATES

       

      Section
        4.2
        of the
        Schedule of Exceptions sets forth the name, jurisdiction of incorporation
        and
        authorized and outstanding capitalization of each Subsidiary. Except as
        disclosed in Section
        4.2
        of the
        Schedule of Exceptions, all of the outstanding shares of capital stock of
        each
        of the Subsidiaries are duly and validly authorized, are validly issued and
        are
        fully paid and nonassessable and have been offered, issued, sold and delivered
        in compliance with applicable federal and state securities laws. Except as
        set
        forth in Section
        4.2
        of the
        Schedule of Exceptions, the Company has, and upon the Closing will have,
        no
        Subsidiaries and will not own of record or beneficially any capital stock
        or
        equity interest or investment in any corporation, association or business
        entity. Except as disclosed in Section
        4.2
        of the
        Schedule of Exceptions, each Subsidiary is a corporation duly organized,
        validly
        existing and in good standing under the laws of its jurisdiction of
        incorporation and has all requisite corporate power and authority to carry
        on
        its business as now conducted and proposed to be conducted. Except as set
        forth
        in Section
        4.2
        of the
        Schedule of Exceptions, no Subsidiary owns or leases any property or engages
        in
        any activity in any jurisdiction which might require such Subsidiary to qualify
        to do business as a foreign corporation in such jurisdiction and where the
        failure to so qualify could reasonably be expected to have a Material Adverse
        Effect or subject such Subsidiary to a material liability. 

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      4.3.  CAPITALIZATION

       

      As
        of the
        date hereof, the Company’s authorized capital stock consists of (i) 650,000,000
        shares of Common Stock, of which 22,946,415 shares are outstanding and
        approximately 341,128,344 shares are reserved for issuance for the purposes
        set
        forth in Section
        4.3
        of the
        Schedule of Exception, and (ii) 290,000,000 shares of Preferred Stock, of
        which
        (1) 45,000,000 shares are Series A Preferred, (2) 25,000,000 shares are Series
        B
        Preferred, (3) 70,000,000 shares are Series C-1 Preferred, (4) 50,000,000
        shares
        are Series C-2 Preferred and (5) 100,000,000 shares are Series C-3 Preferred.
        Set forth in Section
        4.3
        of the
        Schedule of Exceptions is a complete and correct list, as of the Closing
        Date,
        of the number of shares of Common Stock held by the Company’s public
        stockholders generally, stockholders holding in excess of 5% of the Company’s
        Common Stock and all holders of Preferred Stock, options, warrants, debentures
        and other securities convertible or exercisable for Common Stock. Such schedule
        is complete and correct in all material respects. All the issued and outstanding
        shares of capital stock of the Company are (i)
        duly
        authorized and validly issued, (ii)
        fully
        paid and nonassessable and (iii)
        have
        been offered, issued, sold and delivered by the Company in compliance with
        applicable federal and state securities laws. 

       

      4.4.  AUTHORIZATION

       

      	(a)  	
              Each
                of the Company and the Guarantors has all requisite corporate power
                and
                authority (i)
                to
                execute and deliver, and to perform and observe their respective
                obligations under, the Transaction Documents to which it is a respective
                party, and (ii)
                to
                consummate the transactions contemplated hereby and thereby, including,
                without limitation, the grant of any security interest, mortgage,
                payment
                trust, guaranty or other security arrangement by the Company in,
                on or in
                respect of the Company Collateral, and by any and all of the Guarantors
                in, on or in respect of the Guarantor
                Collateral.

            

       

      	(b)  	
              All
                corporate action on the part of (i) the Company and the directors
                and,
                except as set forth in Section
                4.4(b)
                of
                the Schedule of Exceptions, the stockholders of the Company necessary
                for
                the authorization, execution, delivery and performance by the Company
                of
                the Transaction Documents and the transactions contemplated therein,
                and
                for the authorization, issuance and delivery of the Notes, has been
                taken
                and (ii) each Guarantor and their respective directors and stockholders
                necessary for the authorization, execution,
                delivery and performance by each Guarantor of the Guarantors General
                Security Document, the Guaranties and the transactions contemplated
                therein or in any other Transaction Document with respect to the
                Guarantors, has been taken.

            

       

      4.5.  BINDING
        OBLIGATIONS; NO MATERIAL ADVERSE CONTRACTS

       

      The
        Transaction Documents constitute valid and binding obligations of the Company
        and the Guarantors enforceable in accordance with their respective terms.
        Except
        as set forth in Section
        4.5
        of the
        Schedule of Exceptions, the execution, delivery and performance by the Company
        and the Guarantors of the Transaction Documents and compliance therewith
        will
        not result in any violation of and will not conflict with, or result in a
        breach
        of any of the terms of, or constitute a default, or accelerate or permit
        the
        acceleration of any rights or obligations, under, any provision of state,
        local,
        federal or foreign law to which the Company or either of the Guarantors is
        subject, the Certificate of Incorporation, as amended, or the By-Laws, as
        amended, of the Company or either of the Guarantors, or any mortgage, indenture,
        agreement, instrument, judgment, decree, order, rule or regulation or other
        restriction to which the Company or either of the Guarantors is a party or
        by
        which it is bound, and except for Permitted Liens, result in the creation
        of any
        mortgage, pledge, lien, encumbrance or charge upon any of the properties
        or
        assets of the Company or either of the Guarantors pursuant to any such term.
        No
        stockholder of the Company or either Guarantor has or will have any preemptive
        rights or rights of first refusal by reason of the issuance of the Notes.
        

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      4.6.  COMPLIANCE
        WITH INSTRUMENTS

       

      Neither
        the Company nor any Subsidiary (a) is in violation of its organizational
        documents, (b) is in default, and no event has occurred which, with the giving
        of notice, or the lapse of time, or both, would constitute such a default,
        in
        the due performance or observance of any term, covenant or condition contained
        in any material agreement, including, without limitation, any license, indenture
        or other instrument to which it is a party or by which it is bound or to
        which
        any of its property or assets is subject or (c) is in violation of any law,
        ordinance, governmental rule, regulation or court decree to which it or its
        property may be subject (including without limitation any Legal Requirements
        relating to the biotechnology and pharmaceutical industry) except for (x)
        such
        defaults and violations set forth in Section
        4.6
        of the
        Schedule of Exceptions, and (y) such violations under clause (b) and (c)
        that
        would not, individually or in the aggregate, have a Material Adverse Effect.
        

       

      4.7.  LITIGATION

       

      Except
        as
        set forth in Section
        4.7
        of the
        Schedule of Exceptions, there are no actions, suits or proceedings (including
        governmental or administrative proceedings), investigations, third-party
        subpoenas or inquiries by any regulatory agency, body or other governmental
        authority, to which the Company or any of the Subsidiaries is a party or
        is
        subject, or to which any of their authorizations, consents and approvals
        or
        other properties or assets, is subject, which is pending, or, to the best
        knowledge of the Company, threatened or contemplated against the Company
        or any
        Subsidiary, or any of such property or assets, that, individually or in the
        aggregate, could reasonably be expected to have a Material Adverse Effect.
        The
        Company is not subject to any actions, suits or proceedings (including
        governmental or administrative proceedings), investigation, third-party
        subpoenas or inquiries by any regulatory agency, body or other governmental
        authority or any third Person regarding its accounting practices or policies.
        

       

      4.8.  FINANCIAL
        INFORMATION; SEC DOCUMENTS

       

      (a)  The
        Company has furnished to the Lenders complete and correct copies of the
        consolidated financial statements of the Company and its Subsidiaries, including
        consolidated balance sheets as of December 31, 2004 and 2003 and consolidated
        statements of operations, changes in cash flows and stockholders’ equity,
        covering the three years ended December 31, 2004, all of which statements
        have
        been certified by BDO Seidman LLP or Grant Thornton LLP, independent accountants
        within the meaning of the Securities Act and the rules and regulations
        thereunder, and all of which statements are included or incorporated by
        reference in the Company’s Annual Report on Form 10-K for the fiscal year ended
        December 31, 2004 filed with the SEC under the Exchange Act. Such financial
        statements have been prepared in conformity with GAAP applied on a consistent
        basis throughout the periods involved, except as otherwise stated therein
        and
        fairly present the consolidated financial position of the Company and its
        Subsidiaries as of the dates thereof and their consolidated results of
        operations for such periods. Except as previously disclosed to the Lenders
        in
        writing, the Company’s auditors have raised no material issues nor delivered any
        material correspondence with respect to any of the Company’s financial
        statements or financial affairs.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (b)  The
        Company has also furnished to the Lenders the unaudited consolidated balance
        sheet of the Company and its Subsidiaries as of March 31, 2005 and the related
        unaudited consolidated statements of operations, consolidated statements
        of cash
        flow and consolidated statements of stockholders’ equity for the three months
        ended March 31, 2005. Such financial statements were prepared in conformity
        with
        GAAP applied on a basis consistent with the financial statements referred
        to in
        Section 4.8(a) and fairly present the consolidated financial position of
        the
        Company and its Subsidiaries as of such date and their consolidated results
        of
        operations for such periods (subject to normal year-end
        adjustments).

       

      (c)  None
        of
        the documents filed by the Company with the SEC since December 31, 2003 contain
        any untrue statement of a material fact or omit to state a material fact
        required to be stated therein or necessary in order to make the statements
        contained therein not false or misleading in light of the circumstances in
        which
        they were made. There are no facts which the Company has not disclosed in
        the
        Company Reports or disclosed to the Lenders which, individually or in the
        aggregate, could reasonably be expected to have a Material Adverse
        Effect.

       

      (d)  Except
        as
        set forth in Section
        4.8
        of the
        Schedule of Exceptions or in the Company’s Quarterly Report on Form 10-Q for the
        quarter ended March 31, 2005, subsequent to December 31, 2004, (i) none of
        the
        Company or any Guarantor has incurred any liability or obligations, direct
        or
        indirect, or entered into any transactions not in the ordinary course of
        business, in either case which is material to the Company or any Guarantor,
        as a
        whole, (ii) there has not been any material change in the short-term debt
        or
        long-term debt of any of the Company or any Guarantor and (iii) there has
        been
        no material change in the Company’s accounting principles.

       

      (e)  Except
        as
        set forth in Section
        4.8
        of the
        Schedule of Exceptions or in the Company’s Quarterly Report on Form 10-Q for the
        quarter ended March 31, 2005, since December 31, 2004, there has been no
        Material Adverse Effect with respect to the Company and its
        Subsidiaries.

       

      4.9.  OFFERING
        EXEMPTION

       

      (a)  None
        of
        the Company, its Affiliates or any Person acting on its or their behalf has
        engaged or will engage, in connection with the offering and sale of the Notes,
        in any form in general solicitation or general advertising within the meaning
        of
        Rule 502(c) under the Securities Act, and none of the Company, or any of
        its
        Affiliates has, directly or indirectly, solicited any offer to buy, sell
        or
        offer to sell or otherwise negotiate in respect of, in the United States
        or to
        any United States citizen or resident, any security which is or would be
        integrated with the sale of the Notes in a manner that would require the
        Notes
        to be registered under the Securities Act. The offering, sale and issuance
        of
        the Notes have been, are, and will be exempt from registration under the
        Securities Act, and such offering, sale and issuance is also exempt from
        registration under applicable state securities and “blue sky” laws.

       

      (b)  None
        of
        the Company or any Guarantor is, or upon consummation of the transactions
        contemplated under the Transaction Documents, will be, subject to registration
        as an “investment company” under the 1940 Act.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      4.10.  PERMITS;
        GOVERNMENTAL AND OTHER APPROVALS

       

      (a)  Other
        than as set forth in Section
        4.10
        of the
        Schedule of Exceptions or in the Company Reports, each of the Company and
        its
        Subsidiaries possesses all necessary consents, approvals, authorizations,
        orders, registrations, stamps, filings, qualifications, licenses, permits
        or
        other analogous acts by, of, from or with all public, regulatory or governmental
        agencies, bodies and authorities and all other third parties, to own, lease
        and
        operate its respective properties and to carry on its business as now conducted
        and proposed to be conducted except to the extent that the failure to obtain
        any
        such consents, approvals, authorizations, orders, registrations, stamps,
        filings, qualifications, licenses or permits would not have a Material Adverse
        Effect. Other than as set forth in Section
        4.10
        of the
        Schedule of Exceptions, no approval, consent, authorization or other order
        of,
        and no designation, filing, registration, qualification or recording with,
        any
        governmental authority or any other Person is required in connection with
        the
        Company’s valid execution, delivery and performance of this Agreement or the
        offer, issuance and sale of the Notes by the Company to the Lenders or the
        consummation of any other transaction contemplated on the part of the Company
        hereby.

       

      (b)  Without
        limiting the generality of the representations and warranties made in Section
        4.10(a), the Company represents and warrants that (i)
        it and
        the Guarantors are in compliance with all applicable provisions of the FDC
        Act,
        except where any such noncompliance could not reasonably be expected to have
        a
        Material Adverse Effect; (ii)
        its
        products and those of the Guarantors are not adulterated or misbranded and
        are
        in lawful distribution; (iii)
        the
        consent agreement entered into by the Company with the United States Attorney
        for the Eastern District of New York on behalf of the FDA on June 29, 1993
        has
        been terminated; and (iv)
        it and
        the Guarantors are, and will be, in compliance with the following specific
        requirements: (A) Acura Pharmaceutical Technologies, Inc. has registered
        its
        facility with the FDA, (B) the Company and the Guarantors have listed their
        drug
        products with the FDA, (C) each drug product marketed by the Company or any
        Guarantor is the subject of an application approved by the FDA, (D) all drug
        products marketed by the Company or either Guarantor comply with any conditions
        of approval and the terms of the application submitted to the FDA, (E) all
        of
        the Company’s and the Guarantors’ drug products are manufactured in compliance
        with the FDA’s good manufacturing practice regulations, (F) all of the Company’s
        and the Guarantors’ products are labeled and promoted in accordance with the
        terms of the marketing application and the provisions of the FDC Act, (G)
        all
        adverse events relating to the Company and the Guarantors that were required
        to
        be reported to the FDA have been reported to the FDA in a timely manner,
        (H)
        to
        the Company’s best knowledge, neither the Company nor any Guarantor is employing
        or utilizing the services of any individual who has been debarred under the
        FDC
        Act, (I) all stability studies required to be performed for products distributed
        by the Company or a Guarantor have been completed or are ongoing in accordance
        with the applicable FDA requirements, (J) to the best of the Company’s
        knowledge, none of the Company’s or a Guarantor’s products have been exported
        for sale outside the United States, and (K) each of the Company and the
        Guarantors is in compliance with the provisions of the Prescription Drug
        Marketing Act, to the extent applicable; except, with respect to subclauses
        (iv)(E), (iv)(G), (iv)(J) and (iv)(K) above, where any such noncompliance
        could
        not reasonably be expected to have a Material Adverse Effect. 

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (c)  Without
        limiting the generality of the representations and warranties made in Section
        4.10(a), the Company also represents and warrants that it and the Guarantors
        are
        in compliance with all applicable provisions of the CSA and that the Company
        and
        the Guarantors are in compliance with the following specific requirements,
        except where such noncompliance could not reasonably be expected to have
        a
        Material Adverse Effect: (i) the Company and the Guarantors are registered
        with
        the DEA at each facility where controlled substances are exported, imported,
        manufactured or distributed; (ii) all controlled substances are stored and
        handled pursuant to DEA security requirements; (iii) all records and inventories
        of receipt and distributions of controlled substances are maintained in the
        manner and form as required by DEA regulations; (iv) all reports, including,
        but
        not limited to, ARCOS, manufacturing quotas, production quotas, and disposals,
        have been submitted to the DEA in a timely manner; (v) all adverse events,
        including thefts or significant losses of controlled substances, have been
        reported to the DEA in a timely manner; (vi) to the Company’s best knowledge,
        neither the Company nor any Guarantor is employing any individual, with access
        to controlled substances, who has previously been convicted of a felony
        involving controlled substances; and (vii) any imports or exports of controlled
        substances have been conducted in compliance with the CSA and DEA
        regulations. 

       

      4.11.  SALES
        REPRESENTATIVES; CUSTOMERS AND KEY EMPLOYEES

       

      (a)  Except
        as
        set forth in Section
        4.11
        of the
        Schedule of Exceptions, to the best knowledge of the Company, no independent
        sales representatives, customers, officers or key employees or group of key
        employees of the Company or any Guarantor has any intention to terminate
        his,
        her or its relationship with the Company or such Guarantor on or after the
        Closing or, in the case of employees, leave the employ of the Company or
        any of
        the Guarantors on and after the Closing, nor has the Company or any of the
        Guarantors discussed or taken any steps to terminate the employment of any
        officer or key employee or group of key employees. Other than as set forth
        in
Section
        4.11
        of the
        Schedule of Exceptions or in the Company Reports, all personnel of the Company
        and any of the Guarantors are employed on an “at will” basis and may be
        terminated upon notice of not more than 30 days.

       

      (b)  To
        the
        Company’s best knowledge, no employee of the Company or any of the Guarantors,
        or any consultant (including any scientific advisor) with whom the Company
        or
        any of the Guarantors has contracted, is in violation of any term of any
        employment contract, proprietary information agreement, licenses, or any
        other
        agreement relating to the right of any such
        individual to be employed by, or to contract with, the Company or any of
        the
        Guarantors because of the nature of the business conducted by the Company
        and
        the Guarantors; and the continued employment by the Company or any of the
        Guarantors of their present employees, and the performance of the Company’s and
        the Guarantor’s contracts with its independent contractors, will not result in
        any such violation, except where any such violation could not reasonably
        be
        expected to have a Material Adverse Effect. None of the Company or any of
        the
        Guarantors has received any written, or to the best knowledge of the Company,
        oral notice alleging that any such violation has occurred.

       

      (c)  All
        of
        the Company’s and any of the Guarantor’s consultants (including scientific
        advisors), officers and key employees are subject to customary non-disclosure
        and non-competition agreements. 

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      4.12.  COPYRIGHTS,
        TRADEMARKS AND PATENTS; LICENSES

       

      (a)  Section
        4.12
        of the
        Schedule of Exceptions sets forth a list of all of the Company’s and any
        Guarantor’s Intellectual Property Rights. The Intellectual Property Rights are,
        to the best of the Company’s knowledge, fully valid and are in full force and
        effect; provided, that the Company makes no representation as to whether
        any
        pending patent applications will be allowed.

       

      (b)  The
        Company or a Guarantor owns outright all of the Intellectual Property Rights
        listed on Section
        4.12
        of the
        Schedule of Exceptions attached hereto free and clear of all liens and
        encumbrances except for the Permitted Liens, and does not pay, and is not
        required to pay, any royalty to anyone under or with respect to any of
        them.

       

      (c)  Neither
        the Company nor any Guarantor has licensed anyone to use any of such
        Intellectual Property Rights and has no knowledge of, nor has it received
        any
        notice relating to, the infringing use by the Company or any Guarantor of
        any
        Intellectual Property Rights.

       

      (d)  Except
        as
        otherwise disclosed to the Company’s Board of Directors, the Company has no
        knowledge, nor has it received any notice (i) of any conflict with the asserted
        rights of others with respect to any Intellectual Property Rights used in,
        or
        useful to, the operation of the business conducted by the Company and the
        Guarantors or with respect to any license under which the Company or a Guarantor
        is licensor or licensee; or (ii) that the Intellectual Property Rights infringe
        upon the rights of any third party.

       

      (e)  Except
        as
        set forth in Section
        4.12
        of the
        Schedule of Exceptions, neither the Company nor any Guarantor is a party
        to any
        license agreement pursuant to which the Company is the licensor or licensee
        of
        any Intellectual Property Rights.

       

      4.13.  INVENTORY

       

      The
        Company and its Subsidiaries do not maintain any material
        inventory.

       

      4.14.  NO
        DISCRIMINATION; LABOR MATTERS

       

      Neither
        the Company nor any Guarantor in any manner or form discriminates, fosters
        discrimination or permits discrimination against any Person based on gender
        or
        age, or belonging to any minority race or believing in any minority creed
        or
        religion. No charge of discrimination in employment, whether by reason of
        age,
        gender, race, religion or other legally protected category that has been
        asserted or is now pending or, to the best knowledge of the Company and the
        Guarantors, threatened before the United States Equal Employment Opportunity
        Commission or other federal or governmental authorities. The Company and
        each
        Guarantor is in compliance with all applicable Legal Requirements respecting
        employment practices, terms and conditions of employment and wages and hours
        and
        is not and has not engaged in any unfair labor practice. The Company and
        each
        Guarantor has withheld and paid to the appropriate governmental authorities
        or
        is holding for payment not yet due to governmental authorities, all amounts
        required to be withheld from such employees of the Company or the Guarantors
        and
        is not liable for any arrears of wages, taxes, penalties or other sums for
        failure to comply with any of the foregoing. Except as set forth in Section
        4.14
        of the
        Schedule of Exceptions, in connection with the operation of the Company’s and
        each Guarantor’s business, (a) there is no unfair labor practice charge or
        complaint against the Company or any Guarantor pending before the National
        Labor
        Relations Board or any other governmental agency arising out of the Company’s or
        any Guarantor’s activities and the Company has no knowledge, nor has it received
        notice of any facts or information that would give rise thereto; (b) there
        is no
        significant labor trouble, labor strike, material controversy, material
        unsettled grievance, dispute, request for representation, slowdown or stoppage
        actually pending against or affecting the Company or any of the Guarantors
        and,
        to the best knowledge of the Company, none is or has been threatened; and
        (c)
        none of the Company or any of the Guarantors has any collective bargaining
        agreements with respect to any personnel nor is the Company aware of any
        current
        attempts to organize or establish any labor union or employee association
        with
        respect to any personnel, nor is there any certification, interim certifications
        or voluntary recognition of any such union with regard to a bargaining unit.
        

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      4.15.  ENVIRONMENTAL
        MATTERS

       

      (a)  Without
        limiting the generality of the representations and warranties given in
Section
        4.10(a),
        each of
        the Company and the Subsidiaries has obtained all environmental, health and
        safety permits, licenses and other authorizations necessary or required for
        the
        operation of its business, except where the failure to possess such franchises,
        licenses, permits or other authority could not reasonably be expected to
        have a
        Material Adverse Effect, and all such permits, licenses and other authorizations
        are in full force and effect and each of the Company and, except as set forth
        in
Section
        4.15
        of the
        Schedule of Exceptions, the Subsidiaries is in compliance with all terms
        and
        conditions of such permits, except where such noncompliance could not reasonably
        be expected to have a Material Adverse Effect. 

       

      (b)  There
        is
        no proceeding pending or, to the best knowledge of the Company, threatened,
        which may result in the denial, rescission, termination, modification or
        suspension of any environmental or health or safety permits, licenses or
        other
        authorizations necessary for the operation of the business of the Company
        and
        the Subsidiaries.

       

      (c)  During
        the occupancy by the Company or any Subsidiary of any real property owned
        or
        leased by the Company or such Subsidiary, neither the Company nor any
        Subsidiary, and to the best knowledge of the Company, no other Person, has
        caused or permitted materials to be generated, released, stored, treated,
        recycled, disposed of on, under or at such parcels, which materials, if known
        to
        be present, would require cleanup, removal or other remedial or responsive
        action under any environmental Legal Requirements. To the best knowledge
        of the
        Company, there are no underground storage tanks and no PCB, PCB contaminated
        oil
        or asbestos on any property leased by the Company or any
        Subsidiary.

       

      (d)  Except
        as
        set forth in Section
        4.15
        of the
        Schedule of Exceptions, neither the Company nor any Subsidiary is subject
        to any
        judgment, decree, order or citation related to or arising out of environmental
        Legal Requirements, or has received notice that it has been named or listed
        as a
        potentially responsible party by any Person in any matter arising under
        environmental Legal Requirements.

       

      (e)  To
        the
        Company’s best knowledge, each of the Company and the Subsidiaries has disposed
        of all waste in full compliance with all environmental Legal
        Requirements.

       

      4.16.  TAXES

       

      The
        Company and each of the Guarantors have (a) filed all necessary income,
        franchise and other material tax returns, domestic and foreign, (b) paid
        all
        taxes shown as due thereunder and (c) withheld and paid to the appropriate
        tax
        authorities all amounts required to be withheld from wages, salaries and
        other
        remuneration to employees. The Company has no knowledge, nor has it received
        notice, of any tax deficiency which might be assessed against the Company
        or any
        Guarantor which, if so assessed, could reasonably be expected to have a Material
        Adverse Effect. 

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      4.17.  EMPLOYEE
        BENEFIT PLANS AND SIMILAR ARRANGEMENTS

       

      (a)  Section
        4.17
        of the
        Schedule of Exceptions and the Company Reports list all employee benefit
        plans
        and collective bargaining, labor and employment agreements or other similar
        arrangements in effect to which the Company, the Guarantors, and any of their
        respective ERISA Affiliates are a party or by which the Company, the Guarantors,
        and any of respective ERISA Affiliates are bound, legally or otherwise,
        including, without limitation, (i) any profit-sharing, deferred compensation,
        bonus, stock option, stock purchase, pension, retainer, consulting, retirement,
        severance, welfare or incentive plan, agreement or arrangement; (ii) any
        plan,
        agreement or arrangement providing for fringe benefits or perquisites to
        employees, officers, directors or agents, including but not limited to benefits
        relating to employer-supplied automobiles, clubs, medical, dental,
        hospitalization, life insurance and other types of insurance, retiree medical,
        retiree life insurance and any other type of benefits for retired and terminated
        employees; (iii) any employment agreement; or (iv) any other “employee benefit
        plan” (within the meaning of Section 3(3) of ERISA) (herein referred to
        individually as “Plan”
        and
        collectively as “Plans”).

       

      (b)  True
        and
        complete copies of the following documents with respect to any Plan of the
        Company, its Subsidiaries, and each ERISA Affiliate, as applicable, have
        been
        made available to each of the Lenders: (i) the most recent Plan document
        and
        trust agreement (including any amendments thereto and prior plan documents,
        if
        amended within the last two years), (ii) the last two Form 5500 filings and
        schedules thereto, (iii) the most recent IRS determination letter, (iv) all
        summary plan descriptions, (v) a written description of each material
        non-written Plan, (vi) each written communication to employees intended to
        describe a Plan or any benefit provided by such Plan, (vii) the most recent
        actuarial report, and (viii) all correspondence with the IRS, the Department
        of
        Labor and the PBGC concerning any controversy. Each report described in clause
        (vii) accurately reflects the funding status of the Plan to which it relates
        and
        subsequent to the date of such report there has been no adverse change in
        the
        funding status or financial condition of such Plan.

       

      (c)  Each
        Plan
        is and has been maintained in compliance with applicable Legal Requirements,
        including but not limited to ERISA and the Code, and with any applicable
        collective bargaining agreements or other contractual obligations.

       

      (d)  With
        respect to any 412 Plan, there has been no failure to make any contribution
        or
        pay any amount due as required by Section 412 of the Code, Section 302 of
        ERISA
        or the terms of any such Plan, and no funding waiver has been requested or
        received from the IRS. The assets of the Company, its Subsidiaries, or any
        ERISA
        Affiliates are not now, nor will they after the passage of time be, subject
        to
        any lien imposed under Section 412(n) of the Code by reason of a failure
        of the
        Company, any Subsidiary, or any ERISA Affiliate to make timely installments
        or
        other payments required under Section 412 of the Code.

       

      (e)  No
        Plan
        subject to Title IV of ERISA has any Unfunded Pension Liability.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (f)  Except
        as
        shown on Section
        4.17
        of the
        Schedule of Exceptions, there are no pending, or to the best knowledge of
        the
        Company, its Subsidiaries, and ERISA Affiliates,  threatened
        claims, investigations, actions or lawsuits, other than routine claims for
        benefits in the ordinary course, asserted or instituted against (i) any Plan
        or
        its assets, (ii) any ERISA Affiliate with respect to any 412 Plan, or (iii)
        any
        fiduciary with respect to any Plan for which the Company, its Subsidiaries,
        or
        any ERISA Affiliate may be directly or indirectly liable, through
        indemnification obligations or otherwise.

       

      (g)  Except
        as
        set forth in Section
        4.17
        of the
        Schedule of Exceptions, none of the Company, any Subsidiary, or any ERISA
        Affiliate has incurred and or reasonably expects to incur (i) any Withdrawal
        Liability and no event has occurred which, with the giving of notice under
        Section 4219 of ERISA, would result in Withdrawal Liabilities, or any liability
        under Section 4063, 4064, or 4243, or (ii) any outstanding liability under
        Title
        IV of ERISA with respect to any 412 Plan.

       

      (h)  Except
        as
        shown on Section
        4.17
        of the
        Schedule of Exceptions, within the last five years, none of the Company,
        any
        Subsidiary or any ERISA Affiliate has transferred any assets or liabilities
        of a
        412 Plan subject to Title IV of ERISA which had, at the date of such transfer,
        an Unfunded Pension Liability or has engaged in a transaction which may
        reasonably be subject to Section 4212(c) or Section 4069 of ERISA.

       

      (i)  None
        of
        the Company, any Subsidiary, or any ERISA Affiliate has engaged, directly
        or
        indirectly, in a non-exempt prohibited transaction (as defined in Section
        4975
        of the Code or Section 406 of ERISA) in connection with any Plan.

       

      (j)  No
        “reportable event” (within the meaning of Section 4043 of ERISA) has occurred
        with respect to any Plan.

       

      (k)  Neither
        the Company nor any of its Subsidiaries provides, or has provided, retiree
        welfare benefits for the benefit of any present or former employee or
        director.

       

      (l)  Neither
        the Company nor any of its Subsidiaries has made any commitment or any formal
        plan to create any additional Plan or to modify or terminate (except to the
        extent required by applicable law) any existing Plan.

       

      (m)  Neither
        the Company nor any of its Subsidiaries is a party to any plan, agreement
        or
        arrangement pursuant to the terms of which the consummation or announcement
        of
        any transaction contemplated by this Agreement will result (either alone
        or in
        connection with the occurrence of any additional or further acts or events)
        in
        any benefit under any Plan being established or becoming accelerated or
        immediately vested and payable.

       

      (n)  The
        provisions of Section 280G of the Code will not apply with respect to any
        payment made or to be made pursuant to or in connection with any
        Plan.

       

      4.18.  PERSONAL
        PROPERTY

       

      The
        Company and the Guarantors have good and marketable title to each item of
        equipment, machinery, furniture, fixtures, vehicles, structures and other
        personal property, tangible and intangible, included as an asset in the
        Financial Statements filed as part of the Company Reports, free and clear
        of any
        security interests, options, liens, claims, charges or encumbrances whatsoever,
        except as set forth in Section
        4.18
        of the
        Schedule of Exceptions and as disclosed in the Company General Security
        Agreement and the Guarantors General Security Agreement. 

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      4.19.  REAL
        PROPERTY

       

      (a)  The
        Company and the Guarantors do not own any fee simple interest in real property
        other than as set forth in Section
        4.19
        of the
        Schedule of Exceptions (the “Owned
        Property”).
        The
        Company and the Guarantors do not lease or sublease any real property other
        than
        as set forth on Schedule
        4.19
        (the
“Leased
        Property”).
        The
        Company has made available for inspection by the Lenders true and complete
        copies of all Leases. The Company and each Guarantor enjoys a peaceful and
        undisturbed possession of the Owned Property and Leased Property. No Person
        other than the Company or any Guarantor has any right to use or occupy any
        part
        of the Owned Property and the Leased Property. Except as set forth in
Section
        4.19
        of the
        Schedule of Exceptions, the Leases are valid, binding and in full force and
        effect, all rent and other sums and charges payable thereunder are current,
        no
        notice of default or termination under any of the Leases is outstanding,
        no
        termination event or condition or uncured default on the part of the Company
        or,
        to the best of the Company’s knowledge, on the part of the landlord,
        sublandlord, as the case may be, thereunder, exists under the Leases, and
        no
        event has occurred and no condition exists which, with the giving of notice,
        or
        the lapse of time, or both, would constitute such a default or termination
        event
        or condition. There are no subleases, licenses or other agreements granting
        to
        any Person other than the Company or the Guarantors any right to possession,
        use, occupancy or enjoyment of the Premises demised by the Leases. Each Owned
        Property and Leased Property is used in the conduct of the Company’s or the
        Guarantors’ business.

       

      (b)  Without
        limiting the generality of the representations and warranties given in
Section
        4.10(a),
        all
        required permits, licenses, franchises, approvals and authorizations of all
        governmental authorities having jurisdiction over each Leased Property and
        from
        all insurance companies and fire rating and other similar boards and
        organizations have been issued to the Company and the Guarantors to enable
        each
        Leased Property or Owned Property to be lawfully occupied and used for all
        the
        purposes for which they are currently occupied and used and have been lawfully
        issued and are in full force and effect, except where the failure to possess
        such permits, licenses, franchises, approvals and authorizations, individually
        or in the aggregate, could not reasonably be expected to have a Material
        Adverse
        Effect.

       

      (c)  Neither
        the Company nor the Guarantors have received any notice nor have they any
        knowledge of any pending, threatened or contemplated condemnation proceeding
        affecting any Leased Property or the Owned Property or any part
        thereof.

       

      4.20.  DISCLOSURE

       

      The
        information heretofore provided and to be provided in connection with this
        Agreement, including, without limitation, the Schedule of Exceptions and
        the
        Exhibits hereto, the Transaction Documents and each of the agreements,
        documents, certificates and writings previously furnished to the Lenders
        or
        their representatives, do not and will not contain any untrue statement of
        a
        material fact and do not and will not omit to state a material fact necessary
        in
        order to make the statements and writings contained herein and therein not
        false
        or misleading in the light of the circumstances under which they were made.
        There are no facts that (individually or in the aggregate) could reasonably
        be
        expected to have a Material Adverse Effect, which has not been set forth
        herein
        or in the Schedule of Exceptions or the Company Reports. 

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      4.21.  INTENTIONALLY
        OMITTED

       

      4.22.  INSURANCE

       

      (a)  Each
        of
        the Company and the Guarantors maintains, with financially sound and reputable
        insurers, insurance against loss or damage by theft, fire, explosion and
        other
        risks customarily insured against by companies in the line of business of
        the
        Company or the Guarantors, in amounts sufficient to prevent the Company or
        the
        Guarantors from becoming a co-insurer of the property insured as well as
        insurance against other hazards and risks and liability to Persons and property
        to the extent and in the manner customary for companies in similar businesses
        similarly situated or as may be required by law, including, without limitation,
        general liability, fire and business interruption insurance, and product
        liability insurance as may be required pursuant to any license agreement
        to
        which the Company or the Guarantors is a party or by which it is
        bound.

       

      (b)  The
        Company maintains D&O Insurance as detailed in Section
        4.22(b)
        of the
        Schedule of Exceptions, which D&O Insurance is in full force and effect and
        as to which the Company has not received any notice of default, termination,
        change in terms, change in coverage or similar notice.

       

      4.23.  NON-COMPETES

       

      Except
        as
        set forth in Section
        4.23
        of the
        Schedule of Exceptions, and as contemplated by Section
        4.11(c),
        the
        Company and its Subsidiaries are not subject to any non-compete or similar
        arrangements with any Persons that restrict or may restrict the Company and
        its
        Subsidiaries from carrying on its business as now conducted and as it is
        proposed to be conducted. 

       

      4.24.  PRODUCT
        WARRANTY

       

      Except
        as
        set forth in Section
        4.24
        of the
        Schedule of Exceptions, or as reflected or reserved against in the Financial
        Statements, (a) to the knowledge of the Company, each product manufactured
        by
        the Company or any Subsidiary has been in material conformity with all
        applicable contractual commitments of the Company or any Subsidiary, and
        (b) no
        product currently manufactured by the Company or any Subsidiary is subject
        to
        any guaranty, warranty or indemnity of a contractual nature other than the
        applicable standard terms and conditions, if any, applicable to the sale
        or
        delivery of such product. 

       

      4.25.  MINUTE
        BOOKS

       

      The
        Company and the Subsidiaries have made accurate and complete copies of their
        minute books available for inspection by the Lenders.

       

      ARTICLE
        V

       

      AFFIRMATIVE
        COVENANTS

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      The
        Company hereby covenants and agrees, so long as any Note remains outstanding,
        as
        follows: 

       

      5.1.  MAINTENANCE
        OF CORPORATE EXISTENCE; PROPERTIES AND LEASES; TAXES;
        INSURANCE

       

      (a)  The
        Company shall, and shall cause each of the Guarantors to, maintain in full
        force
        and effect its corporate existence, rights and franchises and all terms of
        licenses and other rights to use licenses, trademarks, trade names, service
        marks, copyrights, patents, processes or any other Intellectual Property
        Rights
        owned or possessed by it and necessary to the conduct of its business, except
        where failure to maintain such rights, franchises and terms of licenses and
        other rights to use such Intellectual Property Rights could not reasonably
        be
        expected to have a Material Adverse Effect.

       

      (b)  The
        Company shall, and shall cause the Guarantors to, keep each of its properties
        necessary to the conduct of its business in good repair, working order and
        condition, reasonable wear and tear excepted, and from time to time make
        all
        needful and proper repairs, renewals, replacements, additions and improvements
        thereto; and the Company shall, and shall cause the Guarantors to, at all
        times
        comply with each provision of all leases to which it is a party or under
        which
        it occupies property, except where any such noncompliance could not reasonably
        be expected to have a Material Adverse Effect.

       

      (c)  The
        Company shall, and shall cause each of the Guarantors to, (i) promptly pay
        and
        discharge, or cause to be paid and discharged when due and payable, all lawful
        taxes, assessments and governmental charges or levies imposed upon the income,
        profits, assets, property or business of the Company and the Guarantors,
        (ii)
        withhold and promptly pay to the appropriate tax authorities all amounts
        required to be withheld from wages, salaries and other remuneration to
        employees, and (iii) promptly pay all claims or indebtedness (including,
        without
        limitation, claims or demands of workmen, materialmen, vendors, suppliers,
        mechanics, carriers, warehousemen and landlords) which, if unpaid might become
        a
        lien upon the assets or property of the Company or the Guarantors; provided,
        however,
        that
        any such tax, lien, assessment, charge or levy need not be paid if (1) the
        validity thereof shall be contested timely and in good faith by appropriate
        proceedings, (2) the Company or the Guarantors shall have set aside on its
        books
        adequate reserves with respect thereto, and (3) the failure to pay shall
        not be
        prejudicial in any material respect to the holders of the Notes, and
provided further that
        the
        Company or the Guarantors will pay or cause to be paid any such tax, lien,
        assessment, charge or levy forthwith upon the commencement of proceedings
        to
        foreclose any lien which may have attached as security therefore. Except
        to the
        extent prohibited by Article VI of this Agreement, the Company shall, and
        shall
        cause the Guarantors to, pay or cause to be paid all other indebtedness incident
        to the operations of the Company or the Guarantors.

       

      (d)  The
        Company shall, and shall cause each of the Guarantors to, keep its assets
        which
        are of an insurable character insured by financially sound and reputable
        insurers against loss or damage by theft, fire, explosion and other risks
        customarily insured against by companies in the line of business of the Company
        or the Guarantors, in amounts sufficient to prevent the Company or the
        Guarantors from becoming a co-insurer of the property insured; and the Company
        shall, and shall cause the Guarantors to, maintain, with financially sound
        and
        reputable insurers, insurance against other hazards and risks and liability
        to
        Persons and property to the extent and in the manner customary for companies
        in
        similar businesses similarly situated or as may be required by law, including,
        without limitation, general liability, fire and business interruption insurance,
        and product liability insurance as may be required pursuant to any license
        agreement to which the Company or the Guarantors is a party or by which it
        is
        bound.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      5.2.  BASIC
        FINANCIAL INFORMATION

       

      The
        Company shall furnish the following reports to each Lender, so long as it
        is a
        holder of a Note: 

       

      (a)  as
        soon
        as practicable, but in any event within 90 days after the end of each fiscal
        year of the Company, (i) audited balance sheets of the Company as at the
        end of
        such year, together with audited statements of income and retained earnings
        and
        statements of cash flows of the Company for such year, together with notes
        related thereto, each prepared in accordance with GAAP, consistently applied,
        and setting out in each case in comparative form the figures for the previous
        fiscal year, all in reasonable detail and certified by certified independent
        public accountants of established national reputation, and (ii) a report
        of the
        principal financial officer of the Company containing a management discussion
        and analysis of the Company’s consolidated financial condition at the end of
        such year and the results of operations for such year, including, but not
        limited to, a description of significant events with respect to the Company
        and
        its Subsidiaries, if any, during the preceding year and any planned or
        anticipated significant activities or events during the upcoming
        months;

       

      (b)  as
        soon
        as practicable, but in any event within 45 days after the end of each of
        the
        first three fiscal quarters of the Company in each year, (i) an unaudited
        balance sheet at the end of such quarter, and unaudited statements of income,
        of
        profit and loss and of changes in financial condition of the Company (including
        cash flow statements) for such period and for the current fiscal year to
        date,
        in each case prepared in accordance with GAAP, consistently applied (other
        than
        for accompanying notes and subject to changes resulting from year-end audit
        adjustments), and (ii) a report of the principal financial officer of the
        Company containing a management discussion and analysis of the Company’s
        consolidated financial condition at the end of such quarter and the results
        of
        operations for such quarter and the year to date, including, but not limited
        to,
        a description of significant events with respect to the Company and its
        Subsidiaries, if any, during such periods and any planned or anticipated
        significant activities or events during the upcoming months; and

       

      (c)  with
        reasonable promptness such other information and financial data concerning
        the
        Company as any Person entitled to receive materials under this Section 5.2
        may
        reasonably request. 

       

      5.3.  NOTICE
        OF ADVERSE CHANGE

       

      The
        Company shall promptly give notice to all Lenders (but in any event within
        two
        days) after becoming aware of the existence of any condition or event which
        constitutes, or the occurrence of, any of the following: 

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (a)  any
        Event
        of Default or any default that with the passage of time or the giving of
        notice
        would constitute an Event of Default;

       

      (b)  the
        institution or threatening of institution of any action, suit or proceeding
        against the Company or any Subsidiary before any court, administrative agency
        or
        arbitrator, including, without limitation, any action of a foreign government
        or
        instrumentality, which, if adversely decided, could reasonably be expected
        to
        have a Material Adverse Effect;

       

      (c)  any
        information relating to the Company or any Subsidiary which could reasonably
        be
        expected to have a Material Adverse Effect; or

       

      (d)  any
        failure by the Company or any of its Subsidiaries to comply with the provisions
        of Section 5.4 below.

       

      Any
        notice given under this Section 5.3 shall specify the nature and period of
        existence of the condition, event, information, development or circumstance,
        the
        anticipated effect thereof and what actions the Company or any Guarantor,
        as the
        case may be, has taken and proposes to take with respect thereto. 

       

      5.4.  COMPLIANCE
        WITH AGREEMENTS; COMPLIANCE WITH LAWS

       

      The
        Company shall, and shall cause its Subsidiaries to, comply with the terms
        and
        conditions of all material agreements, commitments or instruments to which
        the
        Company or any of its Subsidiaries is a party or by which it or they may
        be
        bound. The Company shall, and shall cause each of its Subsidiaries to, duly
        comply with any Legal Requirements relating to the conduct of their respective
        businesses, properties or assets, including, but not limited to, the
        requirements of the FDA Act, the Prescription Drug Marketing Act, the CSA,
        ERISA, the Environmental Protection Act, the Occupational Safety and Health
        Act,
        the Foreign Corrupt Practices Act, the Sarbanes-Oxley Act of 2002 and the
        rules
        and regulations of each of the agencies administering such acts, in each
        case
        except for any such noncompliance that could not reasonably be expected to
        have
        a Material Adverse Effect. 

       

      5.5.  PROTECTION
        OF LICENSES

       

      The
        Company shall, and shall cause its Subsidiaries to, maintain, defend and
        protect
        to the best of their ability licenses and sublicenses (and to the extent
        the
        Company or a Subsidiary is a licensee or sublicensee under any license or
        sublicense, as permitted by the license or sublicense agreement), trademarks,
        trade names, service marks, patents and applications therefore and other
        proprietary information or Intellectual Property Rights owned or used by
        it or
        them and shall keep duplicate copies of any licenses, trademarks, service
        marks
        or patents owned or used by it, if any, at a secure place selected by the
        Company. 

       

      5.6.  ACCOUNTS
        AND RECORDS; INSPECTIONS

       

      (a)  The
        Company shall keep true records and books of account in which full, true
        and
        correct entries will be made of all dealings or transactions in relation
        to the
        business and affairs of the Company and its Subsidiaries in accordance with
        GAAP
        applied on a consistent basis.

       

      (b)  The
        Company shall permit each Lender or any of such Lender’s officers, employees or
        representatives during regular business hours of the Company, upon reasonable
        notice and as often as such Lender may reasonably request, to visit and inspect
        the offices and properties of the Company and its Subsidiaries and to make
        extracts or copies of the books, accounts and records of the Company or its
        Subsidiaries, and to discuss the affairs, finances and accounts of the Company
        and its Subsidiaries, with the Company’s (or Subsidiary’s) directors and
        officers, its independent public accountants, consultants and
        attorneys.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (c)  Nothing
        contained in this Section 5.6 shall be construed to limit any rights that
        a
        Lender may have with respect to the books and records of the Company and
        its
        Subsidiaries, to inspect its properties or to discuss its affairs, finances
        and
        accounts.

       

      (d)  The
        Company will retain an Approved Accounting Firm to audit the Company’s financial
        statements at the end of each fiscal year. In the event the services of an
        Approved Accounting Firm or any firm of
        independent public accountants hereafter employed by the Company are terminated,
        the Company will promptly thereafter request the firm of independent public
        accountants whose services are terminated to deliver to the Lenders a letter
        of
        such firm setting forth its understanding as to the reasons for the termination
        of their services and whether there were, during the two most recent fiscal
        years or such shorter period during which said firm had been retained by
        the
        Company any disagreements between them and the Company on any matter of
        accounting principles or practices, financial statement disclosure, or auditing
        scope or procedure. In its notice, the Company shall state whether the change
        of
        accountants was recommended or approved by the Board of Directors or any
        committee thereof. In the event of such termination, the Company will promptly
        thereafter engage another Approved Accounting Firm.

       

      5.7.  MAINTENANCE
        OF OFFICE

       

      The
        Company will maintain its principal office at the address of the Company
        set
        forth in Section 10.4 of this Agreement where notices, presentments and demands
        in respect of this Agreement and any of the Notes may be made upon the Company,
        until such time as the Company shall notify the Lenders in writing, at least
        30
        days prior thereto, of any change of location of such office. 

       

      5.8.  FURTHER
        ASSURANCES

       

      From
        time
        to time the Company shall execute and deliver to the Lenders such other
        instruments, certificates, agreements and documents and take such other action
        and do all other things as may be reasonably requested by the Lenders in
        order
        to implement or effectuate the terms and provisions of this Agreement and
        the
        transactions contemplated hereby. 

       

      5.9.  SEC
        REPORTS

       

      The
        Company will file, on a timely basis, any SEC Reports and keep all such SEC
        Reports and public information current. The Company agrees that none of the
        SEC
        Reports filed by the Company will, at the time of filing, contain any untrue
        statement of a material fact or omit to state any material fact required
        to be
        stated therein or necessary in order to make the statements therein, in the
        light of the circumstances under which they are made, not
        misleading.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      5.10.  COLLATERAL
        

       

       

      With
        respect to all Company Collateral and Guarantor Collateral, the Company shall
        (and shall cause the Guarantors to) take all actions necessary to preserve
        and
        protect the Lenders’ first priority security interest therein pursuant to the
        applicable Transaction Documents or otherwise.

       

      5.11.  MINIMUM
        CASH

       

      The
        Company shall maintain at all times cash or cash deposits (in an account
        pledged
        to the Lenders or their agent) in an amount of at least Two Hundred Thousand
        Dollars ($200,000).

       

      ARTICLE
        VI 

       

      NEGATIVE
        COVENANTS

       

      The
        Company hereby covenants and agrees, so long as any Note remains outstanding,
        it
        will not (and not allow any of the Guarantors to), directly or indirectly,
        without the prior written consent of the Lenders: 

       

      6.1.  STAY,
        EXTENSION AND USURY LAWS

       

      At
        any
        time insist upon, plead, or in any manner whatsoever claim or take the benefit
        or advantage of, any stay, extension or usury law wherever enacted, now or
        at
        any time hereinafter in force, which may affect the covenants or the performance
        of the Notes or this Agreement, the Company hereby expressly waiving all
        benefit
        or advantage of any such law, or by resort to any such law, hinder, delay
        or
        impede the execution of any power herein granted to the Lenders but will
        suffer
        and permit the execution of every such power as though no such law had been
        enacted. 

       

      6.2.  LIENS

       

      Except
        as
        otherwise provided in this Agreement or any other Transaction Document, create,
        incur, assume or permit to exist any mortgage, pledge, lien, security interest
        or encumbrance on any part of its properties or assets, or on any interest
        it
        may have therein, now owned or hereafter acquired, nor acquire or agree to
        acquire property or assets under any conditional sale agreement or title
        retention contract, except that the foregoing restrictions shall not apply
        to:

       

      (a)  liens
        for
        taxes, assessments and other governmental charges, if payment thereof shall
        not
        at the time be required to be made, and provided such reserve as shall be
        required by GAAP consistently applied shall have been made
        therefore;

       

      (b)  liens
        of
        workmen, materialmen, vendors, suppliers, mechanics, carriers, warehouseman
        and
        landlords or other like liens, incurred in the ordinary course of business
        for
        sums not then due or that are being contested in good faith and provided
        that an
        adverse decision in such contest would not materially affect the business
        of the
        Company;

       

      (c)  liens
        securing the Company’s obligations under the Senior Note and the Watson Term
        Loan;

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (d)  statutory
        liens of landlords, statutory liens of banks and rights of set-off, and other
        liens imposed by law, in each case incurred in the ordinary course of business
        (i) for amounts not yet overdue or (ii) for amounts that are overdue and
        that
        are being contested in good faith by appropriate proceedings, so long as
        reserves or other appropriate provisions, if any, as shall be required by
        GAAP,
        shall have been made for any such contested amounts;

       

      (e)  liens
        incurred or deposits made in the ordinary course of business in connection
        with
        workers’ compensation, unemployment insurance and other types of social
        security, or to secure the performance of tenders, statutory obligations,
        surety
        and appeal bonds, bids, leases, government contracts, trade contracts,
        performance and return-of-money bonds and other similar obligations (exclusive
        of obligations for the payment of borrowed money);

       

      (f)  any
        attachment or judgment lien not otherwise constituting an Event of Default,
        or
        an event which, with the giving of notice, the lapse of time, or both, would
        not
        otherwise constitute an Event of Default;

       

      (g)  easements,
        rights-of-way, restrictions, encroachments, and other minor defects or
        irregularities in title, in each case which do not and will not interfere
        with
        the ordinary conduct of the business of the Company or any of its Subsidiaries,
        except where such interference could not reasonably be expected to have a
        Material Adverse Effect;

       

      (h)  any
        (i)
        interest or title of a lessor or sublessor under any lease, (ii) restriction
        or
        encumbrance that the interest or title of such lessor or sublessor may be
        subject to, or (iii) subordination of the interest of the lessee or sublessee
        under such lease to any restriction or encumbrance referred to in the preceding
        clause (ii), so long as the holder of such restriction or encumbrance agrees
        to
        recognize the rights of such lessee or sublessee under such lease;

       

      (i)  liens
        in
        favor of customs and revenue authorities arising as a matter of law to secure
        payment of customs duties in connection with the importation of
        goods;

       

      (j)  any
        zoning or similar law or right reserved to or vested in any governmental
        office
        or agency to control or regulate the use of any real property;

       

      (k)  liens
        securing obligations (other than obligations representing Indebtedness for
        borrowed money) under operating, reciprocal easement or similar agreements
        entered into in the ordinary course of business of the Company and its
        Subsidiaries;
        and

       

      (l)  the
        replacement, extension or renewal of any lien permitted by this Section 6.2
        upon or in the same property theretofore subject or the replacement, extension
        or renewal (without increase in the amount or change in any direct or contingent
        obligor) of the Indebtedness secured thereby.

       

      6.3.  INDEBTEDNESS

       

      Create,
        incur, assume, suffer, permit to exist, or guarantee, directly or indirectly,
        any Indebtedness, excluding: 

       

      (a)  the
        endorsement of instruments for the purpose of deposit or collection in the
        ordinary course of business;

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (b)  Indebtedness
        which may, from time to time be incurred or guaranteed by the Company which
        in
        the aggregate principal amount does not exceed $500,000 and is subordinate
        to
        the Indebtedness under this Agreement on terms reasonably satisfactory to
        the
        Lenders;

       

      (c)  Indebtedness
        existing on the date hereof and described in Section 6.4
        of the
        Schedule of Exceptions;

       

      (d)  Indebtedness
        relating to contingent obligations of the Company and its Subsidiaries under
        guaranties in the ordinary course of business of the obligations of suppliers,
        customers, and licensees of the Company and its Subsidiaries;

       

      (e)  Indebtedness
        relating to loans from the Company to its Subsidiaries or Indebtedness owed
        to
        any of the Guarantors;

       

      (f)  Indebtedness
        relating to capital leases in an amount not to exceed $500,000;

       

      (g)  Indebtedness
        relating to a working capital line of credit in an amount not to exceed
        $5,000,000 and which is subordinate to the Indebtedness under this Agreement
        on
        terms reasonably satisfactory to the Lenders;

       

      (h)  accounts
        or notes payable arising out of the purchase of merchandise or services in
        the
        ordinary course of business; or

       

      (i)  the
        Notes.

       

      6.4.  ARM’S
        LENGTH TRANSACTIONS

       

      Enter
        into any transaction, contract or commitment or take any action other than
        at
        Arm’s Length. 

       

      6.5.  LOANS
        AND ADVANCES

       

      Except
        for loans and advances outstanding as of the Closing Date and set forth in
        Section
        6.5
        of the
        Schedule of Exceptions, directly or indirectly, make any advance or loan
        to, or
        guarantee any obligation of, any Person, except for intercompany loans or
        advances in the ordinary course of business and those provided for in this
        Agreement. 

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      6.6.  INTERCOMPANY
        TRANSFERS; TRANSACTIONS WITH AFFILIATES; DIVERSION OF CORPORATE
        OPPORTUNITIES

       

      (a)  Make
        any
        intercompany transfers of monies or other assets in any single transaction
        or
        series of transactions, except as otherwise permitted in this
        Agreement.

       

      (b)  Engage
        in
        any transaction with any of the officers, directors, employees or Affiliates
        of
        the Company or of its Subsidiaries, except on terms no less favorable to
        the
        Company or the Subsidiary as could be obtained at Arm’s Length.

       

      (c)  Divert
        (or permit anyone to divert) any business or opportunity of the Company or
        any
        Subsidiary to any other corporate or business entity.

       

      6.7.  INVESTMENTS

       

      Make
        any
        investments in, or purchase any stock, option, warrant, or other security
        or
        evidence of Indebtedness of, any Person (exclusive of any Subsidiary), other
        than obligations of the United States Government or certificates of deposit
        or
        other instruments maturing within one year from the date of purchase from
        financial institutions with capital in excess of $100 million, in each case
        which are pledged to the Lenders (or their agent) in a manner that is acceptable
        to the Lenders and that results in a perfected first priority security interest
        in favor of the Lenders (or their agent).

       

      6.8.  OTHER
        BUSINESS

       

      Enter
        into or engage, directly or indirectly, in any business other than the business
        currently conducted or proposed to be conducted as disclosed to the Lenders
        prior to the date hereof by the Company or any Subsidiary. 

       

      6.9.  EMPLOYEE
        BENEFIT PLANS AND COMPENSATION

       

      Except
        as
        otherwise approved by the Board, or by a committee thereof to whom the Board
        has
        delegate such authority, (a) enter into or materially amend any agreement
        to
        provide for or otherwise establish any written or unwritten employee benefit
        plan, program or other arrangement of any kind, covering current or former
        employees of the Company or its Subsidiaries except for any such plan, program
        or arrangement expressly permitted under an existing agreement listed in
        Section
        4.17
        the
        Schedule of Exceptions or in the Company Reports; or (b) provide for or agree
        to
        any material increase in any benefit provided to current or former employees
        of
        the Company or its Subsidiaries over that which is provided to such individuals
        pursuant to a plan or arrangement disclosed in Section
        4.17
        of the
        Schedule of Exceptions or in the Company Reports.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      6.10.  CAPITAL
        EXPENDITURES

       

      Other
        than for capital expenditures approved by the Company’s Board of Directors, make
        or commit to make, or permit any of its Subsidiaries to make or commit to
        make,
        any capital expenditures in excess of $25,000 in the aggregate during any
        fiscal
        year of the Company. 

       

      6.11.  FORMATION
        OF SUBSIDIARIES

       

      Organize
        or invest, or permit any Subsidiary to organize or invest, in any new
        corporation, partnership, joint venture, limited liability company, trust
        or
        estate of which (or in which) (a) more than 50% of the issued and outstanding
        capital stock having ordinary voting power to elect a majority of the board
        of
        directors of such corporation (irrespective of whether at the time capital
        stock
        of any other class of such corporation shall or might have voting power upon
        the
        occurrence of any contingency), the interest in the capital or profits of
        such
        partnership, joint venture or limited liability company or the beneficial
        interest in such trust or estate, is at the time directly or indirectly owned
        or
        controlled by the Company, any of its Subsidiaries or any of their respective
        officers or directors, or (b) a material minority investment in any such
        entity
        is directly or indirectly owned or controlled by the Company, any of its
        Subsidiaries or any of their respective officers or directors. 

       

      6.12.  CERTAIN
        PAYMENTS 

       

      Make
        any
        cash payments of principal or interest with respect to any Indebtedness (other
        than the Loans or as expressly provided for in the Budget), without the prior
        written consent of the Lenders, which consent shall be within their sole
        and
        absolute discretion.

       

      ARTICLE
        VII 

       

      EVENTS
        OF DEFAULT

       

      7.1.  EVENTS
        OF DEFAULT

       

      If
        any of
        the following events shall occur and be continuing, an “Event
        of Default”
        shall
        be deemed to have occurred:

       

      (a)  if
        the
        Company shall default in the payment of any part of the principal or interest
        of
        any Note, when the same shall become due and payable, whether at maturity
        or at
        a date fixed for payment or prepayment or by acceleration or
        otherwise;

       

      (b)  if
        the
        Company shall default in the performance of any of the covenants contained
        in
        Articles V or VI
        and, in
        a case of a default under Section 5.1 through and including Section 5.7
        (exclusive of Section 5.1(c)), such default shall have continued without
        cure
        for fifteen (15) days after written notice (“Default
        Notice”)
        is
        given to the Company with respect to such covenant by any holder of the Notes
        (and the Company shall give to all of the holders of the Notes at the time
        outstanding prompt written notice of the receipt of such Default Notice,
        specifying the default referred to therein); provided,
        however,
        that
        such 15 day grace period shall not apply in the event the Company fails to
        give
        notice as provided in Section 5.3; 

       

      (c)  except
        as
        provided in Section 7.1(b), if the Company or any of the Guarantors shall
        default in the performance of any other agreement contained in any Transaction
        Document or in any other agreement executed in connection with this Agreement
        and such default shall not have been remedied to the satisfaction of the
        Lenders
        within 15 days after notice thereof shall have been given to the Company;
        provided,
        however,
        that
        such 15 day grace period shall not apply in the event the Company fails to
        give
        notice as provided in Section 5.3;

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (d)  if
        any
        representation or warranty made by the Company, any Guarantor or any of their
        officers in any Transaction Document or in or any certificate delivered pursuant
        thereto shall prove to have been incorrect in any material respect when
        made;

       

      (e)  if
        (i)
        any default shall occur under any indenture, mortgage, agreement, instrument
        or
        commitment evidencing, or under which there is at the time outstanding, any
        Indebtedness of the Company or a Subsidiary, in excess of $250,000, or which
        results in such Indebtedness, in an aggregate amount (with other defaulted
        Indebtedness) in excess of $250,000 becoming (or being declared by its holders
        or, on its behalf, by an agent or trustee therefore to be) due and payable
        prior
        to its due date; (ii) irrespective of the monetary thresholds specified in
        subclause (i) above, if any default, event of default or any other condition
        shall occur or exist under the Watson Term Loan which shall be continuing
        after
        the respective grace period, if any, specified in the Watson Term Loan, and
        the
        effect of which is to permit the acceleration of the maturity of the
        Indebtedness outstanding thereunder; (iii) a
        Change
        of Control shall have occurred; or (iv) a Funding Event shall have occurred
        without the simultaneous prepayment in full of the Loans pursuant to Section
        2.2
        above; 

       

      (f)  if
        any of
        the Company or its Subsidiaries shall default in the observance or performance
        of any term or provision of an agreement to which it is a party or by which
        it
        is bound which default could reasonably be expected to have a Material Adverse
        Effect and such default is not waived or cured within the applicable grace
        period; 

       

      (g)  if
        a
        final judgment which, either alone or together with other outstanding final
        judgments against the Company and its Subsidiaries, exceeds an aggregate
        of
        $250,000 shall be rendered against the Company or any Subsidiary and such
        judgment shall have continued undischarged or unstayed for 45 days after
        entry
        thereof;

       

      (h)  if
        the
        Company or any Subsidiary shall generally not pay its debts as such debts
        become
        due or shall make an assignment for the benefit of creditors generally, or
        shall
        admit in writing its inability to pay its debts generally; or if any proceeding
        shall be instituted by or against the Company or any Subsidiary seeking to
        adjudicate it as bankrupt or insolvent, or seeking liquidation, winding up,
        reorganization, arrangement, adjustment, protection, relief or composition
        of it
        or its debts under any law relating to bankruptcy, insolvency or the
        reorganization or relief of debtors, or seeking entry of an order for relief
        or
        the appointment of a receiver, trustee, custodian or other similar official
        for
        it or for any substantial part of its property and, in the case of such
        proceeding instituted against it (but not instituted by it) that is being
        diligently contested by it in good faith, either such proceeding shall remain
        undismissed or unstayed for a period of 45 days or any of the actions sought
        in
        such proceeding (including, without limitation, the entry of an order for
        relief
        against, or the appointment of a receiver, trustee, custodian or other similar
        official for, it or any substantial part of its property) shall occur; or
        if any
        writ of attachment or execution or any similar process shall be issued or
        levied
        against it or any substantial part of its property which is either not released,
        stayed, bonded or vacated within 45 days after its issue or levy or any of
        the
        actions sought or relief sought in any proceeding pursuant to which such
        writ or
        similar process shall be issued or initiated shall occur or be granted; or
        if
        the Company or any Subsidiary takes corporate action in furtherance of any
        of
        the aforesaid purposes or conditions; 

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (i)  if
        any
        provision of any Transaction Document shall for any reason cease to be valid
        and
binding
        on, or
enforceable
        against,
        the Company or any Guarantor, or the Company or any Guarantor shall so assert
        in
        writing; or

       

      (j)  any
        Transaction Document (or any financing statement) which purports:

       

      (i)  to
        create, perfect or evidence a lien on or security interest in any Company
        Collateral or Guarantor Collateral in favor of the Lenders (or their agents
        and
        representatives), or to provide for the priority of any such lien or security
        interest over the interest of any other party in the same Collateral, shall
        cease to create, or to preserve the enforceability, perfection or priority
        of,
        such lien and security interest; or

       

      (ii)  to
        provide for the priority in right of payment of the Company’s obligations under
        the Transaction Documents to or in favor of the Lenders (or their agents
        or
        representatives) shall cease to preserve such priority.

       

      7.2.  REMEDIES

       

      Upon
        the
        occurrence and during the continuance of an Event of Default, any Lender
        or
        Lenders of 60% of the then outstanding principal amount of the Loans may
        at any
        time (unless all defaults shall theretofore have been remedied) at its or
        their
        option, by written notice or notices to the Company (a) declare all the Notes
        to
        be due and payable, whereupon the same shall forthwith mature and become
        due and
        payable, together with interest accrued thereon, without presentment, demand,
        protest or notice, all of which are hereby waived by the Company; and (b)
        declare any other amounts payable to the Lenders under this Agreement or
        as
        contemplated hereby due and payable; provided,
        however,
        that
        upon the occurrence of an Event of Default under Section 7.1(h), the Notes,
        together with interest accrued thereon, shall automatically become and be
        due
        and payable, without presentment, demand, protest or notice of any kind,
        or any
        other action of any Lender of any kind, all of which are hereby waived by
        the
        Company.

       

      Notwithstanding
        anything to the contrary contained in this Section 7.2, in the event that
        at any
        time after the principal of the Notes shall so become due and payable and
        prior
        to the date of maturity stated in the Notes all arrears of principal of an
        interest on the Notes (with interest at the rate specified in the Notes on
        any
        overdue principal and, to the extent legally enforceable, on any interest
        overdue) shall be paid by or for the account of the Company, then the holder
        or
        holders of sixty percent (60%) of the then outstanding principal amount of
        the
        Loans, by written notice or notices to the Company, may (but shall not be
        obligated to) waive such Event of Default and its consequences and rescind
        or
        annul such declaration, but no such waiver shall extend to or affect any
        subsequent Event of Default or impair a right resulting therefrom. If any
        holder
        of the Note shall give any notices or take any other action with respect
        to a
        claimed default, the Company, forthwith upon receipt of such notice or obtaining
        knowledge of any such other action, will give notice thereof to all other
        holders of the Notes, describing such notice or other action and the nature
        of
        the claimed default.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      7.3.  ENFORCEMENT

       

      In
        case
        any one or more Events of Default shall occur and be continuing, the Lenders
        or
        their agent may proceed to protect and enforce the rights of the Lenders
        (granted to them or to their agent) by an action at law, suit in equity or
        other
        appropriate proceeding, whether for the specific performance of any agreement
        in
        favor of the Lenders or their agent which is contained in any of the Transaction
        Documents or in such Note or for an injunction against a violation of any
        of the
        terms hereof or thereof, or in aid of the exercise of any power granted hereby
        or thereby or by law (including, without limitation, the right to enforce
        the
        Company Collateral, the Guaranties and the Guarantor Collateral, each in
        accordance with its respective terms). Each Lender agrees that it will give
        written notice to the other Lenders prior to instituting any such action.
        In
        case of a default in the payment of any principal of or interest on any Note,
        the Company will pay to the holder thereof such further amount as shall be
        sufficient to cover the cost and the expenses of collection, including, without
        limitation, reasonable attorney’s fees, expenses and disbursements. No course of
        dealing and no delay on the part of any Lender or their agent in exercising
        any
        rights shall operate as a waiver thereof or otherwise prejudice such Lender’s or
        their agent’s rights. No right conferred hereby or by any Note upon any holder
        thereof shall be exclusive of any other right referred to herein or therein
        or
        now available at law or in equity, by statute or otherwise..

       

      ARTICLE
        VIII 

       

      INDEMNIFICATION

       

      To
        the
        greatest extent permitted by applicable law, the Company agrees to indemnify
        each Lender, its Affiliates and respective legal counsel, and each of the
        officers, directors, partners and stockholders of each, against and hold
        it
        harmless from all Losses arising out of or resulting from: (i) the breach
        of any
        representation or warranty of the Company in any Transaction Document or
        in any
        agreement, certificate or instrument delivered pursuant thereto; and (ii)
        the
        breach of any agreement by the Company contained in any Transaction Document
        or
        any agreement, certificate of instrument delivered pursuant
        thereto.

      

       

      ARTICLE
        IX 

       

      AMENDMENT
        AND WAIVER

       

      No
        amendment of any provision of this Agreement, including any amendment of
        this
        Article IX, shall be valid unless the same shall be in writing and signed
        by the
        Company (and the Independent Committee) and the Lenders. No waiver by any
        party
        of any default, misrepresentation, or breach of warranty or covenant hereunder
        or under any other Transaction Document, whether intentional or not, shall
        be
        deemed to extend to any prior or subsequent default, misrepresentation, or
        breach of warranty or covenant hereunder or thereunder or affect in any way
        any
        rights arising by virtue of any prior or
        subsequent such occurrence.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      ARTICLE
        X 

       

      MISCELLANEOUS

       

      10.1.  GOVERNING
        LAW

       

      This
        Agreement and the rights of the parties hereunder shall be governed in all
        respects by the laws of the State of New York wherein the terms of this
        Agreement were negotiated, excluding to the greatest extent permitted by
        law any
        rule of law that would cause the application of the laws of any jurisdiction
        other than the State of New York.

       

      10.2.  SUCCESSORS
        AND ASSIGNS

       

      Except
        as
        otherwise expressly provided herein, the provisions hereof shall inure to
        the
        benefit of, and be binding upon and enforceable by and against, the parties
        hereto and their respective successors, assigns, heirs, executors and
        administrators. No party may assign any of its rights hereunder without the
        prior written consent of the other parties; provided,
        however,
        that
        any Lender may assign any of its rights under any of the Transaction Documents
        to (a) any Affiliate of such Lender or (b) any Person to whom such Lender
        shall
        transfer its Note, provided,
        that in
        each case the transferee will be subject to the applicable terms of the
        Transaction Documents to the same extent as if such transferee were an original
        Lender hereunder.

       

      10.3.  ENTIRE
        AGREEMENT

       

      This
        Agreement (including the Exhibits and Schedules hereto), the other Transaction
        Documents and any other documents delivered pursuant hereto and simultaneously
        herewith constitute the full and entire understanding and agreement between
        the
        parties with regard to the subject matter hereof and thereof.

       

      10.4.  NOTICES

       

      All
        notices, demands or other communications given hereunder shall be in writing
        and
        shall be sufficiently given if transmitted by facsimile or delivered either
        personally or by a nationally recognized courier service marked for next
        business day delivery or sent in a sealed envelope by first class mail, postage
        prepaid and either registered or certified, return receipt requested, addressed
        as follows:

       

      (a)  if
        to the
        Company:

       

      Acura
        Pharmaceuticals, Inc.

      616
        N.
        North Court, Suite 120

      Palatine,
        Illinois 60067

      Attention:
        Mr. Andrew D. Reddick

      President
        and Chief Executive Officer

      Facsimile:
        (847) 705-5399

       

      (b) if
        to a
        Lender, to the address set forth on the signature page hereto,
        or to
        such other address with respect to any party hereto as such party may from
        time
        to time notify (as provided above) the other parties hereto. Any such notice,
        demand or communication shall be deemed to have been given (i) on the date
        of
        delivery, if delivered personally, (ii) on the date of facsimile transmission,
        receipt confirmed, (iii) one business day after delivery to a nationally
        recognized overnight courier service, if marked for next day delivery, or
        (iv)
        five business days after the date of mailing, if mailed.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (c) Copies
        of
        any notice, demand or communication given to the Company shall also be delivered
        to St. John & Wayne, L.L.C., Two Penn Plaza East, Newark, New Jersey,
        07105-2249 Attn.: John P. Reilly, Esq., or such other address as may be
        directed. 

       

      10.5.  DELAYS,
        OMISSIONS OR WAIVERS

       

      No
        delay
        or omission to exercise any right, power or remedy accruing to any Lender
        upon
        any breach or default of the Company under this Agreement shall impair any
        such
        right, power or remedy of such Lender nor shall it be construed to be a waiver
        of any such breach or default, or an acquiescence, therein, or of or in any
        similar breach or default thereafter occurring. Any permit, consent or approval
        of any kind or character on the part of any Lender of any breach or default
        under this Agreement must be made in writing and shall be effective only
        to the
        extent specifically set forth in such writing. All remedies, either under
        this
        Agreement or by law or otherwise afforded to any Lender, shall be cumulative
        and
        not alternative. Notwithstanding anything set forth herein or in any Transaction
        Document, if the consent of or the waiver by any Lender is needed or otherwise
        desirable under any Transaction Document and the Company, or any Affiliate
        thereof, pays or other gives consideration to any Lender, or an Affiliate
        thereof, for such consent or waiver the Company shall offer the same to all
        other Lenders.

       

      10.6.  INDEPENDENCE
        OF COVENANTS AND REPRESENTATIONS AND WARRANTIES

       

      All
        covenants hereunder shall be given independent effect so that if a certain
        action or condition constitutes a default under a certain covenant, the fact
        that such action or condition is permitted by another covenant shall not
        affect
        the occurrence of such default. In addition, all representations and warranties
        hereunder shall be given independent effect so that if a particular
        representation or warranty proves to be incorrect or is breached, the fact
        that
        another representation or warranty concerning the same or similar subject
        matter
        is correct or is not breached will not affect the incorrectness of or a breach
        of a representation and warranty hereunder. 

       

      10.7.  RIGHTS
        AND OBLIGATIONS; SEVERABILITY

       

      Unless
        otherwise expressly provided herein, each Lender’s rights and obligations
        hereunder are several rights and obligations, not rights and obligations
        jointly
        held with any other Person. In case any provision of this Agreement shall
        be
        invalid, illegal or unenforceable, the validity, legality and enforceability
        of
        the remaining provisions shall not in any way be affected or impaired
        thereby.

       

      10.8.  AGENT’S
        FEES

       

      The
        Company hereby (a) represents and warrants that the Company has not retained
        a
        finder or broker in connection with the transactions contemplated by this
        Agreement and (b) agrees to indemnify and to hold the Lenders harmless of
        and
        from any liability for commission or compensation in the nature of an agent’s
        fee to any broker or other Person, and the costs and expenses of defending
        against such liability or asserted liability, including, without limitation,
        reasonable attorney’s fees, arising from any act by the Company or any of the
        Company’s employees or representatives.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      10.9.  EXPENSES

       

      (a)  The
        Company shall bear its own expenses and legal fees incurred on its behalf
        with
        respect to the negotiation, execution and consummation of the transactions
        contemplated by this Agreement, and, subject to Section 10.9(b) the Company
        will
        reimburse each Lender for all of the legal fees and expenses incurred by
        such
        Lender’s counsel with respect to the negotiation, execution and consummation of
        the transactions contemplated by this Agreement and the transactions
        contemplated hereby; provided, however, that the Company’s reimbursement
        obligation under this Section 10.9(a) shall not exceed Thirty Five Thousand
        Dollars ($35,000) in the aggregate. 

       

      (b)  If
        the
        Loans are not disbursed, then each party shall bear its own expenses and
        legal
        fees incurred on its behalf with respect to the negotiation, execution and
        consummation of the transactions contemplated by this Agreement.

       

      (c)  The
        Company also agrees to reimburse each Lender for all reasonable legal fees
        and
        expenses subsequently incurred by such Lender or its agent and their respective
        Affiliates in connection with the negotiation, execution and consummation
        of any
        amendment, waiver or consent with respect to any agreement to which the Company
        and the Lender or its agent are parties; provided, that such waiver, amendment
        or consent (i) is requested by the Company or (ii) is required by the terms
        of
        the agreement or is required as a result of any action or inaction of the
        Company in violation of any such agreement.

       

      (d)  The
        Company further agrees to pay or reimburse each Lender and their agent for
        all
        out-of-pocket costs and expenses, including, without limitation, reasonable
        attorneys’ fees and disbursements, and costs of settlement incurred by the
        Lenders or their agent after the occurrence of an Event of Default (i) in
        enforcing any obligation or in foreclosing against the Company Collateral
        or
        Guarantors Collateral or exercising or enforcing any other right or remedy
        available by reason of such Event of Default; (ii) in connection with any
        negotiation, refinancing or restructuring of, or attempted refinancing or
        restructuring of, the credit arrangements provided under this Agreement and
        the
        other Transaction Documents in the nature of a “work-out” or in any insolvency
        or bankruptcy proceeding; (iii) in commencing, defending or intervening in
        any
        litigation or in filing a petition, complaint, answer, motion or other pleadings
        in any legal proceeding relating to either Company or any of its Affiliates
        and
        related to or arising out of the transactions contemplated hereby or by any
        of
        the other Transaction Documents; (iv) in taking any other action in or with
        respect to any suit or proceeding (whether in bankruptcy or otherwise) arising
        out of or in connection with this Agreement or any of the other Transaction
        Documents; (v) in protecting, preserving, collecting, leasing, selling, taking
        possession of, or liquidating any of the Company Collateral or Guarantors
        Collateral; or (vi) attempting to enforce or enforcing any security interest
        in
        any of the Company Collateral, the Guarantors Collateral or any other rights
        under any Transaction Document.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      10.10.  JURISDICTION

       

      (a)  Each
        of
        the parties hereto hereby irrevocably and unconditionally submits, for itself
        and its property, to the nonexclusive jurisdiction of any New York State
        court
        or United States Federal court sitting in New York City, and any appellate
        court
        from any thereof, in any action or proceeding arising out of or relating
        to this
        Agreement or any of the other Transaction Documents to which it is a party
        or to
        whose benefit it is entitled, or for recognition or enforcement of any judgment,
        and each of the parties hereto irrevocably and unconditionally agrees that
        all
        claims in respect of any such action or proceeding may be heard and determined
        in any such New York State court or, to the fullest extent permitted by law,
        in
        such United States Federal court. Each of the parties hereto agrees that
        a final
        judgment in any such action or proceeding shall be conclusive and may be
        enforced in other jurisdictions by suit on the right that any party may
        otherwise have to bring any action or proceeding relating to this Agreement
        or
        any of the other Transaction Documents in the courts of any other jurisdiction.
        

       

      (b)  Each
        of
        the parties hereto irrevocably and unconditionally waives, to the fullest
        extent
        it may legally and effectively do so, any objection that it may now or hereafter
        have to the laying of venue of any suit, action or proceeding arising out
        of or
        in relation to this Agreement or any other Transaction Document to which
        it is a
        party in any such New York State or United States Federal court sitting in
        New
        York City. Each of the parties hereto hereby irrevocably waives, to the fullest
        extent permitted by law, the defense of an inconvenient forum to the maintenance
        of such action or proceeding in any such court. 

       

      10.11.  WAIVER
        OF JURY TRIAL

       

      EACH
        OF
        THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN
        ANY
        ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR
        OTHERWISE) ARISING OUT OF OR RELATING TO ANY TRANSACTION DOCUMENT OR THE
        ACTIONS
        OF ANY PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT
        THEREOF.

       

      10.12.  CONFIDENTIALITY

       

      (a)  Each
        of
        the Lenders hereby agrees to keep (and to cause its Affiliates, employees,
        agents, attorneys, accountants and other professional advisors to keep)
        confidential the confidential information provided to it by or on behalf
        of the
        Company or its Subsidiaries pursuant to or in connection with the Agreement
        or
        any other Transaction Document, provided
        that,
        such information may be disclosed (i)
        solely in connection with the performance of the transactions contemplated
        by
        this Agreement and any other Transaction Document to (A) its Affiliates,
        directors, officers and employees who have a need to know such information
        and
        its agents, attorneys, accountants and other professional advisors or (B)
        the
        other Lenders, (ii) in response to any order of any court or other governmental
        or administrative body or agency or as may be required by any law binding
        upon
        any of the Lenders, (iii) in connection with the exercise of any remedies
        under
        any Transaction Document or the enforcement of rights hereunder and thereunder,
        (iv) with the consent of the Company or (v) to the extent such information
        (A)
        is on the date hereof, or at or before the time such disclosure becomes,
        publicly available other than as a result of a breach by such disclosing
        Person
        of the obligation set forth in this Agreement or (B) at or before the time
        of
        such disclosure becomes available to any Lender on a nonconfidential basis
        from
        a source other than the Company or its Subsidiaries, which source is not
        known
        to the recipient of such information to have breached a confidentiality
        agreement with the Company or its Subsidiaries in respect of such
        information.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (b)  Each
        Lender hereby agrees that in the event such Lender is requested or required
        other than by applicable law (by interrogatory, request for information or
        documents, subpoena, deposition, civil investigative demand or other process)
        to
        disclose any information pursuant to Section 10.12(a)(ii), such Lender will,
        except to the extent such notice would cause such Lender to be in violation
        of
        law, provide the Company with prompt notice of any such request or requirement
        so that the Company may seek an appropriate protective order or other similar
        assurance to prevent disclosure of such information or waive compliance with
        the
        provisions of this Section 10.12. Such Lender may not oppose action by the
        Company to obtain an appropriate protective order or other reliable assurance
        that confidential treatment will be accorded such information, provided
        that
        such Lender may oppose the Company’s action to obtain an appropriate protective
        order or other reliable assurance in the event that, in connection with any
        action, suit or other legal or equitable proceeding (including any bankruptcy
        proceeding), such Lender reasonably believes that the failure to publicly
        disclose such information would adversely affect such Lender’s ability to
        protect or exercise its rights and remedies hereunder or under any other
        Transaction Document. 

       

      (c)  A
        Lender
        may also disclose, subject to their compliance with the requirements of Section
        10.12(b), such information to the extent the Lender reasonably believe
        it is appropriate to in connection with any action, suit or other legal or
        equitable proceeding (including any bankruptcy proceeding) to protect or
        otherwise exercise their rights and remedies hereunder or under any other
        Transaction Document in any legal or equitable proceeding.

       

      (d)  In
        furtherance to the foregoing, each of the Lenders agrees that its right to
        request any information pursuant to Section 5.2(b) or to avail itself of
        the
        provisions of Section 5.6(b) shall be conditioned on its continuing compliance
        with the requirements of this Section 10.12. 

       

      10.13.  TITLES
        AND SUBTITLES

       

      The
        titles of the articles, sections and subsections of this Agreement are for
        convenience of reference only and are not to be considered in construing
        this
        Agreement.

       

      10.14.  COUNTERPARTS

       

      This
        Agreement may be executed in any number of counterparts, including by facsimile
        copy, each of which shall be deemed an original, but all of which together
        shall
        constitute one instrument.

       

      10.15.  MARSHALLING;
        RECOURSE TO SECURITY; PAYMENTS SET ASIDE

       

      The
        Lenders shall not be under any obligation to marshal any assets in favor
        of the
        Company or any of its Affiliates or any other party or against or in payment
        of
        any or all of the Loan or other obligations hereunder. Recourse to security
        shall not be required at any time. To the extent that the Company makes a
        payment or payments to a Lender or a Lender enforces its security interests
        or
        exercises its rights of setoff, and such payment or payments or the proceeds
        of
        such enforcement or setoff or any part thereof are subsequently invalidated,
        declared to be fraudulent or preferential, set aside and/or required to be
        repaid to a trustee, receiver or any other party under any bankruptcy law,
        state
        or federal law, common law or equitable cause, then to the extent of such
        recovery, the obligation or part thereof originally intended to be satisfied,
        and all liens, rights and remedies therefor, shall be revived and continued
        in
        full force and effect as if such payment had not been made or such enforcement
        or setoff had not occurred.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      ARTICLE
        XI 

       

      CERTAIN
        DEFINED TERMS

       

      For
        purposes of this Agreement, the following terms have the meanings indicated
        (unless otherwise expressly provided herein):

       

      “412
        Plan”
        means a
        Plan that is subject to Section 412 of the Code.

       

      “1940
        Act”
        means
        the Investment Company Act of 1940, as amended, and any applicable rules
        and
        regulations thereunder, and any successor to such statute, rules or regulations.
        Any reference herein to a specific section, rule or regulation of the 1940
        Act
        shall be deemed to include any corresponding provisions of future
        law.

       

      “Affiliate”
        has the
        meaning specified in Rule 501(b) under the Securities Act.

       

      “Approved
        Accounting Firm”
        means
        any firm
        of
        independent certified public accountants reasonably acceptable to the
        Lenders.

       

      “ARCOS”
        means
        the Automation of Reports and Consolidated Orders System which monitors the
        flow
        of DEA controlled substances from their point of manufacture to point of
        sale or
        distribution.

       

      “Board
        of Directors”
        means
        the board of directors of the Company.

       

      “Change
        of Control”
        means
        the occurrence of any of the following: (a) the Company consolidates with,
        or
        merges with or into, another Person (other than a direct or indirect wholly
        owned Subsidiary) or sells, assigns, conveys, transfers, leases or otherwise
        disposes of all or substantially all of the Company’s assets or the assets of
        the Company and its Subsidiaries taken as a whole to any Person, or any Person
        consolidates with, or merges with or into, the Company, in any such event
        pursuant to a transaction in which the outstanding Voting Stock of the Company,
        as the case may be, is converted into or exchanged for cash, securities or
        other
        property, other than any such transaction where the outstanding Voting Stock
        of
        the Company, as the case may be, is converted into or exchanged for Voting
        Stock
        of the surviving or transferee corporation and the beneficial owners of the
        Voting Stock of the Company immediately prior to such transaction own, directly
        or indirectly, not less than a majority of the Voting Stock of the surviving
        or
        transferee corporation immediately after such transaction, or (b) the Company,
        either individually or in conjunction with one or more Subsidiaries sells,
        assigns, conveys, transfers, leases or otherwise disposes of, or the
        Subsidiaries sell, assign, convey, transfer, lease or otherwise dispose of,
        all
        or substantially all of the properties and assets of the Company and its
        Subsidiaries, taken as a whole (either in one transaction or a series of
        related
        transactions), including capital stock of the Subsidiaries, to any Person
        (other
        than the Company or a wholly owned Subsidiary of the Company). For purposes
        of
        this definition, the term “Voting
        Stock”
        of the
        Company means securities of any class of capital stock of the Company entitling
        the holders thereof to vote in the election of members of the Board of
        Directors.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      “Code”
        means
        the Internal Revenue Code of 1986, as amended, and any applicable rules and
        regulations thereunder, and any successor to such statute, rules or regulations.
        Any reference herein to a specific section, rule or regulation of the Code
        shall
        be deemed to include any corresponding provisions of future law.

       

      “Commitment”
        means,
        with respect to each Lender, the commitment of such Lender to make such Loan
        hereunder. The initial amount of each Lender’s Commitment is set forth opposite
        its signature hereto. The aggregate amount of the Commitments is $1,000,000.
        

       

      “Common
        Stock”
        means
        the common stock, $0.01 par value, of the Company (now or hereafter issued).
        

       

      “Company
        General Security Agreement”
        means
        that certain Company General Security Agreement of even date herewith by
        and
        between the Company and Galen Partners III, L.P, as agent for the Lenders,
        as
        such agreement may be supplemented, amended or otherwise modified from time
        to
        time in accordance with its terms.

       

      “Company
        Reports”
        means,
        collectively, (a) the Company’s Annual Reports on Form 10-K for the fiscal years
        ended December 31, 2004, and (b) the Company’s Quarterly Report on Form 10-Q for
        the three months ended March 31, 2005.

       

      “CSA”
        means
        Controlled Substances Act, as amended, and any applicable rules and regulations
        thereunder, and any successor to such statute, rules or regulations. Any
        reference herein to a specific section, rule or regulation of the CSA shall
        be
        deemed to include any corresponding provisions of future law.

       

      “D&O
        Insurance”
        means
“directors and officers” insurance.

       

      “DEA”
        means
        the United States Drug Enforcement Administration.

       

      “ERISA”
        means
        the Employee Retirement Income Security Act of 1974, as amended and any
        applicable rules and regulations thereunder, and any successor to such statute,
        rules or regulations. Any reference herein to a specific section, rule or
        regulation of ERISA shall be deemed to include any corresponding provisions
        of
        future law.

       

      “ERISA
        Affiliates”
        means
        (a) any corporation which at any time on or before the Closing Date is or
        was a
        member of the same controlled group of corporations (within the meaning of
        Section 414(b) of the Code) as the Company, its Subsidiaries, or any ERISA
        Affiliate; (b) any partnership, trade or business (whether or not incorporated)
        which at any time on or before the Closing Date is or was under common control
        (within the meaning of Section 414(c) of the Code) with the Company, its
        Subsidiaries, or any ERISA Affiliate; and (c) any entity which at any time
        on or
        before the Closing Date is or was a member of the same affiliated service
        group
        (within the meaning of Section 414(m) of the Code) as the Company, its
        Subsidiaries or any ERISA Affiliate, or any corporation described in clause
        (a)
        or any partnership, trade or business described in clause (b) of this
        paragraph.

       

      “Exchange
        Act”
        means
        the Securities Exchange Act of 1934, as amended, and any applicable rules
        and
        regulations thereunder, and any successor to such statute, rules or regulations.
        Any reference herein to a specific section, rule or regulation of the Exchange
        Act shall be deemed to include any corresponding provisions of future law.
        

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      “FDA”
        means
        the United States Food and Drug Administration. 

       

      “FDC
        Act”
        means
        the federal Food, Drug, and Cosmetic Act, as amended, and any applicable
        rules
        and regulations thereunder, and any successor to such statute, rules or
        regulations. Any reference herein to a specific section, rule or regulation
        of
        the FDC Act shall be deemed to include any corresponding provisions of future
        law.

       

      “Funding
        Event”
        means
        the consummation by the Company or any of its Subsidiaries after the date
        hereof
        of (a) any equity or debt financing, or (b) any sale, transfer, license or
        similar arrangement (including by means of a joint venture) whereby the Company
        or any of its Subsidiaries sells, transfers, licenses or otherwise grants
        an
        interest in any material portion of its assets (including Intellectual Property
        Rights) to another Person, provided that the consummation of a transaction
        under
        Section (a) and/or (b) results in cash proceeds to the Company, net of all
        costs
        and expenses, of at least Three Million Five Hundred Thousand Dollars
        ($3,500,000).

       

      “GAAP”
        means
        generally accepted accounting principles in the United States.

       

      “Guaranties”
        means
        the Continuing Unconditional Secured Guaranties of even date herewith by
        each of
        the Guarantors. 

       

      “Guarantors”
        means
Acura
        Pharmaceutical Technologies, Inc. and Axiom
        Pharmaceutical Corporation.

       

      “Guarantors
        Security Agreement”
        means
        that certain Guarantors General Security Agreement of even date herewith
        by and
        among the Guarantors and Galen Partners III, L.P, as agent for the Lenders,
        as
        such agreement may be supplemented, amended or otherwise modified from time
        to
        time in accordance with its terms.

       

      “Intellectual
        Property Rights”
        means
        any and all patents, patent applications, trademarks, copyrights, trademark
        registrations and applications therefore, patent, trademark or trade name
        licenses, service marks, domain names, contracts with employees or others
        relating in whole or in part to disclosure, assignment or patenting of any
        inventions, discoveries, improvements, processes, formulae or other know-how,
        and all patent, trademark or trade names or copyright licenses which are
        in
        force.

       

      “IP
        Collateral Assignments”
        means
        (a) that certain Patent Security Agreement and that certain Trademark Security
        Agreement, each of even date herewith by and between the Company and Galen
        Partners III, L.P, as agent for the Lenders, and (b) that certain Trademark
        Security Agreement of even date herewith by and between Axiom Pharmaceutical
        Corporation and Galen Partners III, L.P, as agent for the Lenders, as such
        agreements may be supplemented, amended or otherwise modified from time to
        time
        in accordance with their terms.

       

      “IRS”
        means
        the Internal Revenue Service.

       

      “Leases”
        any
        lease and sublease agreements, as amended to date, relating to the Owned
        Property and the Leased Property.

       

      “Legal
        Requirements”
        means
        any federal, state, local, municipal, foreign or other law, statute,
        constitution, principle of common law, resolution, ordinance, code, order,
        edict, judgment, decree, rule, regulation, ruling or requirement issued,
        enacted, adopted, promulgated, implemented or otherwise put into effect by
        or
        under the authority of any governmental entity.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      “Losses”
        means
        any claims, losses, damages, liabilities (or actions in respect thereof),
        obligations, penalties, awards, judgments, expenses (including, without
        limitation, reasonable fees and expenses of counsel) or
        disbursements.

       

      “Material
        Adverse Effect”
        means
        (a) a material adverse effect on, or change in, the business, prospects,
        properties, operations, condition (financial or other) or results of operations
        of the Company and its Subsidiaries, taken as a whole, or (b) a material
        adverse
        effect on (i) the ability of the Company or any of the Guarantors to perform
        its
        respective obligations or (ii) the rights or remedies of any Lender under
        any
        Transaction Document.

       

      “PBGC”
        means
        the Pension Benefit Guaranty Corporation.

       

      “PCB”
        means
        polychlorinated biphenyls.

       

      “Permitted
        Liens”
        means
        the liens permitted by Section 6.2.

       

      “Person”
        means
        any individual, corporation, limited liability company, partnership,
        association, trust or any other entity or organization, including a government
        or political subdivision or an agency or instrumentality thereof. 

       

      “Preferred
        Stock”
        means
        the Series A Preferred, the Series B Preferred, the Series C-1 Preferred,
        the
        Series C-2 Preferred and the Series C-3 Preferred.

       

      “Schedule
        of Exceptions”
        means
        the Schedule of Exceptions attached to this Agreement.

       

      “SEC”
        means
        the Securities and Exchange Commission.

       

      “SEC
        Reports”
        means
        any reports, statements, releases or other documents required to be filed
        by the
        Company with the SEC under the Exchange Act.

       

      “Securities
        Act”
        means
        the Securities Act of 1933, as amended, and any applicable rules and regulations
        thereunder, and any successor to such statute, rules or regulations. Any
        reference herein to a specific section, rule or regulation of the Securities
        Act
        shall be deemed to include any corresponding provisions of future law.

       

      “Senior
        Note”
        means
        that certain Amended and Restated Note in the principal amount of $5,000,000
        issued by the Company pursuant to the Watson Term Loan, and any other promissory
        notes issued by the Company pursuant to the Watson Term Loan from time to
        time.

       

      “Series
        A Preferred”
        means
        the Series A Convertible Preferred Stock, $.01 par value, of the Company
        (now or
        hereafter issued).

       

      “Series
        B Preferred”
        means
        the Series B Convertible Preferred Stock, $.01 par value, of the Company
        (now or
        hereafter issued).

       

      “Series
        C-1 Preferred”
        means
        the Series C-1 Convertible Preferred Stock, $.01 par value, of the Company
        (now
        or hereafter issued).

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      “Series
        C-2 Preferred”
        means
        the Series C-2 Convertible Preferred Stock, $.01 par value, of the Company
        (now
        or hereafter issued).

       

      “Series
        C-3 Preferred”
        means
        the Series C-3 Convertible Preferred Stock, $.01 par value, of the Company
        (now
        or hereafter issued).

       

      “Stock
        Pledge Agreement”
        means
        the Stock Pledge Agreement of even date herewith by and among the Company
        and
        Galen Partners III, L.P, as agent for the Lenders, as such agreement may
        be
        supplemented, amended or otherwise modified from time to time in accordance
        with
        its terms.

       

      “Subsidiary”
        means
        any entity in which the Company owns securities having a majority of the
        voting
        power in the election of directors or persons serving equivalent
        functions.

       

      “Transaction
        Documents”
        means,
        collectively, (a) this Agreement, (b) the Notes, (c) the Company General
        Security Agreement, (d) the Guaranties, (e) the Guarantors Security Agreement,
        (f) the IP Collateral Assignments and (g) the Stock Pledge
        Agreement.

       

      “Unfunded
        Pension Liability”
        means,
        as of any determination date, the amount, if any, by which the present value
        of
        all benefit liabilities (as that term is defined in Section 4001(a)(16) of
        ERISA) of a plan subject to Title IV of ERISA exceeds the fair market value
        of
        all assets of such plan, all determined using the actuarial assumptions that
        would be used by the PBGC in the event of a termination of the plan on such
        determination date.

       

      “Watson
        Term Loan”
        means
        that certain Term Loan Agreement dated March 29, 2000 by and between the
        Company
        and Watson, as such agreement may be supplemented, amended or otherwise modified
        from time to time in accordance with its terms, including, without limitation,
        by the Third Amendment to the Watson Term Loan as of February 6, 2004.

       

      “Withdrawal
        Liability”
        has the
        meaning specified in Section 4201 of ERISA. 

       

      [SIGNATURE
        PAGES TO FOLLOW]

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

        IN
          WITNESS WHEREOF, the parties hereto have executed this Loan Agreement as
          of the
          date first written above.

         

         

        
          	 	
                  ACURA
                    PHARMACEUTICALS, INC.

                
	 	
                  By: /s/
                    Andrew D. Reddick

                  Name:
                    Andrew D. Reddick

                  Title:
                    Chief Executive Officer 

                
	 	 
	
                  Commitment:
                    

                  $21,400.00

                	
                  CARE
                    CAPITAL OFFSHORE INVESTMENTS II, LP

                  By:
                    Care Capital II, LLC, as general partner 

                  47
                    Hulfish Street, Suite 310

                  Princeton,
                    NJ 08542

                   

                   

                  By:
                     /s/
                    David R. Ramsay    

                  Name:
                    David R. Ramsay

                  Its:
                    Authorized Signatory

                
	 	 
	
                  Commitment:
                    

                  $311,933.33

                	
                  CARE
                    CAPITAL INVESTMENTS II, LP

                  By:
                    Care Capital II, LLC, as general partner

                  47
                    Hulfish Street, Suite 310

                  Princeton,
                    NJ 08542

                   

                   

                  By:
                     /s/
                    David R. Ramsay    

                  Name:
                    David R. Ramsay

                  Its:
                    Authorized Signatory

                
	 	 
	
                  Commitment:
                    

                  $304,521.88

                	
                  GALEN
                    PARTNERS III, L.P.

                  By:
                    Claudius, L.L.C., General Partner

                  610
                    Fifth Avenue, 5th
                    Fl.

                  New
                    York, New York 10020

                   

                   

                  By:
                     /s/
                    Srini Conjeevaram    

                  Name:
                    Srini Conjeevaram

                  Its:
                    General Partner

                

        

        
          
             

          

          
             

            
              

            

          

          
             

          

        

        

        

        
          	
                  Commitment:
                    

                  $27,564.48

                	
                  GALEN
                    PARTNERS INTERNATIONAL, III, L.P.

                  By:
                    Claudius, L.L.C., General Partner

                  610
                    Fifth Avenue, 5th
                    Fl.

                  New
                    York, New York 10020

                   

                   

                  By:
                     /s/
                    Srini Conjeevaram    

                  Name:
                    Srini Conjeevaram

                  Its:
                    General Partner

                
	
                  Commitment:
                    

                  $1,246.97

                	
                  GALEN
                    EMPLOYEE FUND III, L.P.

                  By:
                    Wesson Enterprises, Inc.

                  610
                    Fifth Avenue, 5th
                    Fl.

                  New
                    York, New York 10020

                   

                   

                  By:
                     /s/
                    Bruce F. Wesson    

                  Name:
                    Bruce F. Wesson

                  Its:
                    General Partner

                
	
                  Commitment:
                    

                  $333,333.34

                	
                  ESSEX
                    WOODLANDS HEALTH 

                  VENTURES
                    V, L.P.

                  190
                    South LaSalle Street, Suite 2800

                  Chicago,
                    IL 60603

                   

                   

                  By:
                     /s/
                    Immanuel Thangaraj  

                  Name:
                    Immanuel Thangaraj

                  Its:
                    Managing Director

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