Document:

Unassociated Document

    LOAN
      AGREEMENT

     

     

    This
      Loan
      Agreement (“Agreement”)
      is
      made as of January 31, 2006 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”)
      (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 and the Additional Lenders joining this
      Agreement in accordance with its terms, 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. The Lenders may, in their
      sole and absolute discretion, make additional Loans to the Company as provided
      in Section 1.3 hereof. The Company and the Lenders acknowledge and agree that
      no
      Lender is under any obligation to make any Loan in excess of its respective
      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
      initial closing (the “Closing”)
      at
      which the Loans from Essex, Care Capital and Galen 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.
      The
      Company and the Lenders acknowledge and agree that additional Loans may be
      funded to the Company by any one or more of Galen, Care Capital, Essex and
      any
      Additional Lender pursuant to the terms of this Agreement on one or more Closing
      Dates; provided,
      however,
      that
      (i) the aggregate principal amount of the Loans shall not exceed $1,000,000
      without the prior written consent of any two (2) of Essex, Care Capital and
      Galen, and (ii) no Lender is under any obligation to fund any Loan other than
      its respective Commitment. Upon the funding of any additional Loans under this
      Agreement, each Lender and/or Additional Lender making a Loan shall be required
      to execute a Joinder Agreement, which Joinder Agreement shall specify the
      Commitment of such Lender and/or Additional Lender. Any Additional Lender
      executing a Joinder Agreement shall be deemed a “Lender” for all purposes of
      this Agreement. On the date of a Closing (each a “Closing
      Date”),
      the
      Company shall deliver to each Lender at such Closing a Note, dated the
      applicable Closing Date, in the principal amount equal to such Lender’s
      Commitment or, in the event Galen, Care Capital and/or Essex shall make an
      additional Loan hereunder, the Company shall issue to such Lender an additional
      Note dated the applicable Closing Date in the principal amount equal to such
      Lender’s additional 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 Guarantor 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 Guarantor. All of the obligations
      of the Guarantor under the Guaranty 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 Guarantor now existing
      or
      hereinafter acquired, granted pursuant to the Guarantor’s General Security
      Agreement; and (b) collateral assignments of all leases, contracts, patents,
      copyrights, trademarks and service marks of the Guarantor.

     

    
      
         

      

      
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    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.

     

    
      
         

      

      
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    ARTICLE
      III 

    CONDITIONS
      TO CLOSING

     

    The
      obligation of each Lender to make its Loan at a 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 Guarantor, 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 the Guarantor, as applicable,
      shall
      have executed and delivered the following agreements and documents:

     

    	(a)  	
            the
              Company General Security Agreement;

          

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

    	(b)  	
            the
              Guaranty;

          

     

    	(c)  	
            the
              Guarantor’s 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 the Guarantor, (i) attaching a certified copy
              of the certificate of incorporation and current bylaws of the 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 the 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 the Guarantor signing
              the Transaction Documents to which the Guarantor is a party;
              

          

     

    	(g)  	
            a
              Certificate of Good Standing and Tax Status from the state of
              incorporation of the Company and the 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 the 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. 

     

    
      
         

      

      
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    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, the holders of the June 2005 Notes, the holders
      of
      the September 2005 Notes and the holders of the November 2005 Notes 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, the Watson Term Loan,
      the June 2005 Notes, the June 2005 Bridge Loan, the September 2005 Notes and
      the
      September 2005 Bridge Loan, the November 2005 Notes and the November 2005 Bridge
      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 of the date hereof
      and
      as of each Closing Date 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.

     

    
      
         

      

      
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    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 329,239,524
      shares are outstanding and approximately 65,996,526 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, 21,938,595 shares of which have
      been issued and converted into Common Stock, leaving 23,061,405 shares available
      for issuance, (2) 25,000,000 shares are Series B Preferred, 20,246,506 shares
      of
      which have been issued and converted into Common Stock, leaving 4,753,494 shares
      available for issuance, (3) 70,000,000 shares are Series C-1 Preferred,
      56,422,559 shares of which have been issued and converted into Common Stock,
      leaving 13,577,441 shares available for issuance, (4) 50,000,000 shares are
      Series C-2 Preferred, 37,433,096 shares of which have been issued and converted
      into Common Stock, leaving 12,566,904 available for issuance, and (5)
      100,000,000 shares are Series C-3 Preferred, 81,907,068 shares of which have
      been issued and converted into Common Stock, leaving 18,092,932 available for
      issuance. 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. 

     

    
      
         

      

      
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    4.4.  AUTHORIZATION

     

    	(a)  	
            Each
              of the Company and the Guarantor 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 the Guarantor 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) the Guarantor and their respective directors and stockholders
              necessary for the authorization, execution,
              delivery and performance by the Guarantor of the Guarantor’s Security
              Agreement, the Guaranty and the transactions contemplated therein or
              in
              any other Transaction Document with respect to the Guarantor, has been
              taken.

          

     

    4.5.  BINDING
      OBLIGATIONS; NO MATERIAL ADVERSE CONTRACTS

     

    The
      Transaction Documents constitute valid and binding obligations of the Company
      and the Guarantor 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 Guarantor 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 the Guarantor is subject, the
      Certificate of Incorporation, as amended, or the By-Laws, as amended, of the
      Company or the Guarantor, or any mortgage, indenture, agreement, instrument,
      judgment, decree, order, rule or regulation or other restriction to which the
      Company or the Guarantor 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
      the
      Guarantor 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.
      

     

    
      
         

      

      
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    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 September 30, 2005 and the
      related unaudited consolidated statements of operations, consolidated statements
      of cash flow and consolidated statements of stockholders’ equity for the nine
      months ended September 30, 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).

     

    
      
         

      

      
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    (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 September 30, 2005, subsequent to December 31, 2004, (i) neither
      of the Company or the 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 the 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 the 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 September 30, 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.

     

    
      
         

      

      
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    (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 Guarantor 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 Guarantor 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 Guarantor 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 Guarantor have listed their
      drug
      products with the FDA, (C) each drug product marketed by the Company or the
      Guarantor is the subject of an application approved by the FDA, (D) all drug
      products marketed by the Company or the 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 Guarantor’s drug products are manufactured in compliance with
      the FDA’s good manufacturing practice regulations, (F) all of the Company’s and
      the Guarantor’s 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 Guarantor 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 the 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 the Guarantor’s products have been exported
      for sale outside the United States, and (K) each of the Company and the
      Guarantor 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 Guarantor
      are
      in compliance with all applicable provisions of the CSA and that the Company
      and
      the Guarantor 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 Guarantor 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 the 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. 

     

    
      
         

      

      
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    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 the Guarantor has any intention to terminate his,
      her or its relationship with the Company or the Guarantor on or after the
      Closing or, in the case of employees, leave the employ of the Company or any
      of
      the Guarantor on and after the Closing, nor has the Company or the Guarantor
      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 the Guarantor 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 the Guarantor, or any
      consultant (including any scientific advisor) with whom the Company or the
      Guarantor 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 the Guarantor
      because of the nature of the business conducted by the Company and the
      Guarantor; and the continued employment by the Company or the Guarantor 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 the Guarantor 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 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 the
      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.

     

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

    (b)  The
      Company or the 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 the 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 the 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
      Guarantor or with respect to any license under which the Company or the
      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 the 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 the 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
      Guarantor, threatened before the United States Equal Employment Opportunity
      Commission or other federal or governmental authorities. The Company and the
      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 the
      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 Guarantor
      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
      the Guarantor’s business, (a) there is no unfair labor practice charge or
      complaint against the Company or the Guarantor pending before the National
      Labor
      Relations Board or any other governmental agency arising out of the Company’s or
      the 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 the Guarantor and, to
      the
      best knowledge of the Company, none is or has been threatened; and (c) none
      of
      the Company or the Guarantor 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.

     

    
      
         

      

      
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    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.

     

    
      
         

      

      
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    4.16.  TAXES

     

    The
      Company and the Guarantor 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 the 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 Guarantor, and any of their
      respective ERISA Affiliates are a party or by which the Company, the Guarantor,
      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.

     

    
      
         

      

      
        15

        
          

        

      

      
         

      

    

    (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.

     

    
      
         

      

      
        16

        
          

        

      

      
         

      

    

    (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 Guarantor 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 Guarantor’s General Security Agreement. 

     

    4.19.  REAL
      PROPERTY

     

    (a)  The
      Company and the Guarantor 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 Guarantor 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 the Guarantor enjoys a peaceful and
      undisturbed possession of the Owned Property and Leased Property. No Person
      other than the Company or the 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 Guarantor 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
      Guarantor’s 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 Guarantor 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.

     

    
      
         

      

      
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    (c)  Neither
      the Company nor the Guarantor 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.  INSURANCE

     

    (a)  Each
      of
      the Company and the Guarantor 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 Guarantor, in amounts sufficient to prevent the Company or the
      Guarantor 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 Guarantor is a party or by which it is
      bound.

     

    (b)  The
      Company maintains D&O Insurance as detailed in Section
      4.21(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.

     

    4.22.  NON-COMPETES

     

    Except
      as
      set forth in Section
      4.22
      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. 

     

    4.23.  PRODUCT
      WARRANTY

     

    Except
      as
      set forth in Section
      4.23
      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. 

     

    
      
         

      

      
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    4.24.  MINUTE
      BOOKS

     

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

     

    4.25.
       DISSOLUTION
      OF SUBSIDIARY 

     

    The
      Company is in the process of dissolving its Subsidiary, Axiom Pharmaceutical
      Corporation. 

     

    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 the Guarantor 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 Guarantor 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 Guarantor 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 the Guarantor 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 Guarantor, (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 Guarantor; 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 Guarantor 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 Guarantor 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 Guarantor to, pay or cause to be paid all other indebtedness incident
      to the operations of the Company or the Guarantor.

     

    
      
         

      

      
        19

        
          

        

      

      
         

      

    

    (d)  The
      Company shall, and shall cause each of the Guarantor 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 Guarantor, in amounts sufficient to prevent the Company or the Guarantor
      from becoming a co-insurer of the property insured; and the Company shall,
      and
      shall cause the Guarantor 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 Guarantor 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;

     

    
      
         

      

      
        20

        
          

        

      

      
         

      

    

    (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. 

     

    
      
         

      

      
        21

        
          

        

      

      
         

      

    

    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. 

     

    
      
         

      

      
        22

        
          

        

      

      
         

      

    

    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 Guarantor 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. PREEMPTIVE
      RIGHTS

     

    Each
      Lender shall have the right (the “Participation
      Right”)
      to
      purchase such Lender’s Pro Rata Amount of any Unsubscribed Preferred Stock that
      the Company may from time to time propose to sell and issue after the date
      hereof, at the price and upon the general terms specified in the Unsubscribed
      Preferred Stock Issue Notice (as defined below) regarding such Unsubscribed
      Preferred Stock and otherwise on the following terms:

     

    (a)  Whenever
      the Company proposes to issue and sell any Unsubscribed Preferred Stock, the
      Company shall give each Lender written notice (a “Unsubscribed
      Preferred Stock Issue Notice”)
      describing the type and amount of Unsubscribed Preferred Stock proposed to
      be
      issued and the price and general terms upon which the Company proposes to issue
      such Unsubscribed Preferred Stock, specifying a proposed closing date and
      specifying such Lender’s Pro Rata Amount as of the date of the Unsubscribed
      Preferred Stock Issue Notice.

     

    
      
         

      

      
        23

        
          

        

      

      
         

      

    

    (b)  Each
      Lender may exercise its Participation Right with respect to the proposed
      issuance of Unsubscribed Preferred Stock by notice to the Company, given within
      5 days after the Lender shall have received the Unsubscribed Preferred Stock
      Issue Notice describing the Unsubscribed Preferred Stock.

     

    (c)  If
      any
      Lender does not exercise its Participation Right with respect to any proposed
      Unsubscribed Preferred Stock within the 5 day period, then within 1 business
      day
      after the expiration of such 5 day period, the Company shall notify each Lender
      who proposed to purchase not less than such Lender’s Pro Rata Amount of such
      Unsubscribed Preferred Stock of the number of shares of Unsubscribed Preferred
      Stock which remain available for purchase. Upon receipt of the notice specified
      in the preceding sentence, each such Lender shall have the additional
      Participation Right to purchase such Lender’s Pro Rata Amount of the remaining
      Unsubscribed Preferred Stock (considering the Shares held by all Lenders who
      purchased less than their Pro Rata Amount of the Unsubscribed Preferred Stock
      not to be issued and outstanding for purposes of computing the Pro Rata Amount),
      exercisable by written notice delivered to the Company within 2 business days
      after receipt of the notice of the availability of the balance of the
      Unsubscribed Preferred Stock. Such Lenders also may allocate the right to
      purchase the Unsubscribed Preferred Stock between or among them in any
      proportion they choose as reflected in a written notice to the Company within
      such 15 day or 2 business day period, as the case may be.
      Each
      Lender’s rights under this Section 5.11 may be assigned to and among such
      Lender’s Affiliates.

     

    (d)  The
      Company may sell the Unsubscribed Preferred Stock not committed for by Lenders
      at a price and upon general terms no more favorable to the purchasers than
      those
      specified in the Unsubscribed Preferred Stock Issue Notice with regard to such
      Unsubscribed Preferred Stock, at any time during (and only during) the
      120 days following the expiration of the last notice period specified in
      Section 5.11(c).

     

    (e)  The
      sale
      of any Unsubscribed Preferred Stock to Lenders pursuant to this Section 5.11
      shall be closed on the same terms, at the same place as, and simultaneously
      with, the sale of any such Preferred Stock to any other purchasers (provided
      that the closing shall not take place earlier than the proposed closing date
      specified in the applicable Unsubscribed Preferred Stock Issue Notice without
      the consent of all participating Lenders).

     

    (f)  Notwithstanding
      anything to the contrary contained herein, this Section 5.11 shall survive
      until
      the later to occur of (i) the payment of the principal and all accrued and
      unpaid interest on all Notes issued pursuant to this Agreement, and (ii) the
      Company’s receipt of aggregate gross proceeds of at least the sum (a)
      $7,500,000, plus (b) the aggregate principal amount of the Loans advanced to
      the
      Company pursuant to this Agreement, from one or more Funding Transactions
      completed after the date of this Agreement.

     

    (g)  The
      parties agree that the 5 day period for exercise noted above was set assuming
      that the Lenders would receive, at least 10 days before receipt of the
      Unsubscribed Preferred Stock Issue Notice, written notice from the Company
      that
      it planned to issue shares of Preferred Stock that would constitute Unsubscribed
      Preferred Stock if not subscribed for purchase by the holders of the November
      2005 Notes. Such notice shall contain the same information as is required in
      the
      Unsubscribed Preferred Stock Issue Notice, except that it may specify the total
      number of shares of Preferred Stock proposed to be issued (as the portion
      thereof constituting Unsubscribed Preferred Stock may not yet be determined).
      If
      the Lenders do not receive such notice at least 10 days before receipt of the
      Unsubscribed Preferred Stock Issue Notice, then the 5 day period for exercise
      noted above shall be extended so that the Lenders have no fewer than 15 days
      to
      exercise their rights hereunder from the delivery to them of the first written
      notice of the proposed issuance (which in no event shall be fewer than 5 or
      more
      than 15 days after receipt of the Unsubscribed Preferred Stock Issue
      Notice).

     

    
      
         

      

      
        24

        
          

        

      

      
         

      

    

    ARTICLE
      VI 

     

    NEGATIVE
      COVENANTS

     

    The
      Company hereby covenants and agrees, so long as any Note remains outstanding,
      it
      will not (and not allow the Guarantor 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;

     

    
      
         

      

      
        25

        
          

        

      

      
         

      

    

    (c)  liens
      securing the Company’s obligations under (i) the Senior Note and the Watson Term
      Loan, (ii) the June 2005 Notes and the June 2005 Bridge Loan, (iii) the
      September 2005 Notes and the September 2005 Bridge Loan, and (iv) the November
      2005 Notes and the November 2005 Bridge 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.

     

    
      
         

      

      
        26

        
          

        

      

      
         

      

    

    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 6.3
      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 Guarantor;

     

    (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. 

     

    
      
         

      

      
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    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.

     

    
      
         

      

      
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    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.

     

    6.13 ISSUANCE
      OF PREFERRED STOCK

     

    Issue
      or
      incur any obligation to issue any shares of the Company’s Preferred Stock.
      Notwithstanding anything to the contrary contained herein, this Section 6.13
      shall survive until the later to occur of (i) the payment of the principal
      and
      all accrued and unpaid interest on all Notes issued pursuant to this Agreement,
      and (ii) the Company’s receipt of aggregate gross proceeds of at least the sum
      of (a) $7,500,000, plus (b) the aggregate principal amount of the Loans advanced
      to the Company pursuant to this Agreement, from one or more Funding Transactions
      completed after the date of this Agreement.

     

    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;

     

    
      
         

      

      
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    (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 the Guarantor 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, the 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, the June 2005 Bridge Loan,
      the
      September 2005 Bridge Loan or the November 2005 Bridge Loan which shall be
      continuing after the respective grace period, if any, specified in the Watson
      Term Loan, the June 2005 Bridge Loan, the September 2005 Bridge Loan or the
      November 2005 Bridge 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;

     

    
      
         

      

      
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    (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 the Guarantor, or the Company or the 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 50% or more 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.

     

    
      
         

      

      
        31

        
          

        

      

      
         

      

    

    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 fifty percent (50%) or more 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 Guaranty 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.

     

    
      
         

      

      
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    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 holder or holders of fifty percent
      (50%) or more of the then outstanding principal amount of the Loans. The Lenders
      acknowledge and agree that any such waiver, consent or amendment executed by
      the
      holders of 50% or more of the then outstanding principal amount of the Loans
      shall be binding and controlling on all 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.

     

    
      
         

      

      
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    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:

     

    (b)  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. 

     

    
      
         

      

      
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    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.

     

    
      
         

      

      
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    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 Ten Thousand Dollars
      ($10,000) 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
      Guarantor 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 Guarantor
      Collateral; or (vi) attempting to enforce or enforcing any security interest
      in
      any of the Company Collateral, the Guarantor 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.
      

     

    
      
         

      

      
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    (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.

     

    
      
         

      

      
        37

        
          

        

      

      
         

      

    

    (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.

     

    
      
         

      

      
        38

        
          

        

      

      
         

      

    

    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.

     

    “Additional
      Lenders”
means
      any Person making a Loan to the Company pursuant to this Agreement and the
      Joinder Agreement .

     

    “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.

     

    
      
         

      

      
        39

        
          

        

      

      
         

      

    

    “Closing
      Date”
has
      the
      meaning provided in Section 1.3 hereof.

     

    “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 the Commitment of each of Essex, Care Capital
      and Galen is set forth opposite its signature hereto. The Commitment of each
      Additional Lender and/or any additional Commitment of Essex, Care Capital and/or
      Galen will be set forth opposite its signature on the Joinder Agreement to
      which
      it is a party. The aggregate initial amount of the Commitments of Essex, Care
      Capital and Galen is $750,000. 

     

    “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 Reports on Form 10-Q
      for the three months ended March 31, 2005, six months ended June 30, 2005 and
      nine months ended November 30, 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.

     

    
      
         

      

      
        40

        
          

        

      

      
         

      

    

    “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 the sum of Five Million Fifty Thousand Dollars
      ($5,050,000), plus the aggregate principal amount of the Loans advanced to
      the
      Company pursuant to this Agreement.

     

    “Funding
      Transactions”
means
      the consummation by the Company or any of its Subsidiaries on one or more
      occasions after the date hereof of (a) any equity financing, and/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.

     

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

     

    
      
         

      

      
        41

        
          

        

      

      
         

      

    

    “Guaranty”
means
      the Continuing Unconditional Secured Guaranty of even date herewith by the
      Guarantor. 

     

    “Guarantor”
means
      Acura
      Pharmaceutical Technologies, Inc.

     

    “Guarantor’s
      Security Agreement”
means
      that certain Guarantor’s General Security Agreement of even date herewith
      between the Guarantor 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
      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.

     

    “IRS”
means
      the Internal Revenue Service.

     

    “Joinder
      Agreement”
means
      a
      joinder agreement in the form attached to this Agreement as Exhibit
      C,
      as such
      agreement may be supplemented, amended or otherwise modified from time to time
      in accordance with its terms.

     

    “June
      2005 Bridge Loan”
means
      the certain Loan Agreement dated June 22, 2005 by and among the Company and
      the
      holders of the June 2005 Notes, as such agreement may be supplemented, amended
      or otherwise modified from time to time in accordance with its
      terms.

     

    “June
      2005 Notes”
means
      those certain Promissory Notes dated June 22, 2005 in the aggregate principal
      amount of $1,000,000 issued by the Company pursuant to the June 2005 Bridge
      Loan.

     

    “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.

     

    
      
         

      

      
        42

        
          

        

      

      
         

      

    

    “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 the Guarantor to perform its
      respective obligations or (ii) the rights or remedies of any Lender under any
      Transaction Document.

     

    “November
      2005 Bridge Loan”
means
      that certain Loan Agreement dated November 9, 2005 by and among the Company
      and
      the holders of the November 2005 Notes, as such agreement may be supplemented,
      amended or otherwise modified from time to time in accordance with its terms.
      

     

    “November
      2005 Notes”
means
      those Promissory Notes dated November 9, 2005 in the aggregate principal amount
      of $1,050,000 issued by the Company pursuant to the November 2005 Bridge
      Loan.

     

    “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.

     

    “Pro
      Rata Amount”
means,
      as of any date with respect to a specified Lender, the percentage equal to
      (a)
      the number of Shares held by such Lender as of that date, divided by (b) the
      aggregate number of Shares held by all Lenders as of that date, each determined
      on an as converted and as if exercised basis; provided, however, that for
      purposes of calculating the Pro Rata Amount with respect to each of Essex,
      Care
      Capital and Galen, the holdings of Shares of GCE Holdings LLC,
      a
      limited liability company under common control of such Lenders, shall be
      allocated 30% to Essex, 27% to Care Capital and 43% to Galen.

    

    “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.

     

    
      
         

      

      
        43

        
          

        

      

      
         

      

    

    “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.

     

    “September
      2005 Bridge Loan”
means
      the certain Loan Agreement dated September 16, 2005 by and among the Company
      and
      the holders of the September 2005 Notes, as such agreement may be supplemented,
      amended or otherwise modified from time to time in accordance with its
      terms.

     

    “September
      2005 Notes”
means
      those certain Promissory Notes dated September 16, 2005 in the aggregate
      principal amount of $500,000 issued by the Company pursuant to the September
      2005 Bridge Loan.

     

    “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).

     

    “Shares”
means
      and includes all shares of Common Stock and Preferred Stock of the Company
      issued and outstanding at the relevant time plus (a) all shares of Common Stock
      and Preferred Stock that may be issued upon exercise of any options, warrants
      and other rights of any kind that are then exercisable, and (b) all shares
      of
      Common Stock and Preferred Stock that may be issued upon conversion of
      (i) any convertible securities, including, without limitation, any debt
      securities then outstanding, which are by their terms then convertible into
      or
      exchangeable for Common Stock or Preferred Stock of the Company or (ii) any
      such
      convertible securities issuable upon exercise of options, warrants or other
      rights that are then exercisable.

    

    “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.

     

    
      
         

      

      
        44

        
          

        

      

      
         

      

    

    “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 Guaranty, (e) the Guarantor’s 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.

     

    “Unsubscribed
      Preferred Stock”
means
      the number and type of Preferred Stock that shall not have been subscribed
      for
      by the holders of the November 2005 Notes for purchase from the Company pursuant
      to the exercise by the holders of the November 2005 Notes of their pre-emptive
      rights provided in Section 5.11 of the November 2005 Bridge Loan.

     

    “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]

    
      
         

      

      
        45

        
          

        

      

      
         

      

       

    

    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 

    

     

    
      
         

      

      
        46

        
          

        

      

      
         

      

    

    

     

    
      	
              Commitment:
                

              $ 16,050 

            	
              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:
                

              $ 233,950

            	
              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:
                

              $ 228,392

            	
              GALEN
                PARTNERS III, L.P.

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

              610
                Fifth Avenue, 5th
                Fl.

              New
                York, New York 10020

               

               

              By:
                 /s/
                Bruce F. Wesson   

              Name:
                Bruce F. Wesson

              Its:
                General Partner

            

    

     

     

    
      
         

      

      
        47

        
          

        

      

      
         

      

    

    

    
      	
              Commitment:
                

              $ 20,673 

            	
              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/
                Bruce F. Wesson    

              Name:
                Bruce F. Wesson

              Its:
                General Partner

            
	
              Commitment:
                

              $ 
                935

            	
              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:
                

              $
                250,000

            	
              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

            

    

    
 

    
      
         

      

      
        48

        
          

        

      

      
         

      

    

    EXHIBIT
      A

     

     

    FORM
      OF NOTE

     

    

     

    See
      attached.

    
      
         

      

      
        49

        
          

        

      

      
         

      

    

    EXHIBIT
      B

     

     

    LEGAL
      OPINION

     

    

     

    See
      attached.

     

    
      
         

      

      
        50

        
          

        

      

      
         

      

    

    EXHIBIT
      C

     

    
 

    JOINDER
      AGREEMENT

     

    
 

    See
      Attached.

    

    
      
         

      

      
        51

        
          

        

      

      
         

      

       

    

    JOINDER
      TO LOAN AGREEMENT

    
 

    THIS
      JOINDER AGREEMENT (“Joinder
      Agreement”)
      to the
      Loan Agreement, dated as of January __, 2006 (the "Agreement")
      by and
      among Acura Pharmaceuticals, Inc., a New York corporation (the "Company"),
      Care
      Capital Investments II, LP, Care Capital Offshore Investments II, LP, Essex
      Woodlands Health Ventures V, L.P., Galen Partners III, L.P. and the other
      Lenders listed on the signature pages thereto, is made and entered into as
      of
     ,
      2006 by
      and between the Company and the Lenders set forth on Exhibit
      A
      hereto
      (each a "Lender"
      and
      collectively, the "Lenders").
      Capitalized terms used herein but not otherwise defined shall have the meanings
      set forth in the Agreement.

    

    WHEREAS,
      Lenders
      have advanced certain term loans to the Company pursuant to the terms of the
      Agreement as more particularly described as Exhibit
      A
      hereto;
      and 

    

    WHEREAS,
      the
      Agreement requires each Lender to become a party to the Agreement and certain
      Transaction Documents, and each Lender agrees to do so in accordance with the
      terms hereof.

    

    NOW,
      THEREFORE,
      in
      consideration of the mutual covenants contained herein and other good and
      valuable consideration, the receipt and sufficiency of which are hereby
      acknowledged, the parties to this Joinder Agreement hereby agree as
      follows:

    

    1.  Agreement
      to be Bound.
      Each
      Lender hereby agrees that upon execution of this Joinder Agreement, it shall
      become a party to the Agreement and shall, together with the Company, be fully
      bound by, subject to, and entitled to the rights and benefits of, all of the
      covenants, terms and conditions of the Agreement and the following Transaction
      Documents as though an original party thereto and shall be deemed a Lender
      for
      all purposes thereof:

    

    	(i)  	
                the
              Company General Security Agreement;

          

    	(ii)  	
                the
              Guaranty; 

          

    	(iii)  	
                the
              Guarantor’s Security Agreement;

          

    	(iv)  	
                the
              IP
              Collateral Assignments;

          

    	(v)  	
                the
              Stock Pledge Agreement; and

          

    	(vi)  	
                the
              Subordination Agreement.

          

    

    2.  Successors
      and Assigns.
      Except
      as otherwise provided herein, this Joinder Agreement shall inure to the benefit
      of, and be binding upon and enforceable against, the parties hereto and their
      respective successors, assigns, heirs, executors and
      administrators.

    

    3.  Counterparts.
      This
      Joinder Agreement may be executed in separate counterparts, including by
      facsimile, each of which shall be an original and all of which taken together
      shall constitute one and the same agreement.

    

    
      
         

      

      
        52

        
          

        

      

      
         

      

    

    4.  Notices.
      For
      purposes of Section
      10.4
      of the
      Agreement, all notices, demands or other communications to the Lender shall
      be
      directed to the address set forth on the signature page hereto.

    

    5.  Governing
      Law.
      This
      Joinder Agreement and 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 Joinder
      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.

    

    6.  Consent
      to 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 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. 

    

    7.  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. 

    

    8.  Descriptive
      Headings.
      The
      description headings of this Joinder Agreement are inserted for convenience
      only
      and do not constitute a part of this Joinder Agreement.

    

    9.  Representations
      and Warranties.
      In
      addition to the representations and warranties contained in the Agreement,
      the
      Company hereby represents and warrants to the Purchasers as
      follows:

    

    (a)
       The
      Company has all requisite corporate power and authority (i) to execute and
      deliver, and to perform and observe its obligations under, this Joinder
      Agreement and the Transaction Documents to which it is a party, and (ii) to
      consummate the transactions contemplated hereby and thereby, including, without
      limitation, the granting of any payment trust or other security arrangement
      entered into by the Company in connection therewith. The Notes issued by the
      Company to the Lenders as a result of the Agreement and this Joinder Agreement
      (A) are issued and sold in full compliance with the Transaction Documents,
      and
      (B) are entitled to, and upon issuance will have, the same perfected security,
      guaranties, and priority under the Transaction Documents as do the Notes issued
      at the initial Closing.

    

    
      
         

      

      
        53

        
          

        

      

      
         

      

    

    (b) All
      corporate action on the part of the Company and its stockholders (if any)
      necessary for the authorization, execution, delivery and performance by the
      Company of this Joinder Agreement and the transactions contemplated herein,
      and
      for the authorization, issuance and delivery of the Notes hereunder, has been
      taken.

    

    (c) This
      Joinder Agreement and the Transaction Documents constitute valid and binding
      obligations of the Company and the Guarantor enforceable in accordance with
      their respective terms. The execution, delivery and performance by the Company
      of this Joinder Agreement and compliance herewith 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 Guarantor is subject, the
      Certificate of Incorporation, as amended, or the By-laws, as amended, of the
      Company or either of the Guarantor, or any mortgage, indenture, agreement,
      instrument, judgment, decree, order, rule or regulation or other restriction
      to
      which the Company or either of the Guarantor 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 Guarantor pursuant to any such term.

    

    10. Continuing
      Effect.
      Except
      as otherwise set forth specifically above, the Agreement and the Transaction
      Documents shall remain in full force and effect in accordance with their
      respective terms.

     

    

    [SIGNATURE
      PAGE TO FOLLOW]

    
      
         

      

      
        54

        
          

        

      

      
         

      

    

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

    

    
      	 	 	 
	 	ACURA
              PHARMACEUTICALS, INC.
	 
 	 
 	 
 
	Date: 	By:  	/s/ 
	 	
              
Name:
              Andrew D. Reddick
	 	Title:
              Chief Executive Officer
	 	 
	 	LENDERS 

    

    
      	
               

              Commitment:

              $_________________________________ 

            	
               

              _________________________________

              Name:
                ______________________________ 

              Address:
                ______________________________

              _________________________________

              _________________________________

               

            
	
               

              Commitment:

              $_________________________________ 

            	
               

              _________________________________

              Name:
                 

              Address:
                ______________________________ 

              _________________________________

              _________________________________

               

            
	
               

              Commitment:

              $_________________________________ 

            	
               

              _________________________________

              Name:
                ______________________________ 

              Address:______________________________  

              _________________________________

              _________________________________

               

            

    

    

    

    
      
         

      

        55Unassociated Document

    SECURED
      PROMISSORY NOTE

     

    ACURA
      PHARMACEUTICALS, INC.

     

     

    
      	$______________________	
              No.
                N-__

            
	January 31, 2006	 
	 	 

    

    

    ACURA
      PHARMACEUTICALS, INC., a corporation organized under the laws of the State
      of
      New York (the “Company”),
      for
      value received, hereby promises to pay to _______________,  or
      registered assigns (the “Payee”
or
      “Holder”),
      upon
      due presentation and surrender of this Secured Promissory Note (this
“Note”),
      on
      the Maturity Date, the principal amount of [____________ ]
      ($______)
      and all
      accrued but unpaid interest thereon as hereinafter provided. As used herein,
      the
“Maturity
      Date”
means
      June 1, 2006. 

    

    This
      Note
      was issued by the Company pursuant to a certain Loan Agreement dated as of
      January  ,
      2006
      among the Company and certain lenders identified therein, including the Payee
      (together with the Schedules and Exhibits thereto, the “Loan
      Agreement”).
      The
      holders from time to time of the Notes issued under the Loan Agreement
      (including the Holder) are referred to hereinafter as the “Holders”.
      The
      Holder is entitled to the benefits of the Loan Agreement, including, without
      limitation, the rights upon the occurrence and during the continuance of an
      Event of Default and the benefits of security interests and guaranties referred
      to below. Reference is made to the Loan Agreement and the documents entered
      into
      pursuant thereto with respect to certain additional rights of the Holder and
      obligations of the Company and its Subsidiaries not expressly set forth herein.
      Capitalized terms used herein but not otherwise defined herein shall have the
      meaning ascribed thereto in the Loan Agreement. All such rights and obligations
      set forth in the Loan Agreement are incorporated herein by
      reference.

    

    ARTICLE
      I

     

    PAYMENT
      OF PRINCIPAL AND INTEREST; METHOD OF PAYMENT

     

     

    1.1.   Payment,
      if any, of the principal and accrued interest on this Note shall be made in
      cash, in immediately available funds, in such coin or currency of the United
      States of America as at the time of payment shall be legal tender for the
      payment of public and private debts. Interest (computed on the basis of a
      360-day year of twelve 30-day months) shall accrue on the unpaid portion of
      said
      principal amount from time to time outstanding at the Stated Interest Rate
      (as
      defined below), and shall be paid by the Company to the Payee in arrears on
      the
      last day of each calendar quarter unless required to be paid earlier by the
      terms of the Loan Agreement. Both principal hereof and interest hereon are
      payable at such address as the Holder shall designate from time to time by
      written notice to the Company. The Company will pay or cause to be paid all
      sums
      becoming due hereon for principal and interest by check or wire transfer, at
      the
      Holder’s election, and, without any requirement for the presentation of this
      Note or making any notation thereon, except that the Holder hereof agrees that
      payment of the final amount due shall be made only upon surrender of this Note
      to the Company for cancellation. Prior to any sale or other disposition of
      this
      instrument, the Holder hereof agrees to endorse hereon the amount of principal
      paid hereon and the last date to which interest has been paid hereon and to
      notify the Company of the name and address of the transferee. As used herein,
      the “Stated Interest Rate” means the rate of (i) ten percent (10%) per annum
      prior to the occurrence of an Event of Default, and (ii) thirteen percent (13%)
      per annum after the occurrence of an Event of Default and during the continuance
      thereof (regardless of whether the Loans have been accelerated), in each case
      subject to the limitations of applicable law.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    1.2. If
      this
      Note or any portion hereof becomes due and payable on a Saturday, Sunday or
      public holiday under the laws of the State of New York, the due date hereof
      shall be extended to the next succeeding full business day and interest shall
      be
      payable at the Stated Interest Rate per annum during such extension. All
      payments received by the Holder shall be applied first to the payment of all
      accrued interest payable hereunder.

     

     

    1.3 The
      Company shall have the right to prepay the principal amount of this Note, 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, this Note
      is
      subject to mandatory prepayment as provided in the Loan Agreement.

     

    ARTICLE
      II

     

    SECURITY

     

    2.1.  The
      obligations of the Company under this Note are secured pursuant to security
      interests on and collateral assignments of, assets, tangible and intangible,
      of
      the Company granted by the Company to the Holder and the other Holders (or
      their
      agent) pursuant to a General Security Agreement of even date herewith, and
      the
      collateral assignments referred to in the Loan Agreement. In addition, Acura
      Pharmaceutical Technologies, Inc. (“APT”), a wholly owned subsidiary of the
      Company (the “Guarantor”), has executed and delivered in favor of the Holder and
      the other Holders (or their agent) a Continuing Unconditional Guaranty, dated
      an
      even date herewith (the “Guaranty”), guaranteeing the full and unconditional
      payment when due of the amounts payable by the Company to the Holder and the
      other Holders pursuant to the terms of their respective Notes. The obligations
      of the Guarantor under its Guaranty are secured pursuant to security interests
      on and collateral assignments of, assets, tangible and intangible, of the
      Guarantor granted by the Guarantor to the Holder and the other Holders (or
      their
      agent) pursuant to a security agreement of even date herewith, and the
      collateral assignments referred to in the Loan Agreement. 

     

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    

     

    ARTICLE
      III

     

    MISCELLANEOUS

     

     

    3.1.  Default.
      Subject to the terms of the Loan Agreement, upon the occurrence of any one
      or
      more of the Events of Default specified in the Loan Agreement all amounts then
      remaining unpaid on this Note may be declared to be, or automatically become,
      immediately due and payable as provided in the Loan Agreement.

     

     

    3.2.  Collection
      Costs. In the event that this Note shall be placed in the hands of an attorney
      for collection by reason of any event of default hereunder, the undersigned
      agrees to pay reasonable attorney’s fees and disbursements and other reasonable
      expenses incurred by the Holder or its agent in connection with the collection
      of this Note. In addition, the undersigned shall be responsible for all other
      expenses of the Holder and its agent to the extent provided by the Loan
      Agreement.

     

     

    3.3.  Rights
      Cumulative; Specific Performances. The rights, powers and remedies given to
      the
      Payee under this Note shall be in addition to all rights, powers and remedies
      given to it by virtue of the Loan Agreement, any document or instrument executed
      in connection therewith, or any statute or rule of law. 

     

     

    3.4.  No
      Waivers. Any forbearance, failure or delay by the Payee in exercising any right,
      power or remedy under this Note, the Loan Agreement, any documents or
      instruments executed in connection therewith or otherwise available to the
      Payee
      shall not be deemed to be a waiver of such right, power or remedy, nor shall
      any
      single or partial exercise of any right, power or remedy preclude the further
      exercise thereof.

     

     

    3.5.  Amendments
      in Writing. Subject to the terms of the Loan Agreement, no amendment,
      modification or waiver of any provision of this Note shall be effective unless
      it shall be in writing and signed by the Holder, and any such amendment,
      modification or waiver shall apply only in the specific instance for which
      given. 

     

     

    3.6.  Governing
      Law; Jurisdiction. (a)  This
      Note and the rights of the holders hereof shall be governed by, and construed
      in
      accordance with, the laws of the State of New York wherein the terms of this
      Note 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. 

     

    (b)  The
      undersigned 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 Note
      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. The undersigned 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 judgment or any other manner provided by law. Nothing in this Note
      or any other Transaction Document shall affect any right that any party may
      otherwise have to bring any action or proceeding relating to this Note or any
      of
      the other Transaction Documents in the courts of any jurisdiction.

     

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

     

    (c)  The
      Company 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 Note or any other transaction document to which it is a party
      in any such New York State or United States Federal Court. The Company 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. 

     

    3.7.  No
      Counterclaims. The Company waives the right to interpose counterclaims or
      set-offs of any kind and description in any litigation arising hereunder
      (whether or not arising out of or relating to this Note).

     

    3.8.  Successors.
      The term “Payee” and “Holder” as used herein shall be deemed to include the
      Holder and its successors, endorsees and assigns.

     

    3.9.  Certain
      Waivers. The Company hereby waives presentment, demand for payment, protest,
      notice of protest and notice of non-payment hereof.

     

    3.10.  Mutilated,
      Lost, Stolen or Destroyed Notes. In case this Note shall be mutilated, lost,
      stolen or destroyed, the Company shall issue and deliver in exchange and
      substitution for and upon cancellation of the mutilated Note, or in lieu of
      and
      substitution for the Note, mutilated, lost, stolen or destroyed, a new Note
      of
      like tenor and representing an equivalent right or interest, but only upon
      receipt of evidence reasonably satisfactory to the Company of such loss, theft
      or destruction and an indemnity, if requested, also reasonably satisfactory
      to
      it (but without requirement of posting any bond).

     

    3.11.  Maintenance
      of Office. The Company covenants and agrees that so long as this Note shall
      be
      outstanding, it will maintain an office or agency in New York (or such other
      place as the Company may designate in writing to the holder of this Note) where
      notices, presentations and demands to or upon the Company in respect of this
      Note may be given or made.

     

    3.12.  WAIVER
      OF
      JURY TRIAL. THE COMPANY 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 THIS DEBENTURE OR ANY OTHER TRANSACTION
      DOCUMENT TO WHICH IT IS A PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE
      OR ENFORCEMENT THEREOF. 

     

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

     

    IN
      WITNESS WHEREOF, Acura Pharmaceuticals, Inc. has caused this Note to be signed
      by its authorized officer and to be dated the day and year first above
      written.

     

     

    
      	 	 	 
	ATTEST
              [SEAL]	ACURA
              PHARMACEUTICALS, INC.
	 
 	 
 	 
 
	____________________________________	By:  	/s/ 
	 	
              
Name:
              Peter Clemens 
	 	Title
              :
              Senior Vice President and CFO 

    
      	 	 
	 	 
	 	 

    

         

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

    ATTACHMENT
      I

    

    Assignment

    

    

    For
      value
      received, the undersigned hereby assigns subject to the provisions of the Loan
      Agreement, to ________ $_________________ principal amount of the Secured
      Promissory Note evidenced hereby and hereby irrevocably appoints _______________
      attorney to transfer the Note on the books of the within named corporation
      with
      full power of substitution in the premises.

    

    Dated:

    

    In
      the
      presence of:

    

    
      
         

      

        6

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