Document:

EXHIBIT 10.4

Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment. The omitted portions, marked by [***], have been
separately filed with the Securities and Exchange Commission.

                                 LOAN AGREEMENT

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

      WHEREAS, Borrower and Lender are parties to the Common Stock and Warrant
Purchase Agreement dated as of the date hereof (the "Purchase Agreement") and
the Investment and Commission Agreement dated as of the date hereof (the
"Investment and Commission Agreement");

      WHEREAS, Borrower and Quintiles Transnational Corp., an Affiliate of
Lender ("Quintiles"), are parties to a Commercialization Agreement (the
"Commercialization Agreement"), dated as of the date hereof;

      WHEREAS, in connection with the Purchase Agreement, Investment and
Royalty, and Commercialization Agreement, Lender is willing to extend certain
credit facilities to Borrower, subject to and upon the terms and conditions of
this Agreement; and

      NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties, the parties hereby
agree as follows:

                                    ARTICLE I
                                   DEFINITIONS

      1.01 Definitions. Capitalized terms used but not defined in the text of
this Agreement shall have the meanings ascribed to them on Exhibit A attached
hereto and incorporated herein by reference.

                                   ARTICLE II
                            Amount and Terms of Loan

      2.01 Advances.

            (a) Subject to and upon the terms and conditions set forth herein,
Lender agrees, at any time and from time to time, from and after the occurrence
of Milestone One (as defined below) and prior to December 10, 2004 (the
"Maturity Date"), to make advances (each an

                                       1
<PAGE>

"Advance" and collectively the "Advances") to Borrower at such times and in such
amounts as Borrower shall request pursuant to this Agreement, up to an aggregate
principal amount of Eight Million, Five Hundred Thousand Dollars ($8,500,000)
(as adjusted and subject to the satisfaction of certain milestones in accordance
with this Section 2.01, the "Commitment") in lawful money of the United States
of America in immediately available funds. The Commitment shall become available
to Borrower as follows:

                  (i) Upon the occurrence of Milestone One (as defined below),
            one third (1/3) of the Commitment shall be available. "Milestone
            One" shall mean the later to occur of (i) the completion by The
            Lewin Group of a market opportunity assessment and report in
            customary form regarding the Product, which shall include without
            limitation an assessment and report as to pre-launch
            commercialization requirements and sales forecasts, and (ii)
            Borrower shall have obtained a valid and binding extension of the
            deadline for the filing of the NDA referred to in Section 6 of the
            License Agreement until at least October 28, 2003.

                  (ii) Upon the occurrence of Milestone One and Milestone Two
            (as defined below), two thirds (2/3) of the Commitment shall be
            available. "Milestone Two" shall mean the earlier to occur of (i)
            the sale after the date of this Agreement by Borrower of shares of
            its capital stock for cash proceeds with an aggregate purchase price
            of at least $10,000,000 in one or more capital financing
            transactions or pursuant to the exercise of options, warrants or
            rights to purchase its capital stock, and in each case the proceeds
            of which may be used for general corporate purposes or (ii) the
            public disclosure by Borrower of Phase III clinical trial data
            regarding the indication for the Product known as idiopathic
            respiratory distress syndrome ("IRDS"), and the completion by
            Quintiles or an appropriate Affiliate of a written assessment and
            report indicating that such data is favorable and that such data
            substantially enhances the Company's prospects with respect to its
            ability to repay the Commitment as increased by such Milestone Two.

                  (iii) Upon the occurrence of Milestone One, Milestone Two, and
            Milestone Three (as defined below), the full Commitment shall be
            available. "Milestone Three" shall mean the earlier to occur of (i)
            the completion by Quintiles or an appropriate Affiliate of a written
            assessment and report in customary form indicating the
            "approvability" by the FDA of Borrower's NDA for the Product for
            either the IRDS indication or the indication known as meconium
            aspiration syndrome ("MAS"), which shall include without limitation
            an assessment and report as to the quality of the documentation
            comprising such NDA and the clinical data included in such NDA, or
            (ii) the issuance by the FDA of a letter in customary form
            indicating that Borrower's NDA for the Product is "approvable" with
            respect to Borrower's NDA for either the IRDS indication or the MAS
            indication.

            (b) Notwithstanding anything to the contrary in this Agreement, upon
the occurrence of the "First Milestone" (as defined in the Investment and
Commission Agreement),

                                       2
<PAGE>

Borrower shall prepay Advances as described in Section 2.05(b), and the
Commitment shall be automatically reduced by the amount of such required
prepayment.

            (c) Notwithstanding anything to the contrary in this Agreement, upon
the occurrence of the "Second Milestone" (as defined in the Investment and
Commission Agreement), Borrower shall prepay the aggregate outstanding amount of
all Advances and the Commitment shall be automatically terminated.

            (d) As contemplated by the Commercialization Agreement, the JCC (as
defined therein) may authorize expenditures for pre-Launch Marketing Services in
excess of $8,500,000 up to $10,000,000 (without the consent of Lender). In the
event that the JCC authorizes such expenditures in excess of $8,500,000 (but not
in excess of $10,000,000), (i) the Commitment shall be deemed increased by a
commensurate amount, but in any event not in excess of a maximum Commitment of
$10,000,000 in the aggregate, and (ii) Borrower shall execute a new promissory
note as described in Section 3.02(e).

            (e) In the event that the parties mutually agree to authorize
expenditures for pre-Launch Marketing Services in excess of $10,000,000 (but not
in excess of $15,000,000), (i) the Commitment shall be deemed increased by a
commensurate amount, and (ii) Borrower shall execute a new promissory note as
described in Section 3.02 (e). Notwithstanding anything in this Agreement to the
contrary, any increase in the Commitment in excess of $10,000,000 shall require
the express written agreement of Lender in the sole discretion of Lender, and
this subsection (e) shall not imply that Lender is willing, or obligate Lender
in any manner, to agree to any such increase or to agree to any increase in
Lender's obligations under the Investment and Commission Agreement, with any
such increase in Lender's obligations being required to be set forth in an
express written agreement referring to the Investment and Commission Agreement.

            (f) Borrower may use the Commitment, as in effect from time to time,
on a revolving basis by borrowing, repaying the Advances in whole or in part,
and reborrowing, all in accordance with the terms and conditions of this
Agreement. The aggregate outstanding amount of the Advances at any time shall
not exceed the Commitment as in effect at such time. If at any time, the
aggregate outstanding principal amount of the Advances exceeds the Commitment,
Borrower shall immediately pay to Lender in cash the amount of such excess.

            (g) Each Advance shall be a principal amount of a loan, evidenced by
the Note referred to below.

      2.02 Use of Proceeds. At least sixty-five percent (65%) of the Advances
shall be used for the payment of pre-Launch Marketing Services (as defined in
the Commercialization Agreement) provided by Quintiles Transnational Corp. or
its Affiliates and the remainder of the Advances may be used for general
corporate purposes.

                                       3
<PAGE>

      2.03 Notices of Advances; Disbursement of Funds.

            (a) Whenever Borrower desires to obtain an Advance, Borrower shall
give to Lender a written notice of the requested Advance, signed by an
authorized officer of Borrower (each a "Notice of Advance"), and received no
later than 3:00 p.m. Eastern Time three (3) Business Days before the day on
which Borrower desires the Advance to be made. The Notice of Advance shall
specify: (i) the aggregate principal amount of the Advance to be made; (ii) the
date on which Borrower desires the Advance to be made, which date shall be a
Business Day; and (iii) an account of Borrower to which the Advance shall be
directed and wire transfer instructions. The giving of each Notice of Advance
shall constitute a representation and warranty by Borrower to Lender that the
conditions precedent set forth in Section 3.02 have been satisfied.

            (b) Whenever Borrower desires to obtain an Advance, Lender shall
make available to Borrower, at an account of Borrower specified to Lender, not
later than 2:00 p.m. Eastern Time on the date specified in the applicable Notice
of Advance the aggregate amount of such requested Advance. Each such payment
shall be an Advance under this Agreement and the Note. Each Notice of Advance
requesting an Advance shall be irrevocable when sent by Borrower, unless
otherwise agreed by Lender.

            (c) The amount of each Advance shall not be less than $250,000.

      2.04 Note. Borrower's obligation to pay the principal of, and interest on,
the Advances made by Lender shall be evidenced by a single promissory note (the
"Note") duly executed and delivered by Borrower in the form of Exhibit B
attached hereto. All Advances made by Lender to Borrower, and all payments in
respect thereof (and all reborrowings thereof, if any), shall be recorded by
Lender and shall be endorsed on the grid attached to the Note. Failure to make
any such notation shall not affect Borrower's obligations in respect of such
Advances.

      2.05 Repayment; Interest; Fees.

            (a) Borrower shall pay the aggregate outstanding principal amount
of, and all accrued interest on, all Advances on or before the Maturity Date,
unless due and payable sooner pursuant to the provisions of this Agreement.
Borrower may prepay any Advance or any accrued interest on Advances at any time
and from time to time without penalty, on the following terms and conditions:
(i) Borrower shall give Lender at least three (3) Business Days' prior notice of
its intent to prepay and the amount of the prepayment and (ii) each prepayment
shall not be less than [***].

            (b) Upon the occurrence of the "First Milestone" (as defined in the
Investment and Commission Agreement), Borrower shall prepay the Advances in an
aggregate principal amount equal to seventy percent (70%) of the aggregate
amount of the outstanding Advances.

Information marked by [***] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Securities and Exchange Commission.

                                       4
<PAGE>

            (c) Upon the occurrence of the "Second Milestone" (as defined in the
Investment and Commission Agreement), Borrower shall prepay the aggregate
outstanding amount of all Advances.

            (d) Borrower agrees to pay interest in respect of the outstanding
principal amount of each Advance from the date the proceeds are made available
to Borrower until repaid. Interest on the outstanding principal amount of each
Advance shall accrue and be payable at a rate per annum (the "Base Rate") equal
to the greater of (i) [***] or (ii) [***] in excess of the Prime Rate in effect
from time to time, or, if less, the maximum rate permitted by law. Interest
shall be calculated on the basis of a 360-day year for the actual number of days
elapsed.

            (e) Accrued interest shall be due and payable (i) in respect of each
Advance, quarterly in arrears on the last Business Day of each calendar quarter,
and (ii) upon any payment of principal, on the amount paid.

            (f) Borrower agrees to pay to Lender commitment fees as follows:

                [***]

            (g) The outstanding principal amount of an Advance or any accrued
interest amounts thereon or any commitment fees that are not paid when due shall
accrue interest on a daily basis at the lesser of (i) [***] in excess of the
Base Rate, or (ii) the maximum rate permitted by law, such accrual beginning on
the date payment is due and continuing until the date payment is made in full.

            (h) All payments of principal, interest and fees described above
shall be made to Lender in lawful money of the United States of America in
immediately available funds.

                                   ARTICLE III
                              Conditions Precedent

      3.01 Initial Conditions Precedent to Lender's Obligations. The obligation
of Lender to perform its obligations under this Agreement is subject to the
conditions precedent that Lender shall have received from Borrower each of the
following documents on the date of this Agreement:

            (a) The Note duly executed by Borrower;

            (b) The Security Agreement in the form acceptable to the parties
(the "Security Agreement"), and the related financing statement in the form
acceptable to the parties, in each case duly executed by Borrower;

Information marked by [***] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Securities and Exchange Commission.

                                       5
<PAGE>

            (c) Copies of (i) resolutions of the Board of Directors of Borrower
approving this Agreement, the Note, and the Security Agreement and any other
documents required or necessary to consummate the transactions contemplated in
this Loan Agreement (collectively, the "Loan Documents"), the Purchase
Agreement, the Investment and Royalty Agreement, and the Commercialization
Agreement (together with the Loan Documents, collectively, the "Transaction
Documents"), (ii) the Certificate of Incorporation of Borrower, and (iii) the
Bylaws of Borrower, in each case certified by an appropriate officer of
Borrower;

            (d) A certificate of the appropriate officers of Borrower certifying
(i) the names and true signatures of the officers of Borrower authorized to sign
the Transaction Documents, (ii) that the representations and warranties
contained in Article IV of the Purchase Agreement are true and correct as of the
date hereof, (iii) that Borrower has performed, satisfied and complied with all
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with on or prior to the date of this Agreement, and (iv)
that no event has occurred and is continuing, which constitutes an Event of
Default (as defined in Section 6.01 hereof) or would constitute an Event of
Default but for the requirement that notice be given or time elapse or both;

            (e) A certificate of good standing (or comparable document)
regarding Borrower from the State of Delaware; and

            (f) A legal opinion of Dickstein Shapiro Morin & Oshinsky, LLP,
counsel for Borrower, regarding the Transaction Documents and the transactions
contemplated thereby in the form acceptable to the parties.

      3.02 Conditions Precedent to All Advances. The obligation of Lender to
make each Advance shall be subject to the further conditions precedent that, on
the date of such Advance:

            (a) The representations and warranties contained in Article IV of
the Purchase Agreement (other than Sections 4.01 and 4.02) are true and correct
in all material respects on and as of the date of such Advance, before and after
giving effect to such Advance, as though made on and as of such date;

            (b) Borrower shall have performed, satisfied and complied with in
all material respects all covenants, agreements and conditions required under
the Transaction Documents to be performed, satisfied or complied with on or
prior to the date of such Advance;

            (c) No event has occurred and is continuing, or would result from
such Advance, which constitutes an Event of Default, or would constitute an
Event of Default but for the requirement that notice be given or time elapse or
both;

            (d) All principal amount of Advances, accrued interest or commitment
fees under this Agreement, which are due and payable at the time of such
Advance, shall have been paid in full; and

                                       6
<PAGE>

            (e) If the Commitment shall have been increased pursuant to Section
2.01(d), Lender shall have received a new promissory note duly executed by
Borrower in the form of the Note, except that the amount thereof shall be equal
to the amount of the Commitment as so increased, to replace the Note executed by
Borrower on the date hereof. Simultaneously with such replacement, the Note
executed by the Borrower on the date hereof shall be cancelled and returned to
Borrower and deemed null and void and of no further force and effect.

                                   ARTICLE IV
                         REPRESENTATIONS AND WARRANTIES

      4.01 Representations and Warranties. The representations and warranties of
Borrower set forth in Article IV of the Purchase Agreement (excluding Sections
4.02, 4.14 through 4.18, 4.20, and 4.21 and after modifying Section 4.04 so that
"Transaction Documents" shall mean this Agreement) are hereby incorporated by
reference into this Agreement, and Borrower hereby makes such representations
and warranties to Lender.

                                    ARTICLE V
                              Covenants of Borrower

      So long as any or all of the Advances or other obligations of Borrower
under this Agreement shall remain unpaid or Lender shall have any Commitment
hereunder, Borrower shall comply with the following covenants:

      5.01 Compliance with Laws. Borrower shall comply, and cause each of its
subsidiaries to comply, in all material respects with all applicable laws,
rules, regulations and orders, in respect of the conduct of its business and the
ownership of its properties, including without limitation with respect to the
FFDCA, environmental issues, and taxes and other governmental changes, where the
failure to so comply would have a material adverse effect on Borrower.

      5.02 Transfers of Assets. Borrower shall not sell, convey, transfer,
lease, license, assign or otherwise dispose of (whether in one transaction or in
a series of transactions) (a) all or substantially all of its assets or
properties (whether now owned or hereafter acquired) to any entity or person, or
(b) any of its assets or properties except in the ordinary course of business,
or in each case permit any of its subsidiaries to do so, if, in the case of this
subsection (b), such sale, conveyance, transfer, lease, license, assignment or
other disposition is likely to have a material adverse effect on Borrower or on
Lender's rights hereunder.

      5.03 Debt. Borrower shall not create or incur or allow to be created,
incurred or exist, or permit any of its subsidiaries to create or incur or allow
to be created, incurred or exist, any Debt, except (a) accounts payable incurred
or created in the ordinary course of Borrower's business, (b) Debt incurred or
created in the ordinary course of Borrower's business and which does not exceed
$1,000,000 in the aggregate, (c) Debt incurred or created solely for the purpose
of

                                       7
<PAGE>

financing the acquisition of property (other than real property) and equipment
for use in Borrower's business and which does not exceed $2,5000,000 in the
aggregate, and (d) Debt which is junior and subordinate in right of payment to
Borrower's obligations to Lender under the Loan Documents ("Junior Debt") so
long as, prior to the creation of such Junior Debt, Lender has consented in
writing to such Junior Debt (such consent not to be unreasonably withheld), and
Lender and the holder of such Junior Debt have entered into a subordination
agreement in form and substance reasonably satisfactory to Lender providing for
the subordination of the Junior Debt to the obligations of Borrower under the
Loan Documents.

      5.04 Liens, Etc. Borrower shall not create or incur or allow to be
created, incurred or exist, or permit any of its subsidiaries to create or incur
or allow to be created, incurred or exist, any Lien upon or with respect to any
of Borrower's or its subsidiaries' assets or properties, except (a) Permitted
Liens, as defined in the Security Agreement, (b) purchase money Liens upon
property and equipment of Borrower acquired for use in Borrower's business,
securing the purchase price thereof or securing Debt incurred solely for the
purpose of financing the acquisition thereof, and all of which Liens in the
aggregate do not secure Debt in excess of [***], (c) Liens securing capital
lease obligations under which the Lessor's recourse is limited to the leased
property, and (d) Liens securing indebtedness which is junior and subordinate in
right of payment to Borrower's obligations to Lender under the Loan Documents
("Junior Liens") so long as, prior to the creation of such Junior Liens, Lender
has consented in writing to such Junior Liens (such consent not to be
unreasonably withheld), and Lender and the holder of such Junior Liens have
entered into a subordination agreement in form and substance reasonably
satisfactory to Lender providing for the subordination of the indebtedness
secured by the Junior Liens to the obligations of Borrower under the Loan
Documents.

      5.05 Corporate Existence; Business. Borrower will (i) maintain and
preserve in full force and effect its corporate existence, and (ii) continue to
engage in the business in which it is engaged on the date hereof.

      5.06 Exchange Act Registration. Borrower will cause its Common Stock to
continue to be registered under Section 12(g) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), will comply in all material respects with
its reporting and filing obligations under the Exchange Act, and will not take
any action or file any documents to terminate or suspend such registration or
terminate or suspend its reporting or filing obligations under the Exchange Act.

      5.07 SEC Information. Upon request, Borrower will provide to Lender a copy
of any publicly available forms, reports or other documents filed with the
Securities and Exchange Commission.

Information marked by [***] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Securities and Exchange Commission.

                                       8
<PAGE>

      5.08 Notice of Certain Events. Promptly, and in any event within five (5)
Business Days after an executive officer of the company obtains knowledge
thereof, Borrower will notify Lender of (a) the occurrence of an Event of
Default, (b) any litigation, governmental proceeding or investigation or other
event that is likely to materially and adversely affect the financial condition,
properties, business, or results of operations of Borrower, or (c) any Change of
Control.

      5.09 Compliance with Certain Agreements. Borrower shall perform and
fulfill all of its obligations under the License Agreement and the Research
Agreement as necessary to maintain Borrower's rights in such agreements in full
force and effect in all material respects. Borrower shall provide written notice
to Lender within five (5) Business Days of Borrower's receipt of any notice from
any other parties to the License Agreement or the Research Agreement proposing
or threatening to terminate any such agreement.

                                   ARTICLE VI
                                Events of Default

      6.01 Events of Default. The occurrence of each of the following events
shall be considered an event of default ("Event of Default"):

            (a) Borrower shall fail to pay any principal of, or interest on, the
Note when the same becomes due and payable and four (4) Business Days have
elapsed following receipt of notice of such non-payment from Lender to Borrower;

            (b) Any representation or warranty made by Borrower under this
Agreement shall prove to have been incorrect or untrue in any material respect
when made or deemed made and such incorrect or untrue representation or warranty
has a material adverse effect on Borrower or significantly impairs the prospect
that Lender will be repaid in accordance with the terms of this Agreement and is
not cured within thirty (30) days upon receipt of notice thereof by Borrower;

            (c) Borrower shall fail to perform or observe any term, covenant or
agreement contained in this Agreement required to be performed or observed by
Borrower (other than Section 5.02, 5.03 or 5.04) and such failure to perform or
observe such term, covenant or agreement has a material adverse effect on
Borrower or significantly impairs the prospect that Lender will be repaid in
accordance with the terms of this Agreement and is not cured within thirty (30)
days after receipt of notice thereof by Borrower;

            (d) Borrower shall fail to perform or observe the provisions of
Section 5.02, 5.03 or 5.04 above, except, in the case of Section 5.04, if such
Event of Default is based on a tax lien, judgment lien or materialman's lien,
such judgment shall continue without discharge or stay for a period of sixty
(60) days;

            (e) One or more judgments, decrees or orders for the payment of
money shall be entered against Borrower or any of its subsidiaries involving in
the aggregate a liability of

                                       9
<PAGE>

[***] or more, and any such judgment, decree or order shall continue without
discharge or stay for a period of sixty (60) days;

            (f) Borrower shall (i) commence a voluntary case under the federal
bankruptcy laws (as now or hereafter in effect), (ii) file a petition seeking to
take advantage of any other laws relating to bankruptcy, insolvency,
reorganization, winding up or composition for adjustment of debts, (iii) consent
to or fail to contest in a timely manner any petition filed against it in an
involuntary case under such bankruptcy laws or other laws, (iv) apply for or
consent to, or fail to contest in a timely and appropriate manner, the
appointment of, or the taking of possession by, a receiver, custodian, trustee,
or liquidator of itself or of a substantial part of its property, (v) admit in
writing its inability to pay its debts as they become due, (vi) make a general
assignment for the benefit of creditors, or (vii) take any corporate action for
the purpose of authorizing or effecting any of the foregoing;

            (g) A case or other proceeding shall be commenced against Borrower
or any of its subsidiaries in any court of competent jurisdiction seeking (i)
relief under the federal bankruptcy laws (as now or hereafter in effect) or
under any other laws relating to bankruptcy, insolvency, reorganization, winding
up or adjustment of debts, or (ii) the appointment of a trustee, receiver,
custodian, liquidator or the like for Borrower or any of its subsidiaries or for
all or any substantial part of their respective assets, and such case or
proceeding shall continue without dismissal or stay for a period of sixty (60)
consecutive days, or an order granting the relief requested in such case or
proceeding (including, but not limited to, an order for relief under such
federal bankruptcy laws) shall be entered;

            (h) A Change of Control shall occur; provided, however, that a
Change of Control, as defined in clauses (ii) and (iii) of the definition of
Change of Control, shall not be an Event of Default so long as the surviving,
acquiring or continuing entity has a net worth (after giving effect to the
consummation of the applicable transaction and determined in accordance with
generally accepted accounting principles) at least equal to the net worth of
Borrower immediately prior to the consummation of the applicable transaction and
such entity agrees in an enforceable written instrument to be bound by all the
terms and conditions of this Agreement as if it were Borrower and a party
hereto, which instrument shall be delivered a reasonably practicable time prior
to the consummation of such transaction;

            (i) Borrower or any of its subsidiaries shall default in the
performance or observance of any agreement or instrument relating to any Debt,
or any other event shall occur or condition exist, and the effect of such
default, event or condition is to cause or permit the holder of any such Debt to
cause any such Debt to become due prior to its stated maturity;

            (j) the Borrower shall fail to perform or observe any term, covenant
or agreement under the Security Agreement in any material respect;

Information marked by [***] has been omitted pursuant to a request for
confidential treatment. The omitted portion has been separately filed with the
Securities and Exchange Commission.

                                       10
<PAGE>

            (k) There shall have been a material adverse change (other than with
respect to matters relating to general economic conditions on Borrower's
industry as a whole) in the financial condition, properties, business or results
and operations of Borrower, taken as a whole, which materially adversely effects
Borrower's ability to satisfy its obligations under the Loan Documents;
provided, however, that in no event shall a material adverse change be deemed to
have occurred by virtue of the incurrence by the Company or its Affiliates of
any debt or other obligations permitted by this Agreement or the other
Transaction Documents;

            (l) Borrower shall fail to meet the continued listing criteria of
the Nasdaq SmallCap Market at any time if such failure shall continue for thirty
(30) consecutive days following receipt of notice thereof by Borrower of the
occurrence thereof from the Nasdaq SmallCap market or Lender;

            (m) The License Agreement or the Research Agreement shall have been
terminated;

            (n) The Commercialization Agreement shall have been terminated; or

            (o) The Investment and Commission Agreement shall have been
terminated.

      6.02 Effect of Event of Default. If any Event of Default shall occur and
be continuing, then Lender (i) may, by notice to Borrower, declare the
Commitment and its obligation to make Advances to be terminated, whereupon the
same shall forthwith terminate, (ii) may, by notice to Borrower, declare the
Note, all interest thereon and all other amounts payable under this Agreement to
be forthwith due and payable, whereupon the Note, all such interest and all such
amounts shall become and be forthwith due and payable, without presentment,
demand, protest or further notice of any kind, all of which are hereby expressly
waived by Borrower, and (iii) exercise any rights or remedies under the Security
Agreement; provided, however, that if an Event of Default specified in Section
6.01(f) or (g) shall occur, (A) the Commitment and the obligation of Lender to
make Advances shall automatically be terminated and (B) the Note, all such
interest and all such amounts shall automatically become and be due and payable,
without presentment, demand, protest or any notice of any kind, all of which are
hereby expressly waived by Borrower.

                                  ARTICLE VII
                                 MISCELLANEOUS

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

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

                                       11
<PAGE>

certified or registered mail, postage prepaid, (ii) sent by nationally
recognized overnight courier for next Business Day delivery, (iii) personally
delivered, or (iv) made by telecopy or facsimile transmission with confirmed
receipt.

      If to Borrower:  Discovery Laboratories, Inc.
                       350 South Main Street
                       Suite 307
                       Doyelstown, PA 18901-4874
                       Attn: President
                       Facsimile: (215) 340-3940

      with a copy to:  Roberts, Sheridan & Kotel
                       The New York Practice of
                       Dickstein Shapiro's Corporate & Finance Group
                       1177 Avenue of the Americas
                       New York, NY 10036-2714
                       Attn: Ira L. Kotel
                       Facsimile: (212) 997-9880

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

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

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

      7.04 Right of Set-off. If an Event of Default shall have occurred and be
continuing, Lender is hereby authorized at any time and from time to time, to
the fullest extent permitted by law, to set off and apply any payment obligation
by Lender to Borrower under the Transaction Documents against any and all of the
obligations of Borrower now or hereafter existing under this Agreement and the
Note, whether or not Lender shall have made any demand under this Agreement or
the Note and although such obligations may be unmatured. Lender agrees promptly
to notify Borrower after any such set-off and application, provided that the
failure to give such notice shall not affect the validity of such set-off and
application. The rights of Lender

                                       12
<PAGE>

under this Section 7.04 are in addition to other rights and remedies (including,
without limitation, other rights of set-off) which Lender may have.

      7.05 Attorneys' Fees. In the event that any dispute among the parties to
the Loan Documents should result in litigation, the prevailing party in such
dispute shall be entitled to recover from the losing party all fees, costs and
expenses enforcing any right of such prevailing party under or with respect to
the Loan Documents, including without limitation, such reasonable fees and
expenses of attorneys and accountants, which shall include, without limitation,
all fees, costs and expense of appeals.

      7.06 Binding Effect; Assignment. This Agreement shall be binding upon and
inure to the benefit of Borrower and Lender and their respective successors and
assigns, provided that neither Borrower nor Lender may assign or transfer any or
all of its rights or obligations under the Loan Documents without the prior
written consent of the other party and any attempted assignment without consent
shall be null and void; provided, however, that Lender may at any time assign or
transfer any of its rights or obligations under the Loan Documents to an
Affiliate of Lender so long as such Affiliate agrees in an enforceable written
instrument to be bound by all the terms and conditions of the Loan Documents as
if it were Lender and a party thereto, which instrument shall be delivered a
reasonably practicable time prior to such assignment.

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

      7.08 Entire Agreement. This Agreement and the other Transaction Agreements
embody the entire agreement and understanding between the parties hereto with
respect to the subject matter thereof and supersede all prior oral or written
agreements and understandings relating to the subject matter thereof. No
statement, representation, warranty, covenant or agreement of any kind not
expressly set forth in the Transaction Agreements shall affect, or be used to
interpret, change or restrict, the express terms and provisions of the
Agreements. If any provision contained in this Agreement shall be deemed to
conflict with any provision of any of the other Transaction Agreements, then the
provision contained in this Agreement shall be controlling.

      7.09 Further Action. Each party shall, without further consideration, take
such further action and execute and deliver such further documents as may be
reasonably requested by the other party in order to carry out the provisions and
purposes of this Agreement.

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

      7.11 Publicity. Except as otherwise required by applicable law or by
obligations pursuant to any listing agreement with or rules of any securities
exchange or automated quotation

                                       13
<PAGE>

system, each party shall, and shall cause its respective Affiliates to, not,
issue any press release or make any other public statement relating to,
connected with or arising out of this Agreement or the matters contained herein
without the other parties' prior written approval of the contents and the manner
of presentation and publication thereof (which approval shall not be
unreasonably withheld or delayed).

      7.12 Termination by Borrower. At such time that all Advances and accrued
interest have irrevocably been paid in full, the Commitment has expired or been
terminated and Borrower has satisfied all of its obligations under this
Agreement, Lender shall, at the request of Borrower, promptly, and in no event
later than ten (10) Business Days thereafter, make, execute, endorse,
acknowledge, file and/or deliver to Borrower any and all agreements,
certificates, instruments or other documents, and take all other action, as
reasonably requested by Borrower to terminate this Agreement.

      7.13 Disclaimer. Neither Lender nor Borrower, nor any of such party's
Affiliates, directors, officers, employees, subcontractors or agents shall have,
under any legal theory (including, but not limited to, contract, negligence and
tort liability), any liability to any other party hereto for any loss of
opportunity or goodwill, or any type of special, incidental, indirect or
consequential damage or loss, in connection with or arising out of this
Agreement.

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

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

      7.16 Arbitration. (a) If the parties are unable to resolve any Dispute
under Section 7.15, then either party may require the matter to be settled by
final and binding arbitration by sending written notice of such election to the
other party clearly marked "Arbitration Demand". Thereupon such Dispute shall be
arbitrated in accordance with the terms and conditions of this Section 7.15.
Notwithstanding the foregoing, either party may apply to a court of competent
jurisdiction for a temporary restraining order, a preliminary injunction, or
other equitable relief to preserve the status quo or prevent irreparable harm.

                                       14
<PAGE>

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

            (c) Nothing contained herein shall operate to prevent either party
from asserting counterclaim(s) in any arbitration commenced in accordance with
this agreement, and any such party need not comply with the procedural
provisions of this Section 7.16 in order to assert such counterclaim(s).

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

                  (i) The arbitrators shall have the sole authority to decide
whether or not any Dispute between the parties is arbitrable and whether the
party presenting the issues to be arbitrated has satisfied the conditions
precedent to such party's right to commence arbitration as required by this
Section 7.16.

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

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

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

                                       15
<PAGE>

            (e) Except as provided in the last sentence of Section 7.16(a), the
provisions of this Section 7.16 shall be a complete defense to any suit, action
or proceeding instituted in any federal, state or local court or before any
administrative tribunal with respect to any Dispute arising with regard to this
Agreement. Any party commencing a lawsuit in violation of this Section 7.16
shall pay the costs of the other party, including, without limitation,
reasonable attorney's fees and defense costs.

                     [REST OF PAGE INTENTIONALLY LEFT BLANK;
                          SIGNATURES ON FOLLOWING PAGE]

                                       16
<PAGE>

                       [Signature Page to Loan Agreement]

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

                                       BORROWER:

                                       DISCOVERY LABORATORIES, INC.

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

                                       LENDER:

                                       PHARMABIO DEVELOPMENT INC.

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

                                       17
<PAGE>

                                    EXHIBIT A
                                   DEFINITIONS

      "Affiliate" shall mean, as to any person or entity, any corporation or
business entity controlled by, controlling or under common control with such
party or entity. For this purpose, "control" shall mean direct or indirect
beneficial ownership of at least fifty percent (50%) of the voting stock or
income interest in such corporation or other business entity.

      "Business Day" shall mean any day other than a Saturday, Sunday or legal
holiday on which banks in North Carolina and New York are open for the conduct
of their banking business.

      "Change of Control" shall mean the occurrence of any of the following
events: (i) the acquisition, whether directly or indirectly, by any person or
entity, including a "group" as defined in Section 13(d)(3) of the Exchange Act,
of fifty percent (50%) or more of the Common Stock of Borrower; (ii) Borrower
shall merge or consolidate (or engage in any other share exchange, acquisition
or business combination transaction) with or into another corporation or other
entity, with the effect that the persons who were the shareholders of Borrower
immediately prior to the effective time of such transaction hold less than
fifty-one percent (51%) of the combined voting power of the outstanding equity
securities of the surviving, continuing or acquiring entity in such transaction;
(iii) Borrower shall sell, convey, transfer, lease, license, assign or otherwise
transfer or dispose of (whether in one transaction or a series of transactions)
all or substantially all of its assets or properties (whether now owned or
hereafter acquired) to any person or entity, or permit any of its subsidiaries
to do so; or (iv) at any time during any calendar year, fifty percent (50%) or
more of the members of the full Board of Directors of Borrower shall have
resigned or been removed or replaced. The determination of "combined voting
power" shall be based on the aggregate number of votes that are attributable to
outstanding securities entitled to vote in the election of directors, general
partners, managers or persons performing analogous functions to directors of the
entity in question, without regard to contractual arrangements or rights
accruing in special circumstances.

      "Debt" shall mean (i) indebtedness for borrowed money, (ii) obligations
evidenced by bonds, debentures, notes or other similar instruments, (iii)
obligations to pay the deferred purchase price of property or services, (iv)
obligations as lessee under leases which shall have been or should be, in
accordance with generally accepted accounting principles, recorded as capital
leases, and (v) obligations under direct or indirect guaranties in respect of,
and obligations (contingent or otherwise) to purchase or otherwise acquire, or
otherwise to assure a creditor against loss in respect of, indebtedness or
obligations of others of the kinds referred to in clauses (i) through (iv)
above; provided, however, Debt shall not include any Debt of Borrower under this
Agreement.

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

      "FFDCA" shall mean the United States Federal Food, Drug and Cosmetic Act,
as amended from time to time, and all regulations promulgated thereunder.

<PAGE>

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

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

      "NDA" shall mean a "new drug application" as such term is used under the
FFDCA.

      "Prime Rate" shall mean the rate which First Union National Bank (or its
successor) announces from time to time as its prime lending rate, the Prime Rate
to change when and as such prime lending rate changes.

      "Product" shall have the meaning given such term under the Investment and
Commission Agreement.

      "Research Agreement" shall mean the Research Funding and Option Agreement
dated March 1, 2000 between the Scripps Research Institute and the Company.

<PAGE>

                                    EXHIBIT B
                                  FORM OF NOTE

                                 PROMISSORY NOTE

$8,500,000                                                     December __, 2001

            FOR VALUE RECEIVED, DISCOVERY LABORATORIES, INC., a Delaware
corporation ("Borrower"), hereby promises to pay to the order of PHARMABIO
DEVELOPMENT INC., a North Carolina corporation ("Lender"), in lawful money of
the United States of America in immediately available funds, the lesser of (i)
the principal sum of Eight Million, Five Hundred Thousand Dollars ($8,500,000)
and (ii) the aggregate unpaid principal amount of all Advances (as defined in
the Loan Agreement referred to below) made by Lender to Borrower pursuant to the
Loan Agreement (as defined below), together with interest accrued thereon. The
interest shall accrue on the unpaid principal amount of each Advance at the
rates and in the manner provided in the Loan Agreement. Payment of the principal
amount of this Note and accrued interest on this Note shall be made at the times
and in the manner provided in the Loan Agreement. Capitalized terms used but not
defined herein shall have the meanings ascribed to them in the Loan Agreement.

            Each Advance made by Lender to Borrower, and all payments made on
account of the principal amount hereof, shall be recorded and endorsed by Lender
on the grid attached hereto which is a part of this Note. Failure to so record
and endorse such Advances and payments, however, shall not affect Borrower's
obligations in respect of such Advances.

            This Promissory Note is the Note referenced in the Loan Agreement
between Borrower and Lender dated as of the date of this Note (as same may be
amended from time to time, the "Loan Agreement"), and is entitled to the
benefits of the Loan Agreement. The Loan Agreement, among other things, (i)
provides for the making of certain Advances by Lender to Borrower from time to
time, the principal amount of each such Advance being a principal amount
evidenced by this Note, and (ii) provides that this Note is secured by, and
Borrower has granted a security interest in, certain of its assets as set forth
in that certain Security Agreement between Borrower and Lender dated as of the
same date as this Note.

            In case an Event of Default shall occur and be continuing and not
cured prior to the expiration of any applicable cure or grace periods set forth
in the Loan Agreement, the unpaid principal amount of, and accrued interest on,
this Note may be declared to be due and payable in the manner and with the
effect provided in the Loan Agreement.

            Borrower hereby waives presentment, demand, notice, protest and all
other demands and notices in connection with the delivery, acceptance,
performance and enforcement of this Note.

<PAGE>

            This Note is subject to early termination as set forth in the Loan
Agreement. This Note may be voluntarily prepaid, in whole or in part, on the
terms and conditions set forth in the Loan Agreement. Provided that no Advances
or accrued interest are outstanding and have irrevocably been paid in full and
the Commitment shall have expired or been terminated in accordance with the
terms of the Loan Agreement, the Lender shall, at the request of Borrower,
promptly, and in no event later than ten (10) Business Days after notice from
Borrower, cancel and return this Note to Borrower.

            This Note shall be governed by and construed in accordance with the
law of the State of Delaware without regard to the conflicts of law rules of
such state.

            This Note may not be assigned by Lender except to an Affiliate of
Lender which agrees in an enforceable written instrument to be bound by all the
terms and conditions of this Note as if it were Lender, which instrument shall
be delivered a reasonably practicable time prior to such assignment.

            Lender and Borrower agree that disputes relating to this Note shall
be subject to the provisions of the Loan Agreement entitled "Internal Review"
and "Arbitration" set forth in Sections 7.15 and 7.16 thereof, respectively.

                                                    BORROWER:

                                                    DISCOVERY LABORATORIES, INC.

                                                    By: ________________________
                                                    Name:
                                                    Title:

<PAGE>

                       ADVANCES AND PAYMENTS OF PRINCIPAL

              Amount     Amount of Principal Paid        Unpaid         Notation
  Date     of Advance           or Prepaid          Principal Balance    Made By
  ----     ----------           ----------          -----------------    -------Exhibit 10.14

                                LICENSE AGREEMENT

This AGREEMENT is entered into this 11th day of April, 2001 by and between
QUANTUM LOGIC CORPORATION, having offices at 1 Huckleberry Lane, Weston,
Connecticut 06883, hereinafter referred to as QUANTUM, and MIKRON INSTRUMENT
COMPANY, having offices at 16 Thornton Road, Oakland, New Jersey 07436,
hereinafter referred to as MIKRON.

FOR AND IN CONSIDERATION of the mutual benefits to be obtained, the parties
hereto do hereby agree as follows:

1.    QUANTUM conveys hereby to MIKRON, and to its successors or assigns, a
      world-wide license under its applicable patent and intellectual property
      rights, to manufacture and sell laser/microcomputer pyrometers as herein
      defined, in accordance with the terms, conditions and region of validity
      as described below:

      The applicable patents are as follows:

         US Patent No. 4,647,775 "PYROMETER 1" Dated March 3,1987
         US Patent No. 4,647,774 "PYROMETER 2" Dated March 3,1987

         Other patents currently held by QUANTUM, or which may subsequently be
         obtained by QUANTUM, not relating to the defined products, are not
         covered by this AGREEMENT.

         After a mutually agreed upon transition period, QUANTUM will cease the
         manufacture of the covered products.

2.    The pyrometer products covered by this AGREEMENT are designated by the
      model types and descriptions listed below. Catalog sheets describing these
      model types are appended to this AGREEMENT, and become a part thereof.
      Individual products of the various model types may be, or have been, added
      or modified, from time-to-time. Covered model types are:

         QL1310 - Hand-held Laser/Microcomputer Pyrometers
         QL3600 - Portable Laser/Microcomputer Pyrometers
         QL3300 - On-line Laser/Microcomputer Pyrometers
         QL107 - Pyrometer Data Logger

3.    This AGREEMENT shall become effective as of the date affixed above, and
      shall continue in force from year-to-year unless revoked by QUANTUM in
      accordance with the terms of Paragraph 10.

4.    No licenses will be issued by QUANTUM to additional parties under these
      patent and intellectual property rights while this AGREEMENT remains in
      force.

5.    Immediately after the effective date of this AGREEMENT, QUANTUM shall
      begin the conveyance to MIKRON of such drawings, bills of material,
      manuals, and other documentation required for successful manufacture of
      the covered products, as have been developed to date by QUANTUM. There
      shall be no charge by QUANTUM to MIKRON for this material, other than
      mutually-agreed-upon charges deemed necessary to carry out the conveyance
      itself in an efficient manner.

<PAGE>

6.    Existing parts inventory matching current bills of material, maintained by
      QUANTUM to support the manufacture, sale, warranty, and repair of the
      covered products, shall be purchased by MIKRON and paid for in cash within
      60 days of the effective date of this AGREEMENT. The quantity of the
      individual parts to be purchased whose unit cost is less than $10 (ten
      dollars) shall be as shown on the QUANTUM perpetual inventory listing as
      of the date of purchase. Parts whose individual cost is $10 (ten dollars)
      and above, shall be physically counted, and the counting shall be mutually
      observed and verified by the parties hereto. The individual part costs
      shall be QUANTUMS most recent purchase prices for the items, in accordance
      with its records. MIKRON shall have the right to audit and verify these
      figures at its own expense, should it so desire. Existing demos will be
      supplied at no cost.

7.    Redesign or modification of the covered products may be carried out by
      MIKRON at their sole discretion, and at their own expense, in order to
      improve the cost, performance, marketability or manufacturability of the
      covered products.

8.    As compensation for the transfer of these product lines, royalties in the
      amount of 10% (ten percent) of the total selling price of the covered
      products shall be paid by MIKRON to QUANTUM, or to its successors or
      assigns, for a period of ten years.

9.    Royalties as defined above shall be paid quarterly within 60 days of the
      end of each fiscal quarter, for sales made during that quarter. QUANTUM
      shall have the right to have the amount of such sales audited and verified
      by an independent certified accounting firm of its own choice and at its
      own expense, should it so request. Choice of such accounting firm shall be
      subject to approval by MIKRON, but such approval shall not be unreasonably
      withheld.

10.   QUANTUM shall have the right to revoke the license given under this
      AGREEMENT within 60 days from the end of the second year after the
      effective date of the AGREEMENT, should the sales during the year then
      completed fall below $300,000 (three hundred thousand dollars). Should the
      license be revoked, ail the then-current manufacturing drawings, bills of
      material, manuals and documentation relating to the covered products in
      use at the time by MIKRON, shall be turned over to QUANTUM, its successors
      or assigns, at no charge, and MIKRON shall cease permanently the
      manufacture of the covered products. If MIKRON shall have obtained, or
      applied for, new patents in connection with the redesign or modification
      of the covered products in accordance with Paragraph 7, then QUANTUM shall
      also be given exclusive royalty-free licenses under any such patents.

      In the event of cancellation, QUANTUM or its successors will buy back
      MIKRON'S inventory under conditions stated in Paragraph 6.

11.   CONNECTICUT INNOVATIONS, having offices at 999 West Street, Rocky Hill, CT
      holds a lien on QUANTUM's assets, Prior to the effective date of this
      AGREEMENT, QUANTUM shall have gotten consent from CONNECTICUT INNOVATIONS
      to a release for the licensing and transfer of assets contemplated by this
      AGREEMENT.

12.   This AGREEMENT contains the whole understanding between the parties, and
      no modifications or amendments shall be made except in writing.

13.   This AGREEMENT is made in, and shall be construed and enforced in
      accordance with the laws of the State of Connecticut, USA. In the event
      any one or more of the provisions herein shall for any reason be held
      unenforceable, such unenforceability shall not affect any other

2
<PAGE>

      provision of this AGREEMENT, but this AGREEMENT shall be construed as if
      said unenforceable provision (or provisions) had not been contained.

14.   The waiver of any requirement in this AGREEMENT by either party shall not
      be construed as the waiver of the same requirement at a subsequent time or
      the waiver of any other requirement herein.

15.   Any dispute or controversy relating to the terms or conditions of this
      AGREEMENT or breach thereof, shall be submitted to, and determined by,
      arbitration in the State of Connecticut, USA, before the American
      Arbitration Association pursuant to its rules then obtaining. Judgment'
      may be entered upon any award thereunder in any court of competent
      jurisdiction.

IN WITNESS WHEREOF, the parties have hereunto and to a duplicate set hereof set
their hands the day of the year first above written.

QUANTUM:                                   MIKRON:

By:   /s/                                      By: /s/ Dennis Stoneman
   ------------------------------                  -----------------------------

Title:  President                              Title:   VP
      ---------------------------                    ---------------------------

Witness: /s/                                   Witness: /s/
        -------------------------                      -------------------------

3

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