Document:

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                                                                   Exhibit 10.19

                       FOURTH AMENDMENT TO LOAN AGREEMENT

         This Fourth Amendment to Loan Agreement, dated as of June 29, 2001
(this "Agreement"), is by and among aaiPHARMA INC., formerly known as Applied
Analytical Industries, Inc., a Delaware corporation having its principal place
of business in Wilmington, North Carolina (the "U.S. Borrower"), AAI APPLIED
ANALYTICAL INDUSTRIES DEUTSCHLAND GmbH & CO., KG, a German corporation (the
"German Borrower" and, together with the U.S. Borrower, the "Borrowers"), each
of the subsidiaries of the U.S. Borrower identified on the signature pages
hereof (the "Guarantors"), and BANK OF AMERICA, N.A., a national banking
association (the "Bank").

                                    RECITALS:

         A. Pursuant to that certain Amended and Restated Loan Agreement dated
as of November 30, 1999, as amended by a First Amendment to Loan Agreement dated
May 31, 2000, a Second Amendment to Loan Agreement dated August 31, 2000 and a
Third Amendment to Loan Agreement dated as of November 30, 2000 (the "Existing
Loan Agreement"), the Bank has extended a revolving credit facility to the U.S.
Borrower in the amount of up to $25,000,000, has made a term loan to the U.S.
Borrower in the principal amount of $5,250,000 and has extended a revolving
credit facility to the German Borrower in the principal amount of up to DM
5,000,000.

         B. The Borrowers have requested that the Bank amend the Existing Loan
Agreement to, among other things, provide a letter of credit to be issued for
the account of NeoSan Pharmaceuticals, Inc.

         C. The Bank is willing to make such letter of credit available for the
account of NeoSan Pharmaceuticals, Inc. and to make other amendments based upon
and subject to the terms and conditions specified in this Agreement.

         NOW, THEREFORE, based upon the foregoing, and for good and valuable
consideration, the sufficiency and receipt of which is hereby acknowledged, the
parties hereby agree as follows:

                                     PART I
                                   DEFINITIONS

         SUBPART 1.1. Certain Definitions. Terms defined in the recitals of this
Agreement shall have the meanings ascribed to them therein. Unless otherwise
defined herein or the context otherwise requires, the following terms used in
this Agreement have the following meanings (such meanings to be equally
applicable to the singular and plural forms thereof):

                  "Amended Loan Agreement" means the Existing Loan Agreement as
         amended hereby.

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                  "Effective Date" shall have the meaning ascribed to such term
         in Subpart 3.1.

         SUBPART 1.2. Other Definitions. Unless otherwise defined herein or the
context otherwise requires, terms used in this Agreement have the meanings
provided in the Amended Loan Agreement.

                                     PART II
                      AMENDMENTS TO EXISTING LOAN AGREEMENT

         Subject to satisfaction of the conditions specified in Part III of this
Agreement, the Existing Loan Agreement is hereby amended in accordance with this
Part II. Except as so amended, the Existing Loan Agreement, the Notes and the
other Loan Documents shall continue in full force and effect.

         SUBPART 2.1. New Definitions. Section 1.1 of the Existing Loan
Agreement is amended by adding the following definitions to read as follows:

                  "Letter of Credit" shall have the meaning ascribed to such
         term in Section 2.08 hereof.

                  "LOC Documents" means the Letter of Credit, any amendments
         thereto, any documents delivered in connection therewith, any
         application therefor, and any agreements, instruments, guarantees or
         other documents (whether general in application or applicable only to
         the Letter of Credit) governing or providing for (i) the rights and
         obligations of the parties concerned or at risk or (ii) any collateral
         security for such obligations.

         SUBPART 2.2. Amended Definitions. The definitions for "Borrowing Base",
"Funded Debt", "Maturity Date" and "Obligations" in Section 1.1 of the Existing
Loan Agreement are hereby amended and restated in their entirety as follows:

                  "Borrowing Base" means, as of any day, the sum of (a) 80% of
         Eligible Receivables plus (b) the lesser of (i) 75% of Fixed Asset
         Value and (ii) $26,000,000 minus (c) all indebtedness for borrowed
         money, howsoever evidenced, or its equivalent (including but not
         limited to leases required to be capitalized under Generally Accepted
         Accounting Principles and letters of credit), other than Revolving
         Loans outstanding hereunder, incurred by, or issued for the benefit of,
         the Credit Parties and the Letter of Credit; provided that (A) in the
         case of clauses (a) and (b)(i) above, such amounts shall be as set
         forth in the most recent Borrowing Base Certificate delivered to the
         Bank in accordance with the terms of Section 6.01(b)(3) and (B) the
         advance rates set forth above shall be subject to appraisals conducted
         from time to time by the Bank and may be increased or decreased by the
         Bank at any time and from time to time in the exercise of its
         reasonable credit judgment (it being understood that the U.S. Borrower
         hereby consents to any such increases or decreases and acknowledges
         that decreasing the

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         advance rates or increasing the reserves may limit or restrict the
         availability of Revolving Loans requested by the U.S. Borrower);

                  "Funded Debt" means, without duplication, (a) all outstanding
         obligations under the tax retention operating lease (or similar
         agreements) entered into with the Bank or any of its affiliates and (b)
         all interest bearing obligations of the U.S. Borrower and its
         consolidated Subsidiaries including, without limitation, all
         obligations evidenced by promissory notes or other similar contracts
         but excluding (i) such items as trade payables and accruals and (ii)
         the Letter of Credit.

                  "Maturity Date" means (a) with respect to the Revolving Loans,
         September 30, 2001 and (b) with respect to the Term Loan, June 30,
         2001.

                  "Obligations" means a collective reference to (a) all
         obligations of the U.S. Borrower to the Bank in connection with the
         Revolving Loans, the Term Loan and the Letter of Credit and (b) all
         German Borrower Obligations;

         SUBPART 2.3. Revolving Loans. Section 2.01 of the Existing Credit
Agreement is amended in its entirety to read as follows:

         2.01 REVOLVING LOANS.

                  Subject to the terms and conditions and relying upon the
         representations and warranties herein set forth, the Bank agrees to
         make Revolving Loans to the U.S. Borrower, at any time and from time to
         time until the Maturity Date, in an aggregate principal amount at any
         time outstanding not to exceed the lesser of (i) TWENTY-SEVEN MILLION
         TWO HUNDRED THOUSAND DOLLARS ($27,200,000) minus the face amount of the
         Letter of Credit (the "Revolving Loan Committed Amount") and (ii) the
         Borrowing Base plus $6,000,000, for purposes of financing the U.S.
         Borrower's working capital needs. The U.S. Borrower may borrow, repay
         and reborrow hereunder on or after the date hereof and prior to the
         Maturity Date, subject to the terms, provisions and limitations set
         forth herein. The outstanding principal balance of the Revolving Loans,
         together with all accrued but unpaid interest, fees and other charges,
         shall be due and payable in full on the Maturity Date.

         SUBPART 2.4. Utilization Fees. Section 2.04(b) of the Existing Credit
Agreement is amended in its entirety to read as follows:

         (b) The U.S. Borrower agrees to pay the bank a utilization fee (the
         "Utilization Fee") in an amount equal to, for the four fiscal quarter
         period ending June 30, 2001, 1.00% of the portion of Funded Debt as of
         June 30, 2001 that is greater than the Target Funded Debt Level for
         such period. The utilization fee for the period ending June 30, 2001
         shall be deemed earned as of July 15, 2001 and due and payable on
         August 31, 2001.

         SUBPART 2.5. Letter of Credit. A new Section 2.08 is added to the
Existing Loan Agreement to read as follows:

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         2.08 LETTER OF CREDIT.

         (a)      Issuance. The Bank has issued a letter of credit for the
                  account of NeoSan Pharmaceuticals, Inc., a Subsidiary of the
                  U.S. Borrower, and for the benefit of AstraZeneca AB, in the
                  face amount of Two Million Six Hundred Twenty-Five Thousand
                  Dollars ($2,625,000.00) (the "Letter of Credit").
                  Notwithstanding the definition of Maturity Date, the Letter of
                  Credit shall expire on the earlier of (i) September 30, 2001
                  or (ii) receipt by the Bank of notice that either (A) that
                  certain Asset Purchase Agreement (the "Purchase Agreement")
                  between AstraZeneca AB and NeoSan Pharmaceuticals, Inc. (the
                  "Buyer") dated as of June ___, 2001 has been terminated or (B)
                  Buyer has paid the Base Purchase Price pursuant to the
                  Purchase Agreement. The Letter of Credit shall comply with the
                  related LOC Documents.

         (b)      Reimbursement. In the event of any drawing under the Letter of
                  Credit, the Bank will promptly notify the U.S. Borrower. The
                  U.S. Borrower shall reimburse the Bank on the day the Bank
                  pays a drawing under the Letter of Credit in same day funds.
                  The U.S. Borrower may request a Revolving Loan to satisfy its
                  obligations under this Section 2.08(b) if such request is
                  otherwise in compliance with the terms hereof. If the U.S.
                  Borrower shall fail to reimburse the Bank as provided
                  hereinabove, the unreimbursed amount of such drawing shall
                  bear interest at a per annum rate equal to the Prime Rate plus
                  two percent (2%) and shall constitute an Event of Default. The
                  U.S. Borrower's reimbursement obligations hereunder shall be
                  absolute and unconditional under all circumstances
                  irrespective of any rights of set-off, counterclaim or defense
                  to payment the U.S. Borrower may claim or have against the
                  Bank, the beneficiary of the Letter of Credit or any other
                  Person, including, without limitation, any defense based on
                  any failure of the U.S. Borrower or NeoSan Pharmaceuticals,
                  Inc. to receive consideration or the legality, validity,
                  regularity or unenforceability of the Letter of Credit.

         (c)      Indemnification of Bank.

                           (i) In addition to its other obligations under this
                  Loan Agreement, the U.S. Borrower hereby agrees to protect,
                  indemnify, pay and save the Bank harmless from and against any
                  and all claims, demands, liabilities, damages, losses, costs,
                  charges and expenses (including reasonable attorneys' fees)
                  that the Bank may incur or be subject to as a consequence,
                  direct or indirect, of (A) the issuance of the Letter of
                  Credit or (B) the failure of the Bank to honor the drawing
                  under the Letter of Credit as a result of any act or omission,
                  whether rightful or wrongful, of any present or future de jure
                  or de facto government or governmental authority (all such
                  acts or omissions, herein called "Government Acts").

                           (ii) As between the U.S. Borrower and the Bank, the
                  U.S. Borrower shall assume all risks of the acts, omissions or
                  misuse of the Letter of Credit by the beneficiary thereof. The
                  Bank shall not be responsible: (A) for the form,

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                  validity, sufficiency, accuracy, genuineness or legal effect
                  of any document submitted by any party in connection with the
                  application for and issuance of the Letter of Credit, even if
                  it should in fact prove to be in any or all respects invalid,
                  insufficient, inaccurate, fraudulent or forged; (B) for the
                  validity or sufficiency of any instrument transferring or
                  assigning or purporting to transfer or assign the Letter of
                  Credit or the rights or benefits thereunder or proceeds
                  thereof, in whole or in part, that may prove to be invalid or
                  ineffective for any reason; (C) for failure of the beneficiary
                  of the Letter of Credit to comply fully with conditions
                  required in order to draw upon such Letter of Credit; (D) for
                  errors, omissions, interruptions or delays in transmission or
                  delivery of any messages, by mail, cable, telegraph, telex or
                  otherwise, whether or not they be in cipher; (E) for errors in
                  interpretation of technical terms; (F) for any loss or delay
                  in the transmission or otherwise of any document required in
                  order to make a drawing under the Letter of Credit or of the
                  proceeds thereof; and (G) for any consequences arising from
                  causes beyond the control of the Bank, including, without
                  limitation, any Government Acts. None of the above shall
                  affect, impair, or prevent the vesting of the Bank's rights or
                  powers hereunder.

                           (iii) In furtherance and extension and not in
                  limitation of the specific provisions hereinabove set forth,
                  any action taken or omitted by the Bank, under or in
                  connection with the Letter of Credit or the related
                  certificates, if taken or omitted in good faith, shall not put
                  the Bank under any resulting liability to the U.S. Borrower.
                  It is the intention of the parties that this Credit Agreement
                  shall be construed and applied to protect and indemnify the
                  Bank against any and all risks involved in the issuance of the
                  Letter of Credit, all of which risks are hereby assumed by the
                  U.S. Borrower, including, without limitation, any and all
                  risks of the acts or omissions, whether rightful or wrongful,
                  of any present or future Government Acts. The Bank shall not,
                  in any way, be liable for any failure by the Bank or anyone
                  else to pay any drawing under the Letter of Credit as a result
                  of any Government Acts or any other cause beyond the control
                  of the Bank.

                           (iv) Nothing in this Section 2.08 is intended to
                  limit the reimbursement obligation of the U.S. Borrower
                  contained herein. The obligations of the U.S. Borrower under
                  this Section 2.08 shall survive the termination of this Loan
                  Agreement. No act or omissions of any current or prior
                  beneficiary of the Letter of Credit shall in any way affect or
                  impair the rights of the Bank to enforce any right, power or
                  benefit under this Loan Agreement.

                           (v) Notwithstanding anything herein to the contrary,
                  the U.S. Borrower shall not be required to indemnify the Bank
                  for the Bank's gross negligence or willful misconduct.

         (d)      Fees. In consideration of the Bank issuing the Letter of
                  Credit, the U.S. Borrower shall pay to the Bank a fee (the
                  "Letter of Credit Fee") equal to 2.25% per annum for the
                  maximum stated duration of the Letter of Credit (i.e., 90
                  days). The Letter of Credit Fee for the Letter of Credit shall
                  be payable in advance on the date of

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                  the issuance of the Letter of Credit. The Letter of Credit Fee
                  shall be based on the face amount of the Letter of Credit. In
                  addition to the Letter of Credit Fee, the U.S. Borrower agrees
                  to pay to the Bank (i) such fronting and negotiation fees as
                  may be mutually agreed upon by the Bank and the U.S. Borrower
                  from time to time and (ii) customary charges of the Bank with
                  respect to the issuance, amendment, transfer, administration,
                  cancellation and conversion of, and drawings under, the Letter
                  of Credit.

         (e)      NeoSan Pharmaceuticals, Inc. as Account Party. The Letter of
                  Credit contains a statement that such Letter of Credit is
                  issued for the account of NeoSan Pharmaceuticals, Inc.
                  Notwithstanding anything else to the contrary set forth in
                  this Loan Agreement or the LOC Documents, the U.S. Borrower
                  shall be the actual account party for all purposes of this
                  Loan Agreement for such Letter of Credit and the statement
                  regarding NeoSan Pharmaceuticals, Inc. as account party shall
                  not affect the U.S. Borrower's reimbursement obligations
                  hereunder with respect to such Letter of Credit.

         (f)      Conflict with LOC Documents. In the event of any conflict
                  between this Loan Agreement and any LOC Document (including
                  the letter of credit application), this Loan Agreement shall
                  control.

         SUBPART 2.6. Funded Debt to EBITDA. Section 6.01(p)(iii) of the
Existing Credit Agreement is amended in its entirety to read as follows:

                  (iii) the U.S. Borrower shall maintain a ratio of Funded Debt
                  to EBITDA computed as of the last day of each fiscal quarter
                  (commencing with the fiscal quarter ending June 30, 2001) of
                  (A) with respect to the fiscal quarter ending June 30, 2001,
                  not greater than 3.75 to 1.00, and (B) with respect to each
                  fiscal quarter thereafter, not greater than 3.15 to 1.00.; and

         SUBPART 2.7. Term. Section 9.11 of the Existing Credit Agreement is
amended in its entirety to read as follows:

         The term of this Loan Agreement shall be until (i) the Bank no longer
is obligated to lend under the Commitments, (ii) the Bank has received payment
in full of the unpaid principal and interest of the Notes, and (iii) the Letter
of Credit has expired and all amounts outstanding in connection therewith have
been paid in full.

                                    PART III
                                     CONSENT

         SUBPART 3.1. Merger. The Bank hereby consents to the merger of Kansas
City Analytical Services, Inc. ("KCAS") into the U.S. Borrower, notwithstanding
anything in Sections 7.01(d) or (g) of the Existing Loan Agreement to the
contrary, provided that (i) the U.S. Borrower is the surviving corporation; (ii)
the U.S. Borrower will give the Bank notice of such

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merger prior to such merger; and (iii) the U.S. Borrower shall promptly provide
to the Bank any executed documents that the Bank may reasonably request in
connection with such merger and in connection with the continued perfection of
the Bank's security interest in KCAS's and the U.S. Borrower's property.

         SUBPART 3.2. Dissolution. The Bank hereby consents to the dissolution
of Medical & Technical Research Associates, Inc. ("MTRA") and, prior to such
dissolution, the change of the legal name of MTRA, notwithstanding anything in
Articles V, VI or VII of the Existing Loan Agreement to the contrary, provided
that (i) the U.S Borrower will give the Bank notice of such dissolution or name
change prior to such dissolution or name change; and (ii) the U.S. Borrower
shall promptly provide to the Bank any executed documents that the Bank may
reasonably request in connection with such dissolution or name change and in
connection with the continued perfection of the Bank's security interest in
MTRA's and the U.S. Borrower's property.

                                     PART IV
                           CONDITIONS TO EFFECTIVENESS

         SUBPART 4.1 Effective Date. This Agreement shall be and become
effective as of the date hereof (the "Effective Date") when all of the
conditions set forth in this Subpart 4.1 shall have been satisfied.

                  4.1.1. Execution of Agreement. The Bank shall have received an
         original duly executed counterpart of this Agreement from the Borrowers
         and the Guarantors.

                  4.1.2. Closing Certificate. The Bank shall have received a
         certificate from the U.S. Borrower, in form and substance satisfactory
         to the Bank, certifying inter alia that (i) no Default or Event of
         Default exists as of the Effective Date, and (ii) the representations
         and warranties of the Credit Parties made in or pursuant to the
         Existing Loan Agreement and the other Loan Documents are true in all
         material respects on and as of the Effective Date.

                                     PART V
                                  MISCELLANEOUS

         SUBPART 5.1 Cross-References. References in this Agreement to any Part
or Subpart are, unless otherwise specified, to such Part or Subpart of this
Agreement.

         SUBPART 5.2 Instrument Pursuant to Existing Loan Agreement. This
Agreement is a document executed pursuant to the Existing Loan Agreement and
shall (unless otherwise expressly indicated therein) be construed, administered
and applied in accordance with the terms and provisions of the Existing Loan
Agreement.

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<PAGE>   8

         SUBPART 5.3 Loan Documents. Each Credit Party hereby confirms and
agrees that the Loan Documents are, and shall continue to be, in full force and
effect, except as amended hereby, and except that, on and after the Effective
Date references in each Loan Document to the "Loan Agreement", "thereunder",
"thereof" or words of like import referring to the Existing Loan Agreement shall
mean the Amended Loan Agreement.

         SUBPART 5.4. Representations and Warranties. Each Credit Party hereby
represents and warrants that (i) it has the requisite corporate power and
authority to execute, deliver and perform this Agreement, (ii) it is duly
authorized to, and has been authorized by all necessary corporate action, to
execute, deliver and perform this Agreement, (iii) it has no claims,
counterclaims, offsets, or defenses to the Loan Documents and the performance of
its obligations thereunder, or if such Credit Party has any such claims,
counterclaims, offsets, or defenses to the Loan Documents or any transaction
related to the Loan Documents, the same are hereby waived, relinquished and
released in consideration of the Bank's execution and delivery of this
Agreement, (iv) the representations and warranties contained in the Loan
Documents are, subject to the limitations set forth therein, true and correct in
all material respects on and as of the date hereof as though made on and as of
such date (except for those which expressly relate to an earlier date), (v) no
event of default under any other agreement, document or instrument to which such
Credit Party is a party will occur as a result of the transactions contemplated
hereby, and (vi) as of the date of this Agreement, no Event of Default exists.

         SUBPART 5.5. Costs and Expenses. The U.S. Borrower hereby agrees to pay
on demand all costs and expenses (including without limitation the reasonable
fees and expenses of counsel to the Bank) incurred by the Bank in connection
with the negotiation, preparation, execution, and delivery of this Agreement and
the enforcement or preservation of any rights and remedies of the Bank hereunder
(including without limitation any such fees and expenses subsequently incurred
by the Bank in any subsequent bankruptcy or insolvency proceeding involving a
Credit Party).

         SUBPART 5.6. Counterparts, Effectiveness, Etc. This Agreement may be
executed by the parties hereto in several counterparts, each of which shall be
deemed to be an original and all of which shall constitute together but one and
the same agreement.

         SUBPART 5.7. Captions. The captions in this Agreement are inserted only
as a matter of convenience and for reference and in no way define, limit or
describe the scope of this Agreement or any provision hereof.

         SUBPART 5.8 Governing Law. THIS AMENDMENT SHALL BE DEEMED TO BE A
CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NORTH
CAROLINA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF.

         SUBPART 5.9 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and assigns.

              (the remainder of this page intentionally left blank)

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                                              Signature Page to Fourth Amendment
                                     to Loan Agreement dated as of June 29, 2001
                                         for Applied Analytical Industries, Inc.

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

U.S. BORROWER:               aaiPHARMA INC., formerly known as
                             APPLIED ANALYTICAL INDUSTRIES, INC.,
                             a Delaware corporation

                             By:_______________________
                             Name:_____________________
                             Title:______________________

GERMAN BORROWER:             AAI APPLIED ANALYTICAL INDUSTRIES
                             DEUTSCHLAND GmbH & CO., KG,
                             a German corporation

                             By:_______________________
                             Name:_____________________
                             Title:______________________

THE GUARANTORS:              APPLIED ANALYTICAL INDUSTRIES
                                      LEARNING CENTER, INC.
                             AAI TECHNOLOGIES, INC.
                             AAI PROPERTIES, INC.
                             KANSAS CITY ANALYTICAL SERVICES, INC.
                             MEDICAL & TECHNICAL RESEARCH
                                      ASSOCIATES, INC.
                             AAI JAPAN, INC.
                             APPLIED ANALYTICAL INDUSTRIES
                                      ITALY, S.r.l.
                             AAI UK LTD.
                             AAI VERMOGENSVER-
                                      WALTUNGSGESELLSCHAFT mgH
                             AAI APPLIED ANALYTICAL INDUSTRIES DEUTSCHLAND
                                      VERWALTUNGS-GESELLSCHAFT mbH
                             APPLIED ANALYTICAL INDUSTRIES
                                      DEUTSCHLAND GmbH
                             AAI BENELUX B.V.
                             AAI APPLIED ANALYTICAL INDUSTRIES
                                      FRANCE S.A.R.L.
<PAGE>   10

                                              Signature Page to Fourth Amendment
                                     to Loan Agreement dated as of June 29, 2001
                                         for Applied Analytical Industries, Inc.

                             NEOSAN ARZNEIMITTEL-
                                      VERTRIEBSGESELLSCHAFT mbH
                             NEOSAN PHARMACEUTICALS, INC.
                             I.P.A.- INTERNATIONALE PHARMA
                                      AGENTUR GmbH
                             INPHARMCO GESELLSCHAFT zur
                                      VERMARKTUNG VON
                                      ARZNEIMITTELN mbH
                             LAB (GREAT BRITAIN) LIMITED
                             PROSCIENTIA HOLDING AG
                             TECHNOPHARM S.A.
                             AAI INTERNATIONAL, INC.

                             By:_______________________
                             Name:_____________________
                             Title:____________________

BANK:                        BANK OF AMERICA, N.A.

                             By:
                                ----------------------------------
                             Name:
                                  --------------------------------
                             Title:
                                   -------------------------------<PAGE>   1

                                                                   EXHIBIT 10.20

                       APPLIED ANALYTICAL INDUSTRIES, INC.

                2000 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS

I.       PURPOSE

         The purpose of the Applied Analytical Industries, Inc. 2000 Stock
Option Plan for Non-Employee Directors (the "Plan") is to provide for
stock-based compensation to directors who are not employees of the Company or
any of its subsidiaries ("Directors") of the Company. This purpose will be
achieved through the grant of stock options ("Options") to purchase shares of
the Company's common stock, $.001 par value ("Common Stock"), subject to
restrictions on transfer or such other restrictions as the administrators of the
Plan may determine.

2.       ADMINISTRATION

         The Plan will be administered by the Company's Board of Directors (the
"Board").

         The Board shall have complete authority to: (i) interpret all terms and
provisions of the Plan consistent with law; (ii) select from the group of
Directors eligible to participate in the Plan the Directors to whom Options
shall be granted; (iii) within the limits established herein, determine the
number of shares to be subject to, and the exercise price of, each Option; (iv)
prescribe the form of instrument(s) evidencing Options granted under the Plan;
(v) determine the time or times at which Options shall be granted to Directors;
(vi) provide, if appropriate, for the exercisability of Options in installments
or subject to specified conditions; (vii) determine the method of exercise of
Options; (viii) adopt, amend and rescind general and special rules and
regulations for the Plan's administration; and (ix) make all other
determinations necessary or advisable for the administration of the Plan.

         Any action which the Board is authorized to take may be taken without a
meeting if all the members of the Board sign a written document authorizing such
action to be taken, unless different provision is made by the By-Laws of the
Company or by resolution of the Board.

         The Board may designate selected Board members or certain employees of
the Company to assist the Board in the administration of the Plan and may grant
authority to such persons to execute documents, including Options, on behalf of
the Board.

         No member of the Board or employee of the Company assisting the Board
pursuant to the preceding paragraph shall be liable for any action taken or
determination made in good faith.

3.       STOCK SUBJECT TO PLAN

         The stock to be offered under the Plan shall be authorized but unissued
shares of the Company's Common Stock. An aggregate of 410,000 shares of Common
Stock are reserved for

<PAGE>   2

issuance upon exercise of Options. The number of shares reserved under the Plan
may be adjusted to reflect any change in the capitalization of the Company as
contemplated by Section 9 hereof and occurring after the adoption of the Plan.
The Board will maintain records showing the cumulative total of all shares
subject to Options outstanding under the Plan.

         None of the Options granted under Section 4 hereof are intended to
qualify as, or shall be deemed to be, incentive stock options under Section 422
of the Internal Revenue Code of 1986, as amended (the "Code").

4.       OPTION AWARDS

         (A)      ELIGIBILITY AND FACTORS CONSIDERED IN GRANTING OPTIONS

         The grant of Options under this Section 4 shall be limited to those
Directors of the Company or any of its Subsidiaries who are not employees
thereof and who have are selected by the Board. In making any determination as
to the Director(s) to whom Options shall be granted under this Section 4 and as
to the number of shares to be subject thereto, the Board shall take into
account, in each case, such factors as the Board shall deem relevant to the
accomplishment of the purposes of the Plan.

         (B)      TIME OF GRANTING OPTIONS

         The date of grant of an Option under this Section 4 shall be, for all
purposes, the date on which the Board makes the determination of granting such
Option (each such date, a "Grant Date"). Notice of the determination shall be
given to each Director to whom an Option is so granted under this Section 4
within a reasonable time after the Grant Date.

         (C)      EXERCISE PRICE FOR OPTIONS

         The price per share at which each Option granted under this Section 4
may be exercised shall be such price as shall be determined by the Board at the
time of grant based on such criteria as may be adopted by the Board at the time
of grant in good faith, taking into account, in each case, the fair market value
of the common stock and such additional factors as the Board shall deem relevant
to the accomplishment of the purposes of the Plan; provided, however, that in no
event shall the exercise price per share of an Option be less than 100% of the
fair market value of the Company's shares of common stock on the Grant Date for
such Option. Fair market value shall be the average of the high and low sales
prices per share as reported by the exchange on which the Common Stock is
trading, including without limitation the NASDAQ National Market, on any Grant
Date.

         (E)      TERM OF OPTIONS

         The term of each Option granted under this Section 4 shall be
established by the Board, but shall not exceed 10 years from the Grant Date for
such Option.

<PAGE>   3

         (F)      CANCELLATION AND REPLACEMENT OF OPTIONS

         The Board may at any time or from time to time permit the voluntary
surrender by the holder of any outstanding Option granted under this Section 4
where such surrender is conditioned upon the granting under this Section 4 to
such holder of new Option(s) for such number of shares as the Board shall
determine, or may require such a voluntary surrender as a condition precedent to
the grant under this Section 4 of new Option(s) to such holder.

         The Board shall determine the terms and conditions of any such new
Option(s), including their exercise price and the periods during which they may
be exercised, subject to and in accordance with the provisions of the Plan, all
or any of which may differ from the terms and conditions of the Option(s)
surrendered. Any such new Option(s) shall be subject to all the relevant
provisions of the Plan.

         The shares subject to any Option so surrendered or terminated shall no
longer be charged against the limitation or limitations provided in Section 3 of
the Plan and may thereafter become the subject of new Option grants under the
Plan.

         The granting of new Option(s) in connection with the surrender of
outstanding Option(s) under the Plan shall be considered for the purposes of the
Plan as the grant of new Option(s) and not an alteration, amendment or
modification of the Plan or of the Option(s) being surrendered.

         (G)      VESTING

         Except as otherwise determined by the Board, Options shall vest as
follows:

<TABLE>
<CAPTION>
                                                   Aggregate Percentage of
                                                   Shares under Options Vested
         Date                                      on such Date
         ----                                      ---------------------------
<S>                                                <C>
Twelve months after Grant Date                                33%

Twenty-four months after Grant Date                           66%

Thirty-six months after Grant Date                           100%
</TABLE>

Notwithstanding the foregoing, any Option granted pursuant to this Plan shall be
deemed fully vested immediately prior to an Acquisition Transaction. For the
purposes of the Plan, an "Acquisition Transaction" shall mean and include the
following:

                  (i)      The consummation of a tender offer or exchange offer
                           for the ownership of securities of the Company
                           representing 51% or more of the combined voting
                           powers of the Company's then outstanding voting
                           securities;

<PAGE>   4

                  (ii)     The adoption by the Company's stockholders of a plan
                           of merger or consolidation providing for the merger
                           or consolidation of the Company with another
                           corporation (other than an affiliate of the Company
                           within the meaning of the Securities Exchange Act of
                           1934, as amended) and as a result of such merger or
                           consolidation less than 75% of the outstanding voting
                           securities of the surviving or resulting corporation
                           would then be owned in the aggregate by the former
                           stockholders of the Company; or

                  (iii)    The transfer by the Company of substantially all of
                           its assets to another corporation or entity which is
                           not a wholly owned subsidiary of the Company.

5.       NON-TRANSFERABILITY

         An Option granted to a participant under the Plan shall not be
transferable by him or her except: (i) by will; (ii) by the laws of descent and
distribution; (iii) pursuant to a qualified domestic relations order as defined
by the Code or in Title I of the Employee Retirement Income Security Act, or the
rules thereunder; or (iv) as otherwise determined by the Board.

6.       EXERCISABILITY OF OPTIONS

         Subject to the provisions of the Plan, Options granted under Section 4
hereof shall be exercisable at such time or times after the Grant Date to the
extent such Options are vested.

         Any Option shall terminate in full (whether or not previously
exercisable) prior to the expiration of its term on the date thirty (30) days
after the date the optionee ceases to be a director of the Company or any
Subsidiary of the Company, unless (i) the optionee shall (a) die while a
director of the Company or such Subsidiary, in which case the participant's
legatee(s) under his or her last will or the participant's personal
representative or representatives may exercise all or part of the previously
unexercised portion of such Option at any time within one year, but not beyond
the expiration of its term, after the participant's death to the extent the
optionee could have exercised the Option immediately prior to his or her death,
(b) become permanently or totally disabled within the meaning of section
22(e)(3) of the Code (or any successor provision) while a director of the
Company or such Subsidiary, in which case the participant or his or her personal
representative may exercise the previously unexercised portion of such Option at
any time within one year, but not beyond the expiration of its term, after
termination of his or her directorship to the extent the optionee could have
exercised the Option immediately prior to such termination, or (c) resign or not
be a candidate for reelection as a director of the Company or any Subsidiary
after age 62, in which case the participant may exercise the previously
unexercised portion of such Option at any time within six months, but not beyond
the expiration of its term, after the participant's resignation or cessation of
being a director of the Company or any Subsidiary to the extent the optionee
could have exercised the

<PAGE>   5

Option immediately prior to such resignation or retirement, or (ii) the Board
shall determine otherwise.

         In no event may an Option be exercised after the expiration of its
fixed term.

7.       METHOD OF EXERCISE

         Each Option granted under the Plan shall be deemed exercised when the
holder (a) shall indicate the decision to do so in writing delivered to the
Company, (b) shall at the same time tender to the Company payment in full of the
exercise price for the shares for which the Option is exercised, which payment
may be made in cash, and (c) shall comply with such other reasonable
requirements as the Board may establish; provided that in order to enable an
optionee to exercise options granted under the Plan, the Board may determine, in
the exercise of its discretion, to (i) cause the Company to lend money or other
property to such optionee upon such terms and conditions and in such amounts as
the Board may determine, (ii) grant such optionee permission to pay the exercise
price in installments, or to accept such optionee's note as whole or partial
payment, (iii) permit such optionee to repay loans made by the Company to such
optionee for the exercise of options with issued and outstanding shares of
common stock, (iv) grant such optionee permission to pay the exercise price by
delivering for cancellation Options having an aggregate value (calculated by
subtracting the exercise price per share from the fair market value of a share
of Common Stock) equal to the total amount of the exercise price, or (v) provide
such financial assistance to such optionee as the Board determines to be
desirable. The exercise of any option granted under the Plan may be made subject
to the condition that, if at any time the Board shall determine, in its
discretion, that the satisfaction of withholding tax or other withholding
liabilities under any state or federal law is necessary or desirable as a
condition of, or in connection with, such exercise or the delivery or purchase
of shares pursuant thereto, then in such event, the exercise of the option shall
not be effective unless such withholding tax or other withholding liabilities
shall have been satisfied in a manner acceptable to the Company, which may
include the withholding by the Company of shares of Common Stock to be issued
upon exercise of an Option having a fair market value equal to the required
withholding amount. With respect to the foregoing sentences, the value of the
shares of Common Stock shall be the fair market value determined in accordance
with Section 4(c) of the Plan as of the day of such payment or withholding.

         No person, estate or other entity shall have any of the rights of a
shareholder with reference to shares subject to an Option until a certificate
for such shares has been issued by the Company.

         An Option granted under the Plan may be exercised for any lesser number
of shares than the full amount for which it could be exercised. Such a partial
exercise of an Option shall not affect the right to exercise the Option from
time to time in accordance with the Plan for the remaining shares subject to the
Option.

<PAGE>   6

8.       TERMINATION OF OPTIONS

         An Option granted under the Plan shall be considered terminated in
whole or in part, to the extent that, in accordance with the provisions of the
Plan and such Option, it can no longer be exercised for any shares originally
subject to the Option.

9.       ADJUSTMENTS UPON CHANGES IN CAPITALIZATION

         In the event of any change in the outstanding Common Stock of the
Company by reason of a stock dividend, stock split, stock consolidation,
recapitalization, reorganization, merger, split up or the like, the shares
available for purposes of the Plan or under option in outstanding option
agreements pursuant to the Plan (and the option price under such agreements)
shall be appropriately adjusted so as to preserve, but not increase, the
benefits of the Plan to the Company and the benefits to the holders of such
Options.

         Adjustments under this Section shall be made by the Board, whose
determination as to what adjustments shall be made and the extent thereof, shall
be final, binding and conclusive.

10.      COMPLIANCE WITH SECURITIES LAWS AND OTHER REQUIREMENTS

         No certificate(s) for shares shall be issued upon exercise of an Option
until the Company shall have taken such action, if any, as is then required to
comply with the provisions of the Securities Act of 1933, as amended, the North
Carolina Uniform Securities Act, as amended, any other applicable state
securities law(s) and the requirements of any exchange (including the NASDAQ
National Market) on which the Common Stock may, at the time, be listed.

         In the case of the exercise of an Option by a person or estate
acquiring the right to exercise the Option by bequest or inheritance, the Board
may require reasonable evidence as to the ownership of the Option and may
require such consents and releases of taxing authorities as it may deem
advisable.

11.      NO RIGHT TO DIRECTORSHIP

         Neither the adoption of the Plan nor its operation, nor any document
describing or referring to the Plan, or any part thereof, shall confer upon any
Director participant under the Plan any right to continue as a director of the
Company, or shall in any way affect the right and power of the Company or its
stockholders to terminate the directorship, or not to reelect as a director,
with the Company of any participant under the Plan at any time with or without
assigning a reason therefor, to the same extent as the Company might have done
if the Plan had not been adopted.

<PAGE>   7

12.      EFFECTIVE DATE OF THE PLAN

         The Plan was adopted by the Board on June 16, 2000, and shall be
effective until June 16, 2010, after which time no Option shall be granted, but
such termination shall not affect any Option previously granted under the Plan.

13.      CONDITION PRECEDENT FOR PLAN

         The Plan is expressly conditioned upon the approval, following its
adoption by the Board, of the Plan by the stockholders of the Company at the
annual meeting of the stockholders of the Company occurring in 2001 or at any
special meeting of the stockholders occurring prior to such annual meeting at
which the Plan is considered. In the event that the stockholders reject the Plan
or fail to approve the Plan at such meeting, then the Plan and all grants made
under it by the Board shall automatically cease to exist and be of no further
effect.

FORM OF OPTION GRANT LETTER

Dear

In accordance with the 2000 Directors Stock Option Plan (the "Plan") of Applied
Analytical Industries, Inc. (the "Company"), you, as a non-employee director of
the Company, were granted on __________________, _____, an option to purchase
_____ shares of the common stock of the Company upon the following terms and
conditions:

         (1)      The exercise price shall be $_________ (__% of the fair market
                  value of a share as determined in accordance with Section 4(c)
                  of the Plan on the date of grant - _______, __)

         (2)      This Option will vest and become exercisable according to the
                  schedule set forth in the Plan;

         (3)      Once exercisable, this Option may be exercised until
                  __________, ___ subject to the terms and conditions of the
                  Plan, a copy of which is attached hereto and incorporated
                  herein by reference. This Option is granted subject to the
                  Plan and shall be construed in accordance with the Plan.

         (4)      To exercise this Option, the holder must deliver written
                  notice of the decision to do so and at the same time tender to
                  the Company payment in full of the exercise price for the
                  shares for which the Option is exercised, which payment may be
                  made in cash or as otherwise provided for in accordance with
                  Section 7 of the Plan.

<PAGE>   8

         (5)      The exercise of this Option shall be subject to the condition
                  that, if at any time the Board (as defined in the Plan) shall
                  determine, in its discretion, that the satisfaction of
                  withholding tax or other withholding liabilities under any
                  state or federal law is necessary or desirable as a condition
                  of, or in connection with, such exercise or the delivery or
                  purchase of shares pursuant thereto, then in such event, the
                  exercise of the option shall not be effective unless such
                  withholding tax or other withholding liabilities shall have
                  been satisfied in a manner acceptable to the Company, which
                  may include the withholding by the Company of shares of Common
                  Stock to be issued upon exercise of an Option having a fair
                  market value equal to the required withholding amount.

This Option is not transferable except pursuant to the terms and conditions of
the Plan.

                                            Very truly yours,

                                            APPLIED ANALYTICAL INDUSTRIES, INC.

                                            By:

                                            Title:

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