Document:

Unassociated Document

     

    SUBORDINATION
      AGREEMENT,
      dated
      as of January 31, 2006, by and among Acura Pharmaceuticals, Inc., a New York
      corporation (the "Company"),
      the
      legal and beneficial holders of the Watson Note (the "Watson
      Holders"),
      the
      holders of the June 2005 Notes (the "June
      2005 Lenders"),
      the
      holders of the September 2005 Notes (the “September
      2005 Lenders”),
      the
      holders of the November 2005 Notes (the “November
      2005 Lenders”),
      the
      holders of the January 2006 Notes (the “January 2006 Lenders”), Galen Partners
      III, L.P., a Delaware limited partnership, as agent for the Watson Holders,
      the
      June 2005 Lenders, the September 2005 Lenders, the November 2005 Lenders and
      the
      January 2006 Lenders (in such capacity, the "Agent")
      and
      the Grantors listed on the signature pages hereof. 

     

    RECITALS

     

    (A)  Certain
      capitalized terms used in this Agreement without definition have the meaning
      ascribed to them in Section 1
      below.

     

    (B)  WHEREAS,
      Watson Pharmaceuticals, Inc., a Nevada corporation ("Watson")
      and
      the Company have entered into a Loan Agreement dated March 29, 2000 (such
      agreement, as supplemented, amended or otherwise modified from time to time,
      including, without limitation, as amended through the Third Amendment to Loan
      Agreement dated February 6, 2004, the "Watson
      Loan Agreement")
      pursuant to which Watson agreed to extend certain funds to the Company. The
      Company’s obligation to pay the principal amount of, and interest on, the Watson
      Term Loan is now evidenced by a secured promissory note dated as of December
      20,
      2002 (the "Watson
      Note")
      which
      is secured by (i) a lien on and security interest in the Company Personal
      Property granted pursuant to the Watson Security Agreement dated March 29,
      2000
      between the Company and Watson (such agreement, as amended, supplemented, or
      otherwise modified from time to time, the "Watson
      Security Agreement"),
      (ii)
      collateral assignments of the Company Assignable Property pursuant to the Watson
      Security Agreement or otherwise (such collateral assignments, as amended,
      supplemented, or otherwise modified from time to time, collectively the
“Watson
      Assignments”),
      and
      (iii) a lien on and security interest in the Company Investment Property
      pursuant to a Stock Pledge Agreement between the Company and Watson (such
      agreement, as amended, supplemented, or otherwise modified from time to time,
      the "Watson
      Stock Pledge Agreement").

     

    (C)  WHEREAS,
      in connection with, and in order to support the obligations of the Company
      under, the Watson Loan Agreement, each of the Guarantors has guaranteed the
      Company’s obligations under the Watson Term Loan and has undertaken certain
      additional obligations pursuant to the Continuing Unconditional Secured Guaranty
      by each Guarantor dated March 29, 2000 (each such guaranty and all other
      obligations of each of the Guarantors under the Watson Loan Agreement, in each
      case, as they may be amended, supplemented or otherwise modified from time
      to
      time, a "Watson
      Guaranty").
      The
      Watson Guaranties are secured by (i) a lien on and security interest in the
      Guarantor Personal Property of each Guarantor granted pursuant to a Guarantors
      General Security Agreement dated March 29, 2000 between the Guarantors and
      Watson (such agreement, as amended, supplemented, or otherwise modified from
      time to time, the "Watson
      Guarantors General Security Agreement"),
      (ii)
      collateral assignments of the Guarantor Assignable Property of each Guarantor
      pursuant to the Watson Guarantors General Security Agreement or otherwise (such
      collateral assignments, as amended, supplemented, or otherwise modified from
      time to time, collectively the “Watson
      Guarantor Assignments”),
      and
      (iii) a mortgage granted by Acura Pharmaceutical Technologies, Inc. to Watson
      of
      its Guarantor Mortgage Property (such mortgage, as amended, supplemented, or
      otherwise modified from time to time, the "Watson Mortgage").
      

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    (D)  WHEREAS,
      the June 2005 Lenders and the Company have entered into a Loan Agreement dated
      as of June 22, 2005 (such agreement, as amended, supplemented, or otherwise
      modified from time to time, the "June
      2005 Loan Agreement")
      pursuant to which the Company has issued the June 2005 Notes. The June 2005
      Notes are secured by (i) liens and security interests granted pursuant to the
      Company General Security Agreement dated as of June 22, 2005 between the Company
      and the Agent (such agreement, as amended, supplemented, or otherwise modified
      from time to time, the "June
      2005 Company General Security Agreement"),
      (ii)
      collateral assignments of the Company Assignable Property pursuant to the June
      2005 Company General Security Agreement or otherwise (such collateral
      assignments, as amended, supplemented, or otherwise modified from time to time,
      collectively the “June
      2005 Assignments”),
      and
      (iii) a lien on and security interest in the Company Investment Property
      pursuant to a Stock Pledge Agreement between the Company and the Agent (such
      agreement, as amended, supplemented, or otherwise modified from time to time,
      the "June
      2005 Stock Pledge Agreement").
      

     

    (E)  WHEREAS,
      as a condition to the June 2005 Lenders’ obligation to lend sums under the June
      2005 Loan Agreement and in order to support the Obligations of the Company
      under
      the June 2005 Loan Agreement, each of the Guarantors has guaranteed the
      Company’s Obligations under the June 2005 Notes and the June 2005 Loan Agreement
      and has undertaken certain additional obligations pursuant to the Continuing
      Unconditional Secured Guaranty by each Guarantor dated as of June 22, 2005
      (each
      such guaranty and all other obligations of each of the Guarantors under the
      June
      2005 Loan Agreement, in each case, as they may be amended, supplemented or
      otherwise modified from time to time, a "June
      2005 Guaranty").
      The
      June 2005 Guaranties are secured by (i) a lien on and security interest in
      the
      Guarantor Personal Property of each Guarantor granted pursuant to a Guarantors
      General Security Agreement dated as of June 22, 2005 between the Guarantors
      and
      the Agent (such agreement, as amended, supplemented, or otherwise modified
      from
      time to time, the "June
      2005 Guarantors General Security Agreement")
      and
      (ii) collateral assignments of the Guarantor Assignable Property of each
      Guarantor pursuant to the June 2005 Guarantors General Security Agreement or
      otherwise (such collateral assignments, as amended, supplemented, or otherwise
      modified from time to time, collectively the “June
      2005 Guarantor Assignments”).
      

     

    (F)  WHEREAS,
      the September 2005 Lenders and the Company have entered into a Loan Agreement
      dated as of September 16, 2005 (such agreement, as amended, supplemented, or
      otherwise modified from time to time, the "September
      2005 Loan Agreement")
      pursuant to which the Company has agreed to issue the September 2005 Notes.
      The
      September 2005 Notes are secured by (i) liens and security interests granted
      pursuant to the Company General Security Agreement dated as of September 16,
      2005 between the Company and the Agent (such agreement, as amended,
      supplemented, or otherwise modified from time to time, the "September
      2005 Company General Security Agreement"),
      (ii)
      collateral assignments of the Company Assignable Property pursuant to the
      September 2005 Company General Security Agreement or otherwise (such collateral
      assignments, as amended, supplemented, or otherwise modified from time to time,
      collectively the “September
      2005 Assignments”),
      and
      (iii) a lien on and security interest in the Company Investment Property
      pursuant to a Stock Pledge Agreement between the Company and the Agent (such
      agreement, as amended, supplemented, or otherwise modified from time to time,
      the "September
      2005 Stock Pledge Agreement").
      

     

    
      
        
        

      

      
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    (G)  WHEREAS,
      as a condition to the September 2005 Lenders’ obligation to lend sums under the
      September 2005 Loan Agreement and in order to support the Obligations of the
      Company under the September 2005 Loan Agreement, each of the Guarantors has
      guaranteed the Company’s Obligations under the September 2005 Notes and the
      September 2005 Loan Agreement and has undertaken certain additional obligations
      pursuant to the Continuing Unconditional Secured Guaranty by each Guarantor
      dated as of September 16, 2005 (each such guaranty and all other obligations
      of
      each of the Guarantors under the September 2005 Loan Agreement, in each case,
      as
      they may be amended, supplemented or otherwise modified from time to time,
      a
      "September
      2005 Guaranty").
      The
      September 2005 Guaranties are secured by (i) a lien on and security interest
      in
      the Guarantor Personal Property of each Guarantor granted pursuant to a
      Guarantors General Security Agreement dated as of September 16, 2005 between
      the
      Guarantors and the Agent (such agreement, as amended, supplemented, or otherwise
      modified from time to time, the "September
      2005 Guarantors General Security Agreement")
      and
      (ii) collateral assignments of the Guarantor Assignable Property of each
      Guarantor pursuant to the September 2005 Guarantors General Security Agreement
      or otherwise (such collateral assignments, as amended, supplemented, or
      otherwise modified from time to time, collectively the “September
      2005 Guarantor Assignments”).
      

     

    (H)  WHEREAS,
      the November 2005 Lenders and the Company have entered into a Loan Agreement
      dated as of November 9, 2005 (such agreement, as amended, supplemented, or
      otherwise modified from time to time, the "November
      2005 Loan Agreement")
      pursuant to which the Company has issued the November 2005 Notes. The November
      2005 Notes are secured by (i) liens and security interests granted pursuant
      to
      the Company General Security Agreement dated as of November 9, 2005 between
      the
      Company and the Agent (such agreement, as amended, supplemented, or otherwise
      modified from time to time, the "November
      2005 Company General Security Agreement"),
      (ii)
      collateral assignments of the Company Assignable Property pursuant to the
      November 2005 Company General Security Agreement or otherwise (such collateral
      assignments, as amended, supplemented, or otherwise modified from time to time,
      collectively the “November
      2005 Assignments”),
      and
      (iii) a lien on and security interest in the Company Investment Property
      pursuant to a Stock Pledge Agreement between the Company and the Agent (such
      agreement, as amended, supplemented, or otherwise modified from time to time,
      the "November
      2005 Stock Pledge Agreement").
      

     

    (I)  WHEREAS,
      as a condition to the November 2005 Lenders’ obligation to lend sums under the
      November 2005 Loan Agreement and in order to support the Obligations of the
      Company under the November 2005 Loan Agreement, each of the Guarantors has
      guaranteed the Company’s Obligations under the November 2005 Notes and the
      November 2005 Loan Agreement and has undertaken certain additional obligations
      pursuant to the Continuing Unconditional Secured Guaranty by each Guarantor
      dated as of November 9, 2005 (each such guaranty and all other obligations
      of
      each of the Guarantors under the November 2005 Loan Agreement, in each case,
      as
      they may be amended, supplemented or otherwise modified from time to time,
      a
      "November
      2005 Guaranty").
      The
      November 2005 Guaranties are secured by (i) a lien on and security interest
      in
      the Guarantor Personal Property of each Guarantor granted pursuant to a
      Guarantors General Security Agreement dated as of the date hereof between the
      Guarantors and the Agent (such agreement, as amended, supplemented, or otherwise
      modified from time to time, the "November
      2005 Guarantors General Security Agreement")
      and
      (ii) collateral assignments of the Guarantor Assignable Property of each
      Guarantor pursuant to the November 2005 Guarantors General Security Agreement
      or
      otherwise (such collateral assignments, as amended, supplemented, or otherwise
      modified from time to time, collectively the “November
      2005 Guarantor Assignments”).
      

     

    
      
        
        

      

      
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    (J)  WHEREAS,
      in connection with the execution of the November 2005 Loan Agreement, the
      Company, Agent, the Watson Holders, the June 2005 Lenders, the September 2005
      Lenders and the November 2005 Lenders entered into a Subordination Agreement
      dated as of November 9, 2005 (the “November
      2005 Subordination Agreement”).
      

     

    (K)  WHEREAS,
      the January 2006 Lenders and the Company have entered into a Loan Agreement
      dated as of the date hereof (such agreement, as amended, supplemented, or
      otherwise modified from time to time, the "January
      2006 Loan Agreement")
      pursuant to which the Company has agreed to issue the January 2006 Notes. The
      January 2006 Notes are, or will be, secured by (i) liens and security interests
      granted pursuant to the Company General Security Agreement dated as of the
      date
      hereof between the Company and the Agent (such agreement, as amended,
      supplemented, or otherwise modified from time to time, the "January
      2006 Company General Security Agreement"),
      (ii)
      collateral assignments of the Company Assignable Property pursuant to the
      January 2006 Company General Security Agreement or otherwise (such collateral
      assignments, as amended, supplemented, or otherwise modified from time to time,
      collectively the “January
      2006 Assignments”),
      and
      (iii) a lien on and security interest in the Company Investment Property
      pursuant to a Stock Pledge Agreement between the Company and the Agent (such
      agreement, as amended, supplemented, or otherwise modified from time to time,
      the "January
      2006 Stock Pledge Agreement").
      

     

    (L)  WHEREAS,
      as a condition to the January 2006 Lenders’ obligation to lend sums under the
      January 2006 Loan Agreement and in order to support the Obligations of the
      Company under the January 2006 Loan Agreement, APT has guaranteed the Company’s
      Obligations under the January 2006 Notes and the January 2006 Loan Agreement
      and
      has undertaken certain additional obligations pursuant to the Continuing
      Unconditional Secured Guaranty by APT dated as of as of the date hereof (such
      guaranty and all other obligations of APT under the January 2006 Loan Agreement,
      in each case, as they may be amended, supplemented or otherwise modified from
      time to time, the "January
      2006 Guaranty").
      The
      January 2006 Guaranty is, or will be, secured by (i) a lien on and security
      interest in the Guarantor Personal Property of APT granted pursuant to a
      Guarantor’s General Security Agreement dated as of the date hereof between APT
      and the Agent (such agreement, as amended, supplemented, or otherwise modified
      from time to time, the "January
      2006 Guarantor’s General Security Agreement")
      and
      (ii) collateral assignments of the Guarantor Assignable Property of APT pursuant
      to the January 2006 Guarantor’s General Security Agreement or otherwise (such
      collateral assignments, as amended, supplemented, or otherwise modified from
      time to time, collectively the “January
      2006 Guarantor Assignments”).
      

     

    
      
        
        

      

      
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    (M)  WHEREAS,
      it is a condition to closing under the January 2006 Loan Agreement that the
      parties hereto shall have entered into this Agreement to confirm, among other
      things, their relative rights with respect to the Company Collateral and the
      Guarantor Collateral. 

     

    (N)  WHEREAS,
      it is a condition to closing under the November 2005 Loan Agreement that the
      parties hereto shall have entered into this Agreement to confirm, among other
      things, their relative rights with respect to the Company Collateral and the
      Guarantor Collateral. 

     

    NOW
      THEREFORE, in consideration of the foregoing and the mutual promises and
      agreements hereinafter contained, the parties hereto agree as follows:

     

    SECTION
      1. Definitions.  (a)
      As
      used herein, the following terms have the following meanings: 

     

    "Agent"
      has the
      meaning specified in the introductory paragraph of this Agreement. 

     

    this
      "Agreement"
      means
      this Subordination Agreement, as it may be supplemented, amended or otherwise
      modified from time to time. 

     

    “APT”
means
      Acura Pharmaceutical Technologies, Inc., an Indiana corporation.

     

    "Bankruptcy
      Proceeding"
      means,
      in the case of any Grantor, each of the following: (a) any distribution of
      all
      or any of the assets of such Grantor upon the dissolution, winding up, total
      or
      partial liquidation, arrangement, reorganization, adjustment, protection, relief
      or composition of such Grantor or its debts, whether in any bankruptcy,
      insolvency, arrangement, reorganization, receivership or relief proceeding
      or
      similar case or proceeding under any Federal or state bankruptcy or similar
      law
      and (b) any assignment for the benefit of creditors of any other marshalling
      of
      the assets and liabilities of such Grantor or otherwise. 

     

    "Cash
      Obligations"
      means,
      as at any time, the Obligations of the Company or any Guarantor, as applicable,
      to the extent then payable in cash.

     

    "Collateral"
      means,
      collectively, the Company Collateral and the Guarantor Collateral of all
      Guarantors.

     

    "Company"
      has the
      meaning specified in the introductory paragraph of this Agreement. 

     

    "Company
      Assignable Property"
      means,
      collectively, all of the Company’s leases, contracts, patents, copyrights,
      trademarks and service marks, now owned or existing or hereafter acquired or
      arising.

     

    "Company
      Collateral"
      means,
      collectively, the Company Personal Property, the Company Assignable Property
      and
      Company Investment Property.

     

    
      
        
        

      

      
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    "Company
      Investment Property"
      means
      all of the issued and outstanding shares of Acura Pharmaceutical Technologies,
      Inc. 

     

    "Company
      Personal Property"
      means
      all of the Company’s properties and assets of whatever nature, tangible or
      intangible, now owned or existing or hereafter acquired or arising.

     

    "Company
      Security Documents"
      means,
      collectively, the Watson Company Security Documents, the June 2005 Company
      Security Documents, the September 2005 Company Security Documents, the November
      2005 Company Security Documents and the January 2006 Company Security Documents.
      

     

    "Grantors"
      means
      the Company, Axiom Pharmaceutical Corporation, a Delaware corporation, and
      Acura
      Pharmaceutical Technologies, Inc., an Indiana corporation, and each other
      subsidiary or affiliate of the Company that is or becomes a party to any
      Security Document or any Guaranty Security Document.

     

    "Guarantors"
      means
      (i) either or both of Axiom Pharmaceutical Corporation, a Delaware corporation,
      and APT, as applicable in the context, and (ii) each other subsidiary or
      affiliate of the Company that is or becomes a party to any Security Document.
      

     

    "Guarantor
      Assignable Property"
      means,
      collectively, in respect of any Guarantor, all of such Guarantor’s leases,
      contracts, patents, copyrights, trademarks and service marks, now owned or
      existing or hereafter acquired or arising.

     

    "Guarantor
      Collateral"
      means,
      collectively, in respect of any Guarantor, (a) its Guarantor Personal Property,
      (b) its Guarantor Assignable Property and (c) if such Guarantor is APT, its
      Guarantor Mortgage Property.

     

    "Guarantor
      Mortgage Property"
      means
      APT’s real property located at 16235 State Road 17, Culver,
      Indiana.

     

    "Guarantor
      Personal Property"
      means,
      in respect of a Guarantor, all of such Guarantor’s properties and assets of
      whatever nature, tangible or intangible, now owned or existing or hereafter
      acquired or arising.

     

    "Guarantor
      Security Documents"
      means,
      collectively, the Watson Guarantor Security Documents, the June 2005 Guarantor
      Security Documents, the September 2005 Guarantor Security Documents, the
      November 2005 Guarantor Security Documents and the January 2006 Guarantor
      Security Documents. 

     

    "Guaranty
      Documents"
      means,
      collectively, the Watson Guaranties, the June 2005 Guaranties, the September
      2005 Guaranties, the November 2005 Guaranties and the January 2006 Guaranty.
      

     

    "January
      2006 Company General Security Agreement"
      has the
      meaning specified in the recitals. 

     

    
      
        
        

      

      
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    "January
      2006 Company Security Documents"
      means,
      collectively, the January 2006 Company General Security Agreement, the January
      2006 Assignments and the January 2006 Stock Pledge Agreement. 

     

    "January
      2006 Guarantor Security Documents"
      means,
      collectively, the January 2006 Guarantor’s General Security Agreement and the
      January 2006 Guarantor Assignments. 

     

    "January
      2006 Guarantor’s General Security Agreement"
      has the
      meaning specified in the recitals.

     

    "January
      2006 Guaranty"
      has the
      meaning specified in the recitals. 

     

    "January
      2006 Lenders"
      has the
      meaning specified in the introductory paragraph of this Agreement. 

     

    "January
      2006 Loan Agreement"
      has the
      meaning specified in the recitals. 

     

    "January
      2006 Loan Maximum Amount"
      means,
      at any time, an amount equal to the sum of (a) the aggregate principal amount
      of
      all January 2006 Notes then outstanding, (b) without duplication, the aggregate
      amount of unpaid interest theretofore accrued on the January 2006 Notes, and
      (c)
      without duplication, the aggregate amount of all costs, expenses, fees,
      indemnities and other amounts payable in respect of the January 2006 Notes,
      the
      January 2006 Loan Agreement, the January 2006 Guaranty, the January 2006 Company
      Security Documents and the January 2006 Guarantor Security
      Documents.

     

    "January
      2006 Notes"
      means
      the Company’s Secured Promissory Notes (as amended, supplemented or otherwise
      modified from time to time) issued from time to time under the January 2006
      Loan
      Agreement.

     

    "January
      2006 Stock Pledge Agreement"
      has the
      meaning specified in the recitals.

     

    "June
      2005 Company General Security Agreement"
      has the
      meaning specified in the recitals. 

     

    "June
      2005 Company Security Documents"
      means,
      collectively, the June 2005 Company General Security Agreement, the June 2005
      Assignments and the June 2005 Stock Pledge Agreement. 

     

    "June
      2005 Guarantor Security Documents"
      means,
      collectively, the June 2005 Guarantors General Security Agreement and the June
      2005 Guarantor Assignments. 

     

    "June
      2005 Guarantors General Security Agreement"
      has the
      meaning specified in the recitals.

     

    "June
      2005 Guaranty"
      has the
      meaning specified in the recitals. 

     

    
      
        
        

      

      
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    "June
      2005 Lenders"
      has the
      meaning specified in the introductory paragraph of this Agreement. 

     

    "June
      2005 Loan Agreement"
      has the
      meaning specified in the recitals. 

     

    "June
      2005 Loan Maximum Amount"
      means,
      at any time, an amount equal to the sum of (a) the aggregate principal amount
      of
      all June 2005 Notes then outstanding, (b) without duplication, the aggregate
      amount of unpaid interest theretofore accrued on the June 2005 Notes, and (c)
      without duplication, the aggregate amount of all costs, expenses, fees,
      indemnities and other amounts payable in respect of the June 2005 Notes, the
      June 2005 Loan Agreement, the June 2005 Guaranties, the June 2005 Company
      Security Documents and the June 2005 Guarantor Security Documents.

     

    "June
      2005 Notes"
      means
      the Company’s Secured Promissory Notes (as amended, supplemented or otherwise
      modified from time to time) issued from time to time under the June 2005 Loan
      Agreement.

     

    "June
      2005 Stock Pledge Agreement"
      has the
      meaning specified in the recitals.

     

    "Junior
      Secured Party",
      as to
      any item of Collateral, and as to Secured Creditors purporting to have liens
      on
      and securities interests in such item under the Security Documents, means one
      such Secured Creditor whose lien on and security interest in such item (and
      to
      the extent such lien on and security interest in such item) is stated in Section
      2 hereof to be junior in right to the liens and security interests of one or
      more such other Secured Creditors on and in such item. 

     

    "Obligations"
      of the
      Company or any Guarantor means, at any time, any loans, advances, debts,
      liabilities and obligations of the Company or such Guarantor, (a) in the case
      of
      the Company, under the January 2006 Notes, the January 2006 Loan Agreement,
      the
      November 2005 Notes, the November 2005 Loan Agreement, the September 2005 Notes,
      the September 2005 Loan Agreement, the June 2005 Notes, the June 2005 Loan
      Agreement and the Watson Loan Agreement; and (b) in the case of any Guarantor,
      under its Watson Guaranty, its January 2006 Guaranty, its November 2005
      Guaranty, its September 2005 Guaranty and its June 2005 Guaranty, in each case,
      whether matured or unmatured, contingent or liquidated and whether for
      principal, accrued and unpaid interest (including, without limitation, interest
      accruing after the filing of a petition, or other act, initiating a Bankruptcy
      Proceeding), accrued and unpaid expenses, indemnities, fees (including attorneys
      fees and disbursements) or otherwise, whether or not such obligations are due
      and payable at such time.

     

    "November
      2005 Company General Security Agreement"
      has the
      meaning specified in the recitals. 

     

    "November
      2005 Company Security Documents"
      means,
      collectively, the November 2005 Company General Security Agreement, the November
      2005 Assignments and the November 2005 Stock Pledge Agreement. 

     

    
      
        
        

      

      
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    "November
      2005 Guarantor Security Documents"
      means,
      collectively, the November 2005 Guarantors General Security Agreement and the
      November 2005 Guarantor Assignments. 

     

    "November
      2005 Guarantors General Security Agreement"
      has the
      meaning specified in the recitals.

     

    "November
      2005 Guaranty"
      has the
      meaning specified in the recitals. 

     

    "November
      2005 Lenders"
      has the
      meaning specified in the introductory paragraph of this Agreement. 

     

    "November
      2005 Loan Agreement"
      has the
      meaning specified in the recitals. 

     

    "November
      2005 Loan Maximum Amount"
      means,
      at any time, an amount equal to the sum of (a) the aggregate principal amount
      of
      all November 2005 Notes then outstanding, (b) without duplication, the aggregate
      amount of unpaid interest theretofore accrued on the November 2005 Notes, and
      (c) without duplication, the aggregate amount of all costs, expenses, fees,
      indemnities and other amounts payable in respect of the November 2005 Notes,
      the
      November 2005 Loan Agreement, the November 2005 Guaranties, the November 2005
      Company Security Documents and the November 2005 Guarantor Security
      Documents.

     

    "November
      2005 Notes"
      means
      the Company’s Secured Promissory Notes (as amended, supplemented or otherwise
      modified from time to time) issued from time to time under the November 2005
      Loan Agreement.

     

    "November
      2005 Stock Pledge Agreement"
      has the
      meaning specified in the recitals. 

     

    "November
      2005 Subordination Agreement"
      has the
      meaning specified in the recitals.

     

    "Required
      January 2006 Lenders"
      means
      January 2006 Lenders holding at least fifty percent (50%) of the outstanding
      principal amount of the January 2006 Notes.

     

    “Required
      June 2005 Lenders”
means
      June 2005 Lenders holding at least sixty percent (60%) of the outstanding
      principal amount under the June 2005 Notes.

     

    “Required
      November 2005 Lenders”
means
      November 2005 Lenders holding at least fifty percent (50%) of the outstanding
      principal amount under the November 2005 Notes.

     

    “Required
      Senior Secured Parties”
means
      the Required January 2006 Lenders, the Required November 2005 Lenders, the
      Required September 2005 Lenders and the Required June 2005 Lenders.

     

    
      
        
        

      

      
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    “Required
      September 2005 Lenders”
means
      September 2005 Lenders holding at least sixty percent (60%) of the outstanding
      principal amount under the September 2005 Notes;

    

    “Required
      Watson Holders”
means
      Watson Holders holding at least sixty percent (60%) of the outstanding principal
      amount under the Watson Notes.

    

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

     

    "Secured
      Creditors"
      means
      the Watson Holders, the June 2005 Lenders, the September 2005 Lenders, the
      November 2005 Lenders and the January 2006 Lenders, and their respective agents,
      permitted successors, transferees and assigns, in their respective capacities
      as
      the beneficiaries under the Security Documents and the Guaranty Documents,
      respectively (whether named in such agreement or as an assignee thereof).

     

    "Security
      Documents"
      means,
      collectively, the Company Security Documents and the Guarantor Security
      Documents. 

     

    "Senior
      Secured Party",
      as to
      any item of Collateral, and as to Secured Creditors purporting to have liens
      on
      and security interests in such item under the Security Documents, means one
      such
      Secured Creditor whose lien on and security interest in such item (and to the
      extent such lien on and security interest in such item) is stated in Section
      2
      hereof to be senior and prior in right to the liens and security interests
      of
      one or more such other Secured Creditors on and in such item.

     

    "September
      2005 Company General Security Agreement"
      has the
      meaning specified in the recitals. 

     

    "September
      2005 Company Security Documents"
      means,
      collectively, the September 2005 Company General Security Agreement, the
      September 2005 Assignments and the September 2005 Stock Pledge Agreement.

     

    "September
      2005 Guarantor Security Documents"
      means,
      collectively, the September 2005 Guarantors General Security Agreement and
      the
      September 2005 Guarantor Assignments. 

     

    "September
      2005 Guarantors General Security Agreement"
      has the
      meaning specified in the recitals.

     

    "September
      2005 Guaranty"
      has the
      meaning specified in the recitals. 

     

    "September
      2005 Lenders"
      has the
      meaning specified in the introductory paragraph of this Agreement. 

     

    "September
      2005 Loan Agreement"
      has the
      meaning specified in the recitals. 

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    "September
      2005 Loan Maximum Amount"
      means,
      at any time, an amount equal to the sum of (a) the aggregate principal amount
      of
      all September 2005 Notes then outstanding, (b) without duplication, the
      aggregate amount of unpaid interest theretofore accrued on the September 2005
      Notes, and (c) without duplication, the aggregate amount of all costs, expenses,
      fees, indemnities and other amounts payable in respect of the September 2005
      Notes, the September 2005 Loan Agreement, the September 2005 Guaranties, the
      September 2005 Company Security Documents and the September 2005 Guarantor
      Security Documents.

     

    "September
      2005 Notes"
      means
      the Company’s Secured Promissory Notes (as amended, supplemented or otherwise
      modified from time to time) issued from time to time under the September 2005
      Loan Agreement.

     

    "September
      2005 Stock Pledge Agreement"
      has the
      meaning specified in the recitals.

     

    "Transaction
      Documents"
      means,
      collectively, (a) this Agreement,(b) the January 2006 Loan Agreement, (c) the
      January 2006 Notes, (d) the November 2005 Loan Agreement, (e) the November
      2005
      Notes, (f) the September 2005 Loan Agreement, (g) the September 2005 Notes,
      (h)
      the June 2005 Loan Agreement, (i) the June 2005 Notes, (j) the Watson Loan
      Agreement, (k) the Watson Note, (l) the Security Documents, and (m) the Guaranty
      Documents. 

     

    "Watson"
      has the
      meaning specified in the recitals. 

     

    "Watson
      Holders"
      has the
      meaning specified in the introductory paragraph of this Agreement. 

     

    "Watson
      Company Security Documents"
      means,
      collectively, the Watson Security Agreement, the Watson Assignments and the
      Watson Stock Pledge Agreement. 

     

    "Watson
      Guarantor Security Documents"
      means,
      collectively, the Watson Guarantors General Security Agreement, the Watson
      Guarantor Assignments and the Watson Mortgage. 

     

    "Watson
      Guaranty"
      has the
      meaning specified in the recitals. 

     

    "Watson
      Guarantors General Security Agreement"
      has the
      meaning specified in the recitals.

     

    "Watson
      Loan Agreement"
      has the
      meaning specified in the recitals. 

     

    "Watson
      Maximum Amount"
      means,
      at any time, an amount equal to the sum of (a) $5,000,000, (b) without
      duplication, the aggregate amount of unpaid interest theretofore accrued on
      the
      Watson Term Loan and (c) without duplication, the aggregate amount of all costs,
      expenses, fees, indemnities and other amounts payable in respect of the Watson
      Loan Agreement, the Watson Note, the Watson Guaranties, the Watson Company
      Security Documents and the Watson Guarantor Security Documents.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    "Watson Mortgage"
      has the
      meaning specified in the recitals.

     

    "Watson Note"
      has the
      meaning specified in the recitals.

     

    "Watson
      Security Agreement"
      has the
      meaning specified in the recitals.

     

    "Watson
      Stock Pledge Agreement"
      has the
      meaning specified in the recitals.

     

    "Watson
      Term Loan"
      means
      the term loan in the principal amount of $5,000,000 (as amended, supplemented,
      or otherwise modified from time to time) evidenced by the Watson
      Note.

     

    (b) UCC
      Terms.
      Terms
      defined in Article 9 of the Uniform Commercial Code in effect in the State
      of
      New York (or in any other State, including, without limitation, the State of
      Indiana, to the extent that the Uniform Commercial Code in effect in such State
      is to be applied pursuant to the terms hereof) and not otherwise defined herein
      are used as therein defined. 

     

    SECTION
      2. Priorities.    (a)
      (i) The parties hereto hereby agree to the following priorities of interest
      in
      the Company Collateral: 

     

    The
      liens
      and securities interests of the January 2006 Lenders (under the January 2006
      Company Security Documents) on and in the Company Collateral, securing the
      Company’s Obligations to the January 2006 Lenders (up to an aggregate amount
      equal to the January 2006 Loan Maximum Amount in effect from time to time)
      shall
      at all times be senior and prior in right to the liens thereon and security
      interests therein of the November 2005 Lenders under the November 2005 Company
      Security Documents, the September 2005 Lenders under the September 2005 Company
      Security Documents, the June 2005 Lenders under the June 2005 Company Security
      Documents and the Watson Holders under the Watson Company Security Documents.
      

     

    The
      liens
      and securities interests of the November 2005 Lenders (under the November 2005
      Company Security Documents) on and in the Company Collateral, securing the
      Company’s Obligations to the November 2005 Lenders (up to an aggregate amount
      equal to the November 2005 Loan Maximum Amount in effect from time to time)
      shall at all times be senior and prior in right to the liens thereon and
      security interests therein of the September 2005 Lenders under the September
      2005 Company Security Documents, the June 2005 Lenders under the June 2005
      Company Security Documents and the Watson Holders under the Watson Company
      Security Documents. 

     

    The
      liens
      and securities interests of the September 2005 Lenders (under the September
      2005
      Company Security Documents) on and in the Company Collateral, securing the
      Company’s Obligations to the September 2005 Lenders (up to an aggregate amount
      equal to the September 2005 Loan Maximum Amount in effect from time to time)
      shall at all times be senior and prior in right to the liens thereon and
      security interests therein of the June 2005 Lenders under the June 2005 Company
      Security Documents and the Watson Holders under the Watson Company Security
      Documents. 

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    The
      liens
      and security interests of the June 2005 Lenders (under the June 2005 Company
      Security Documents) on and in the Company Collateral, securing the Company’s
      Obligations to the June 2005 Lenders (up to an aggregate amount equal to the
      June 2005 Loan Maximum Amount in effect from time to time) shall at all times
      be
      senior and prior in right to the liens thereon and security interests therein
      of
      the Watson Holders under the Watson Company Security Documents. 

     

    The
      liens
      and security interests of the Watson Holders (under the Watson Company Security
      Documents) on and in the Company Collateral securing the Company’s Obligations
      to the Watson Holders (up to an aggregate amount equal to the Watson Maximum
      Amount in effect from time to time) shall at all times be junior and subordinate
      in right to the liens thereon and security interests therein of the January
      2006
      Lenders under the January 2006 Company Security Documents, the November 2005
      Lenders under the November 2005 Company Security Documents, the September 2005
      Lenders under the September 2005 Company Security Documents and the June 2005
      Lenders under the June 2005 Company Security Documents. 

     

    (ii)
       The
      parties hereto hereby agree to the following priorities of interest in the
      Guarantor Collateral of each Guarantor: 

     

    The
      liens
      and security interests of the January 2006 Lenders (under the January 2006
      Guarantor Security Documents) on and in the Guarantor Collateral of such
      Guarantor, securing such Guarantor’s Obligations under its January 2006 Guaranty
      (in respect of the Company’s Obligations to the January 2006 Lenders up to an
      aggregate amount equal to the January 2006 Loan Maximum Amount in effect from
      time to time) shall at all times be senior and prior in right to the liens
      thereon and security interests therein of the November 2005 Lenders under the
      November 2005 Guarantor Security Documents, the September 2005 Lenders under
      the
      September 2005 Guarantor Security Documents, the June 2005 Lenders under the
      June 2005 Guarantor Security Documents and the Watson Holders under the Watson
      Guarantor Security Documents. 

     

    The
      liens
      and security interests of the November 2005 Lenders (under the November 2005
      Guarantor Security Documents) on and in the Guarantor Collateral of such
      Guarantor, securing such Guarantor’s Obligations under its November 2005
      Guaranty (in respect of the Company’s Obligations to the November 2005 Lenders
      up to an aggregate amount equal to the November 2005 Loan Maximum Amount in
      effect from time to time) shall at all times be senior and prior in right to
      the
      liens thereon and security interests therein of the September 2005 Lenders
      under
      the September 2005 Guarantor Security Documents, the June 2005 Lenders under
      the
      June 2005 Guarantor Security Documents and the Watson Holders under the Watson
      Guarantor Security Documents. 

     

    The
      liens
      and security interests of the September 2005 Lenders (under the September 2005
      Guarantor Security Documents) on and in the Guarantor Collateral of such
      Guarantor, securing such Guarantor’s Obligations under its September 2005
      Guaranty (in respect of the Company’s Obligations to the September 2005 Lenders
      up to an aggregate amount equal to the September 2005 Loan Maximum Amount in
      effect from time to time) shall at all times be senior and prior in right to
      the
      liens thereon and security interests therein of the June 2005 Lenders under
      the
      June 2005 Guarantor Security Documents and the Watson Holders under the Watson
      Guarantor Security Documents. 

     

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    The
      liens
      and security interests of the June 2005 Lenders (under the June 2005 Guarantor
      Security Documents) on and in the Guarantor Collateral of such Guarantor,
      securing such Guarantor’s Obligations under its June 2005 Guaranty (in respect
      of the Company’s Obligations to the June 2005 Lenders up to an aggregate amount
      equal to the June 2005 Loan Maximum Amount in effect from time to time) shall
      at
      all times be senior and prior in right to the liens thereon and security
      interests therein of the Watson Holders under the Watson Guarantor Security
      Documents. 

     

    The
      liens
      and security interests of the Watson Holders (under the Watson Guarantor
      Security Documents) on and in the Guarantor Collateral of such Guarantor
      securing such Guarantor’s Obligations under its Watson Guaranty (in respect of
      the Company’s Obligations to the Watson Holders up to an aggregate amount equal
      to the Watson Maximum Amount in effect from time to time) shall at all times
      be
      junior and subordinate in right to the liens thereon and security interests
      therein of the January 2006 Lenders and the January 2006 Guarantor Security
      Documents, the November 2005 Lenders under the November 2005 Guarantor Security
      Documents, the September 2005 Lenders under the September 2005 Guarantor
      Security Documents and the June 2005 Lenders under the June 2005 Guarantor
      Security Documents. 

     

    (b)
       (i)
      The
      parties hereto hereby agree to the following priorities in right of payment
      of
      the Company’s Cash Obligations:

     

    The
      Company’s Cash Obligations under the January 2006 Notes and the January 2006
      Loan Agreement (up to an aggregate amount equal to the January 2006 Loan Maximum
      Amount in effect from time to time) shall at all times be senior and prior
      in
      right of payment to the Company’s Cash Obligations under the November 2005 Loan
      Agreement, the November 2005 Notes, the September 2005 Loan Agreement, the
      September 2005 Notes, the June 2005 Loan Agreement, the June 2005 Notes, the
      Watson Loan Agreement and the Watson Note.

     

    The
      Company’s Cash Obligations under the November 2005 Notes and the November 2005
      Loan Agreement (up to an aggregate amount equal to the November 2005 Loan
      Maximum Amount in effect from time to time) shall at all times be senior and
      prior in right of payment to the Company’s Cash Obligations under the September
      2005 Loan Agreement, the September 2005 Notes, the June 2005 Loan Agreement,
      the
      June 2005 Notes, the Watson Loan Agreement and the Watson Note.

     

    The
      Company’s Cash Obligations under the September 2005 Notes and the September 2005
      Loan Agreement (up to an aggregate amount equal to the September 2005 Loan
      Maximum Amount in effect from time to time) shall at all times be senior and
      prior in right of payment to the Company’s Cash Obligations under the June 2005
      Loan Agreement, the June 2005 Notes, the Watson Loan Agreement and the Watson
      Note.

     

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

    The
      Company’s Cash Obligations under the June 2005 Notes and the June 2005 Loan
      Agreement (up to an aggregate amount equal to the June 2005 Loan Maximum Amount
      in effect from time to time) shall at all times be senior and prior in right
      of
      payment to the Company’s Cash Obligations under the Watson Loan Agreement and
      the Watson Note.

     

    The
      Company’s Cash Obligations under the Watson Loan Agreement (up to an aggregate
      amount equal to the Watson Maximum Amount in effect from time to time) shall
      at
      all time be junior and subordinate in right of payment to the Company’s Cash
      Obligations under the November 2005 Notes, the November 2005 Loan Agreement,
      the
      September 2005 Notes, the September 2005 Loan Agreement, the June 2005 Notes
      and
      the 2005 Loan Agreement.

     

    (ii) The
      parties hereto hereby agree to the following priorities in right of payment
      of
      each Guarantor’s Cash Obligations:

     

    Such
      Guarantor’s Cash Obligations under its January 2006 Guaranty in respect of the
      Company’s Obligations to the January 2006 Lenders (up to an aggregate amount
      equal to the January 2006 Loan Maximum Amount in effect from time to time)
      shall
      at all times be senior and prior in right of payment to such Guarantor’s Cash
      Obligations under its November 2005 Guaranty, its September 2005 Guaranty,
      its
      June 2005 Guaranty and its Watson Guaranty.

     

    Such
      Guarantor’s Cash Obligations under its November 2005 Guaranty in respect of the
      Company’s Obligations to the November 2005 Lenders (up to an aggregate amount
      equal to the November 2005 Loan Maximum Amount in effect from time to time)
      shall at all times be senior and prior in right of payment to such Guarantor’s
      Cash Obligations under its September 2005 Guaranty, its June 2005 Guaranty
      and
      its Watson Guaranty.

     

    Such
      Guarantor’s Cash Obligations under its September 2005 Guaranty in respect of the
      Company’s Obligations to the September 2005 Lenders (up to an aggregate amount
      equal to the September 2005 Loan Maximum Amount in effect from time to time)
      shall at all times be senior and prior in right of payment to such Guarantor’s
      Cash Obligations under its June 2005 Guaranty and its Watson
      Guaranty.

     

    Such
      Guarantor’s Cash Obligations under its June 2005 Guaranty in respect of the
      Company’s Obligations to the June 2005 Lenders (up to an aggregate amount equal
      to the June 2005 Loan Maximum Amount in effect from time to time) shall at
      all
      times be senior and prior in right of payment to such Guarantor’s Cash
      Obligations under its Watson Guaranty.

     

    Such
      Guarantor’s Cash Obligations under its Watson Guaranty in respect of the
      Company’s Obligations to the Watson Holders (up to an aggregate amount equal to
      the Watson Maximum Amount in effect from time to time) shall at all times be
      junior and subordinate in right of payment to such Guarantor’s Cash Obligations
      under its January 2006 Guaranty, its November 2005 Guaranty, its September
      2005
      Guaranty and its June 2005 Guaranty.

     

    For
      the
      avoidance of doubt, nothing in this Section 2(b) shall apply at any time to
      any
      Obligations of the Company or any Guarantor to the extent that they are not
      then
      Cash Obligations.

     

    (c) Except
      as
      otherwise provided in Sections 2(a) and 2(b) hereof, no Secured Creditor shall
      have any lien or security interest which is prior to the lien and security
      interest of any other Secured Creditor in any item of Collateral covered by
      the
      Company Security Documents or the Guarantor Security Documents. 

     

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

    (d) So
      long
      as any Person is a Secured Creditor, the priorities set forth in this Agreement
      are applicable irrespective of the order of creation, attachment or perfection
      of any lien or security interest arising under the Security Documents (whether
      or not such security interests have been perfected) or any priority that might
      otherwise be available to such Secured Creditor under applicable law and
      notwithstanding any representation or warranty of the Company or any of the
      Guarantors to the contrary in any Transaction Document. 

     

    (e) Each
      Secured Creditor agrees not to contest, or to bring (or voluntarily join in)
      any
      action or proceeding for the purpose of contesting, the creation, attachment,
      validity, enforceability, perfection or priority (as herein provided) of, or
      seeking to avoid, the lien and security interest which any Security Document
      (as
      amended or otherwise modified hereby) purports to create in favor of any other
      Secured Creditor on or in any item of Collateral. Nothing herein shall be deemed
      or construed to prevent any Secured Creditor from commencing an action or
      proceeding against any other Secured Creditor to assert any right or claim
      it
      may have arising under or in connection with this Agreement. 

     

    (f) Notwithstanding
      anything to the contrary in this Agreement, in the event of a Bankruptcy
      Proceeding of the Company, the November 2005 Lenders hereby agree as follows,
      in
      each case unless otherwise consented to in writing by the Required January
      2006
      Lenders:

     

    (i) the
      November 2005 Lenders waive any and all rights to dispute actions taken by
      the
      Required January 2006 Lenders to seek adequate protection with respect to the
      collateral securing the January 2006 Notes;

     

    (ii) the
      November 2005 Lenders agree not to seek any form of adequate protection other
      than: (A) replacement liens which shall be junior to any replacement liens
      granted to the January 2006 Lenders and to any liens securing
      debtor-in-possession (“DIP”)
      financing that has been approved by the Required January 2006 Lenders, and
      (B)
      periodic reports from the Company;

     

    (iii) the
      November 2005 Lenders agree not to oppose the use of cash collateral as agreed
      to by the Required January 2006 Lenders and will not oppose the use of any
      November 2005 Lenders’ cash collateral; provided, however, that the November
      2005 Lenders receive replacement liens. The November 2005 Lenders agree to
      a
      carve out from their collateral equal to any carve out agreed to by the Required
      January 2006 Lenders, for example, for fees of the U.S. Trustee and estate
      professionals; 

     

    (iv) the
      November 2005 Lenders agree not to oppose their liens being primed by any DIP
      loan that has been approved by the Required January 2006 Lenders; provided
      however, that the November 2005 Lenders receive replacement liens junior to
      the
      liens securing the DIP loan and the replacement liens received by the January
      2006 Lenders. Notwithstanding the foregoing, the November 2005 Lenders reserve
      all rights to oppose other aspects of any DIP loan that could be asserted if
      they held unsecured debt; 

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

    (v) in
      the
      event of a sale or sales of an asset or assets by the Company that has been
      approved by the Required January 2006 Lenders in a bankruptcy case, the November
      2005 Lenders agree to waive any right to assert that it is impossible to sell
      assets free and clear of their liens without their consent. Notwithstanding
      the
      foregoing, the November 2005 Lenders retain their rights to object a sale of
      assets on grounds other than the assets being sold free and clear of the
      November 2005 Lenders’ liens; 

     

    (vi) the
      November 2005 Lenders waive any and all rights to credit bid at a bankruptcy
      sale of the Company’s assets, unless the Required January 2006 Lenders’ consent;
      and 

     

    (vii) the
      November 2005 Lenders agree not to vote in favor of any plan of reorganization
      proposed in a bankruptcy case unless the plan either pays the January 2006
      Lenders in full in cash or is supported by the Required January 2006
      Lenders.

     

    (g)
       Notwithstanding
      anything to the contrary in this Agreement, in the event of a Bankruptcy
      Proceeding of the Company, the September 2005 Lenders hereby agree as follows,
      in each case unless otherwise consented to in writing by each of the Required
      November 2005 Lenders and the Required January 2006 Lenders:

     

    (i) the
      September 2005 Lenders waive any and all rights to dispute actions taken by
      the
      Required November 2005 Lenders to seek adequate protection with respect to
      the
      collateral securing the November 2005 Notes; and waive any and all rights to
      dispute actions taken by the Required January 2006 Lenders to seek adequate
      protection with respect to collateral securing the January 2006 Notes;

     

    (ii) the
      September 2005 Lenders agree not to seek any form of adequate protection other
      than: (A) replacement liens which shall be junior to any replacement liens
      granted to the November 2005 Lenders and junior to any replacement liens granted
      to the January 2006 Lenders, and to any liens securing debtor-in-possession
      (“DIP”)
      financing that has been approved by the Required November 2005 Lenders and
      has
      been approved by the Required January 2006 Lenders, and (B) periodic reports
      from the Company;

     

    (iii) the
      September 2005 Lenders agree not to oppose the use of cash collateral as agreed
      to by the Required November 2005 Lenders and as agreed to by the January 2006
      Lenders and will not oppose the use of any September 2005 Lenders’ cash
      collateral; provided, however, that the September 2005 Lenders receive
      replacement liens. The September 2005 Lenders agree to a carve out from their
      collateral equal to any carve out agreed to by the Required November 2005
      Lenders and agreed to by the January 2006 Lenders, for example, for fees of
      the
      U.S. Trustee and estate professionals; 

     

    (iv) the
      September 2005 Lenders agree not to oppose their liens being primed by any
      DIP
      loan that has been approved by each of the Required November 2005 Lenders and
      the Required January 2006 Lenders; provided however, that the September 2005
      Lenders receive replacement liens junior to the liens securing the DIP loan
      and
      the replacement liens received by the November 2005 Lenders and the January
      2006
      Lenders. Notwithstanding the foregoing, the September 2005 Lenders reserve
      all
      rights to oppose other aspects of any DIP loan that could be asserted if they
      held unsecured debt; 

     

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

    (v) in
      the
      event of a sale or sales of an asset or assets by the Company that has been
      approved by each of the Required November 2005 Lenders and the Required January
      2006 Lenders in a bankruptcy case, the September 2005 Lenders agree to waive
      any
      right to assert that it is impossible to sell assets free and clear of their
      liens without their consent. Notwithstanding the foregoing, the September 2005
      Lenders retain their rights to object a sale of assets on grounds other than
      the
      assets being sold free and clear of the September 2005 Lenders’ liens;

     

    (vi) the
      September 2005 Lenders waive any and all rights to credit bid at a bankruptcy
      sale of the Company’s assets, unless each of the Required November 2005 Lenders
      and the Required January 2006 Lenders consent; and 

     

    (vii) the
      September 2005 Lenders agree not to vote in favor of any plan of reorganization
      proposed in a bankruptcy case unless the plan either pays both the November
      2005
      Lenders and the January 2006 Lenders in full in cash or is supported by each
      of
      the Required November 2005 Lenders and the Required January 2006
      Lenders.

     

    (h) Notwithstanding
      anything to the contrary in this Agreement, in the event of a Bankruptcy
      Proceeding of the Company, the June 2005 Lenders hereby agree as follows, in
      each case unless otherwise consented to in writing by each of the Required
      September 2005 Lenders, the Required November 2005 Lenders and the Required
      January 2006 Lenders:

     

    (i) the
      June
      2005 Lenders waive any and all rights to dispute actions taken by the Required
      September 2005 Lenders to seek adequate protection with respect to the
      collateral securing the September 2005 Notes, waive any all rights to dispute
      actions taken by the Required November 2005 Lenders to seek adequate protection
      with respect to the collateral securing the November 2005 Notes and waive any
      and all rights to dispute actions taken by the Required January 2006 Lenders
      to
      seek adequate protection with respect to the collateral securing the January
      2006 Notes;

     

    (ii) the
      June
      2005 Lenders agree not to seek any form of adequate protection other than:
      (A)
      replacement liens which shall be junior to any replacement liens granted to
      the
      September 2005 Lenders, junior to any replacement liens granted to the November
      2005 Lenders, and junior to any replacement liens granted to the January 2006
      Lenders, and to any liens securing debtor-in-possession (“DIP”)
      financing that has been approved by each of the Required September 2005 Lenders,
      the Required November 2005 Lenders and the Required January 2006 Lenders, and
      (B) periodic reports from the Company;

     

    (iii) the
      June
      2005 Lenders agree not to oppose the use of cash collateral as agreed to by
      each
      of the Required January 2006 Lenders, the Required November 2005 Lenders and
      the
      Required September 2005 Lenders and will not oppose the use of any June 2005
      Lenders’ cash collateral; provided, however, that the June 2005 Lenders receive
      replacement liens. The June 2005 Lenders agree to a carve out from their
      collateral equal to any carve out agreed to by each of the Required January
      2006
      Lenders, the Required November 2005 Lenders and the Required September 2005
      Lenders, for example, for fees of the U.S. Trustee and estate professionals;
      

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

    (iv) the
      June
      2005 Lenders agree not to oppose their liens being primed by any DIP loan that
      has been approved by each of the Required January 2006 Lenders, the Required
      November 2005 Lenders and the Required September 2005 Lenders; provided however,
      that the June 2005 Lenders receive replacement liens junior to the liens
      securing the DIP loan and the replacement liens received by the January 2006
      Lenders, the November 2005 Lenders and the September 2005 Lenders.
      Notwithstanding the foregoing, the June 2005 Lenders reserve all rights to
      oppose other aspects of any DIP loan that could be asserted if they held
      unsecured debt; 

     

    (v) in
      the
      event of a sale or sales of an asset or assets by the Company that has been
      approved by each of the January 2006 Lenders, the Required November 2005 Lenders
      and the Required September 2005 Lenders in a bankruptcy case, the June 2005
      Lenders agree to waive any right to assert that it is impossible to sell assets
      free and clear of their liens without their consent. Notwithstanding the
      foregoing, the June 2005 Lenders retain their rights to object a sale of assets
      on grounds other than the assets being sold free and clear of the June 2005
      Lenders’ liens; 

     

    (vi) the
      June
      2005 Lenders waive any and all rights to credit bid at a bankruptcy sale of
      the
      Company’s assets, unless each of the Required January 2006 Lenders, the Required
      November 2005 Lenders and the Required September 2005 Lenders consent; and
      

     

    (vii) the
      June
      2005 Lenders agree not to vote in favor of any plan of reorganization proposed
      in a bankruptcy case unless the plan either pays each of the January 2006
      Lenders, the November 2005 Lenders and the September 2005 Lenders in full in
      cash or is supported by each of the Required January 2006 Lenders, the Required
      November 2005 Lenders and the Required September 2005 Lenders.

     

    (i) 
      Notwithstanding anything to the contrary in this Agreement, in the event of
      a
      Bankruptcy Proceeding of the Company, the Watson Holders hereby agree as
      follows, in each case unless otherwise consented to in writing by the Required
      Senior Secured Parties:

     

    (i) the
      Watson Holders waive any and all rights to dispute actions taken by the Senior
      Secured Parties to seek adequate protection with respect to the collateral
      securing the June 2005 Notes, the September 2005 Notes, the November 2005 Notes
      and the January 2006 Notes;

     

    (ii) the
      Watson Holders agree not to seek any form of adequate protection other than:
      (A)
      replacement liens which shall be junior to any replacement liens granted to
      the
      Senior Secured Parties and to any liens securing debtor-in-possession
      (“DIP”)
      financing that has been approved by the Required Senior Secured Parties, and
      (B)
      periodic reports from the Company;

     

    (iii) the
      Watson Holders agree not to oppose the use of cash collateral as agreed to
      by
      the Required Senior Secured Parties and will not oppose the use of any Watson
      Holders’ cash collateral; provided, however, that the Watson Holders receive
      replacement liens. The Watson Holders agree to a carve out from their collateral
      equal to any carve out agreed to by the Required Senior Secured Parties, for
      example, for fees of the U.S. Trustee and estate professionals; 

     

    
      
        
        

      

      
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    (iv) the
      Watson Holders agree not to oppose their liens being primed by any DIP loan
      that
      has been approved by the Required Senior Secured Parties; provided however,
      that
      the Watson Holders receive replacement liens junior to the liens securing the
      DIP loan and the replacement liens received by the Senior Secured Parties.
      Notwithstanding the foregoing, the Watson Holders reserve all rights to oppose
      other aspects of any DIP loan that could be asserted if they held unsecured
      debt; 

     

    (v) in
      the
      event of a sale or sales of an asset or assets by the Company that has been
      approved by the Required Senior Secured Parties in a bankruptcy case, the Watson
      Holders agree to waive any right to assert that it is impossible to sell assets
      free and clear of their liens without their consent. Notwithstanding the
      foregoing, the Watson Holders retain their rights to object a sale of assets
      on
      grounds other than the assets being sold free and clear of the Watson Holders’
liens; 

     

    (vi) the
      Watson Holders waive any and all rights to credit bid at a bankruptcy sale
      of
      the Company’s assets, unless the Required Senior Secured Parties consent; and

     

    (vii) the
      Watson Holders agree not to vote in favor of any plan of reorganization proposed
      in a bankruptcy case unless the plan either pays the Senior Secured Parties
      in
      full in cash or is supported by the Required Senior Secured
      Parties.

     

    (j) 
      The June
      2005 Lenders agree than in the event of a Bankruptcy Proceeding of the Company
      to (i) vote for any Plan of Reorganization supported by the Required June 2005
      Lenders, (ii) vote for and not object to a sale or sales of an asset that has
      been approved by the Required June 2005 Lenders; (iii) vote for and not object
      to any DIP loan that has been approved by the Required June 2005 Lenders; (iv)
      support and not object to a carve out from their collateral equal to any carve
      out agreed to by the Required June 2005 Lenders; (v) waive any and all rights
      to
      dispute actions taken by the Required June 2005 Lenders to seek adequate
      protection with respect to the collateral securing the June 2005 Notes; and
      (vi)
      waive any right to assert that it is impossible to sell assets free and clear
      of
      their liens without their consent, if such right has been waived by the Required
      June 2005 Lenders. 

     

    (k)
      The
      September 2005 Lenders agree than in the event of a Bankruptcy Proceeding of
      the
      Company to (i) vote for any Plan of Reorganization supported by the Required
      September 2005 Lenders, (ii) vote for and not object to a sale or sales of
      an
      asset that has been approved by the Required September 2005 Lenders; (iii)
      vote
      for and not object to any DIP loan that has been approved by the Required
      September 2005 Lenders; (iv) support and not object to a carve out from their
      collateral equal to any carve out agreed to by the Required September 2005
      Lenders; (v) waive any and all rights to dispute actions taken by the Required
      September 2005 Lenders to seek adequate protection with respect to the
      collateral securing the September 2005 Notes; and (vi) waive any right to assert
      that it is impossible to sell assets free and clear of their liens without
      their
      consent, if such right has been waived by the Required September 2005 Lenders.
      

     

    
      
        
        

      

      
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    (l)
      The
      November 2005 Lenders agree than in the event of a Bankruptcy Proceeding of
      the
      Company to (i) vote for any Plan of Reorganization supported by the Required
      November 2005 Lenders, (ii) vote for and not object to a sale or sales of an
      asset that has been approved by the Required November 2005 Lenders; (iii) vote
      for and not object to any DIP loan that has been approved by the Required
      November 2005 Lenders; (iv) support and not object to a carve out from their
      collateral equal to any carve out agreed to by the Required November 2005
      Lenders; (v) waive any and all rights to dispute actions taken by the Required
      November 2005 Lenders to seek adequate protection with respect to the collateral
      securing the November 2005 Notes; and (vi) waive any right to assert that it
      is
      impossible to sell assets free and clear of their liens without their consent,
      if such right has been waived by the Required November 2005
      Lenders.

     

    (m) The
      January 2006 Lenders agree than in the event of a Bankruptcy Proceeding of
      the
      Company to (i) vote for any Plan of Reorganization supported by the Required
      January 2006 Lenders, (ii) vote for and not object to a sale or sales of an
      asset that has been approved by the Required January 2006 Lenders; (iii) vote
      for and not object to any DIP loan that has been approved by the Required
      January 2006 Lenders; (iv) support and not object to a carve out from their
      collateral equal to any carve out agreed to by the Required January 2006
      Lenders; (v) waive any and all rights to dispute actions taken by the Required
      January 2006 Lenders to seek adequate protection with respect to the collateral
      securing the January 2006 Notes; and (vi) waive any right to assert that it
      is
      impossible to sell assets free and clear of their liens without their consent,
      if such right has been waived by the Required January 2006 Lenders.

     

    (n)
      The
      Watson Holders agree than in the event of a Bankruptcy Proceeding of the Company
      to (i) vote for any Plan of Reorganization supported by the Required Watson
      Holders, (ii) vote for and not object to a sale or sales of an asset that has
      been approved by the Required Watson Holders; (iii) vote for and not object
      to
      any DIP loan that has been approved by the Required Watson Holders; (iv) support
      and not object to a carve out from their collateral equal to any carve out
      agreed to by the Required Watson Holders; (v) waive any and all rights to
      dispute actions taken by the Required Watson Holders to seek adequate protection
      with respect to the collateral securing the Watson Notes; and (vi) waive any
      right to assert that it is impossible to sell assets free and clear of their
      liens without their consent, if such right has been waived by the Required
      Watson Holders.

     

    SECTION 3.  Enforcement
      of Security.    (a)  
      Each Secured Creditor may, from time to time, to the extent provided in the
      Transaction Documents to which it is a party, (i) give notice that an "event
      of
      default" has occurred and is continuing under such Transaction Documents, (ii)
      accelerate the Company’s Obligations under such Transaction Documents and (iii)
      whether or not it has given such notice or has effected such acceleration (but
      except as otherwise provided in this Agreement), take or authorize the taking
      of
      such action with regard to the protection, exercise, enforcement and collection
      of its rights in and to that portion of the Collateral, in which it may have
      an
      interest, as it may determine to be necessary or appropriate; provided,
      however,
      that
      each Secured Creditor which is, as to any item of Collateral, a Junior Secured
      Party in relation to one or more Senior Secured Parties, agrees that it (A)
      will
      not take any action to enforce, collect on or exercise any or its rights or
      remedies in respect of its liens on and security interests in such item or
      take
      or receive from the Company or any Guarantor, respectively, directly or
      indirectly, in cash or other property or by setoff or in any other manner,
      whether pursuant to any judicial or nonjudicial enforcement, collection,
      execution, levy or foreclosure proceedings or otherwise, including by deed
      in
      lieu of foreclosure, the Collateral, or any part thereof or interest therein,
      in
      each case unless and until each such Senior Secured Party has given written
      notice to such Junior Secured Party that those Obligations to such Senior
      Secured Party which are secured by such item and which are stated in Section
      2
      hereof to be senior to the Obligations to such Junior Secured Party have been
      indefeasibly paid in full (and each such Senior Secured Party hereby agrees
      promptly to give such notification following such payment to such Senior Secured
      Party), (B) will not interfere with any exercise by or on behalf of each such
      Senior Secured Party in respect of any liens and security interests of such
      Senior Secured Party on or in such item or any other rights or remedies of
      such
      Senior Secured Party in furtherance of the rights and remedies of such Senior
      Secured Party to the extent set forth in Section 2 hereof, and (C) will hold
      and
      promptly pay or deliver to each such Senior Secured Party, in order of and
      in
      accordance with the priorities set forth in Section 2 above (subject, however,
      to Section 3(b) hereof), any such item received by such Junior Secured Party
      (including, without limitation, any proceeds from the sale or other disposition
      of such item), in each case unless and until each such Senior Secured Party
      has
      given written notice to such Junior Secured Party that its Obligations (to
      the
      extent set forth in clause (A) above) have been indefeasibly paid in full.
      

     

    
      
        
        

      

      
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    (b)  (i)  Except
      as otherwise provided in clause (ii) below, each Secured Creditor agrees to
      hold
      any item of Collateral, received by it, in or against which a security interest
      or lien may be perfected by possession, as possessory agent on behalf of all
      Secured Creditors that have a lien on or security interest in such item
      (including, if appropriate, on its own behalf), and, unless such Secured
      Creditor is a Senior Secured Party as to such item in relation to all other
      Secured Creditors, to give notice (indicating the nature and amount of such
      items) of such item and to turn over to the appropriate Secured Creditor thereto
      forthwith upon receipt thereof, provided
      that
      this clause (i) is intended solely to assure continuous perfection of the liens
      and security interests granted under the Security Documents and nothing in
      this
      clause (i) shall be deemed or construed as altering the priorities or
      obligations set forth elsewhere in this Agreement; and (ii) in the event any
      Secured Creditor receives any proceeds from the sale or any other disposition
      of
      any Collateral in contravention of this Agreement) or in excess of the portion
      of such proceeds to which such Secured Creditor is entitled hereunder, such
      Secured Creditor shall give notice (indicating the nature and amount of such
      proceeds and such excess, as applicable) and turn such proceeds or such excess,
      as applicable, over to the appropriate Secured Creditor entitled thereto.

     

    (c) Except
      as
      otherwise expressly provided in this Agreement, each right, power and remedy
      of
      any of the Secured Creditors provided for in this Agreement or any of the
      Transaction Documents, or any other document relating thereto, whether such
      right, power or remedy is now existing or hereafter available at law or in
      equity or by statute or otherwise, shall be cumulative and concurrent (except
      to
      the extent otherwise provided in any such document) and shall be in addition
      to
      every other such right, power or remedy. Except as otherwise provided in Section
      3(a), the Transaction Documents, or any other document relating thereto, the
      exercise or the beginning of the exercise by any Secured Creditor of any one
      or
      more of such rights, powers or remedies shall not preclude the simultaneous
      or
      later exercise of all such rights, powers or remedies, and no course of dealing
      or failure or delay on the part of any party hereto in exercising any such
      right, power or remedy shall operate as a waiver thereof or otherwise prejudice
      its rights, powers or remedies. 

     

    
      
        
        

      

      
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    (d) Each
      Secured Creditor which is, as to any item of Collateral, a Junior Secured Party
      in relation to one or more Senior Secured Parties agrees that this Agreement
      shall be enforceable against it in all circumstances, including, without
      limitation, in any Bankruptcy Proceeding. 

     

    SECTION 4.  Notices
      of Default; Collateral Disposition, etc.    (a)
      Each of the Secured Creditors agrees individually to give the others (as
      applicable): copies of any written notice of an event of default (under any
      Transaction Document) received from or sent to any Grantor, (i) within 10
      business days of receipt of any such notice by such Secured Creditor from such
      Grantor (or, if earlier, prior to such Secured Creditor’s exercising any right
      or remedy or taking any other action, in respect of such event of default,
      against the Company, any Guarantor, any Company Collateral or any Guarantor
      Collateral), or, as applicable, (ii) simultaneously with any such notice sent
      by
      such Secured Creditor to any Grantor; and

     

    (b) This
      Agreement is intended, in part, to constitute a request for notice and a written
      notice of a claim by each Secured Creditor to the other of any interest in
      the
      Collateral, in accordance with the provisions of Section 9-611 and 9-621 of
      the
      Uniform Commercial Code. 

     

    (c) Anything
      herein to the contrary notwithstanding, nothing in this Section 4 shall permit
      any Secured Creditor to exercise any right or remedy, or to take any other
      action, against or in respect of the Company, any Guarantor, any Company
      Collateral or any Guarantor Collateral in contravention of Sections 2 or 3
      hereof or of any other provision of this Agreement. 

     

    SECTION 5.  Rights
      of Subrogation.    Any
      Junior Secured Party in respect of one or more Senior Secured Parties agrees
      that, whether or not any such Senior Secured Party shall have received any
      payment or distribution to any one or more Senior Secured Parties from the
      Company or any Guarantor or on account of their Obligations, such Junior Secured
      Party shall not be entitled to exercise any rights of subrogation or
      reimbursement (or similar right or remedy of a surety) until the date on which
      all Obligations to all such Senior Secured Parties (to the extent such
      Obligations are stated in Section 2 hereof to be senior to the Obligations
      to
      such Junior Secured Party) shall have been indefeasibly paid in full.

     

    SECTION 6.  Further
      Assurances.    Any
      Junior Secured Party in respect of one or more Senior Secured Parties will,
      at
      the expense of the Company, at any time and from time to time promptly execute
      and deliver all further instruments and documents and take all further action,
      that any Senior Secured Party may reasonably request, in order to protect any
      right or interest granted or purported to be granted hereby or to enable any
      Senior Secured Party to exercise and enforce its rights and remedies hereunder.
      

     

    SECTION 7.  Waiver
      of Marshalling and Similar Rights.    Each
      of the parties hereto, to the fullest extent permitted by applicable law, waives
      any requirement regarding, and agrees not to demand, request, plead or otherwise
      claim the benefit of, any marshalling, appraisement, valuation or other similar
      right that a creditor or any other Person may otherwise may have under
      applicable law. 

     

    
      
        
        

      

      
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    SECTION 8.  Obligations
      Hereunder Not Affected.    Except
      as otherwise provided in this Agreement, all rights, interests, agreements
      and
      obligations of the Secured Creditors hereunder, in respect of each other or
      in
      respect of the other parties to this Agreement, and all agreements and
      obligations of the Junior Secured Parties in respect of the respective Senior
      Secured Parties under this Agreement shall remain in full force and effect
      irrespective of: 

     

    (a) Any
      lack
      of validity or enforceability of any Transaction Document or any other agreement
      or instrument relating thereto; 

     

    (b) Any
      change in the time, manner or place of payment of, the security for, or in
      any
      other term of, all or any of the Obligations secured or guaranteed by the
      Security Documents, or any other extension, renewal, supplement, amendment
      or
      other modification, waiver, refinancing or restructuring of or any consent
      to
      departure from, or any act, omission or default under, this Agreement or any
      other Transaction Document (including, without limitation, any increase in
      such
      Obligations resulting from the extension of additional credit to, or the
      issuance of additional debt or equity instruments by, the Company or any of
      its
      Subsidiaries or otherwise, but excluding, in any event, any such increase in
      the
      Company’s Obligations to any one or more Secured Creditors to the extent that,
      after giving effect thereto and to any reductions associated or occurring
      substantially concurrently with such increase, the aggregate amount of the
      Company’s Obligations to such Secured Creditors would exceed the aggregate
      amount of such Obligations to such Secured Creditors stated to be subject to
      the
      priorities of Section 2 hereof); 

     

    (c) Any
      taking, exchange, surrender, release or non-perfection of any lien or security
      interest in the Collateral, or any other collateral, or any taking, release,
      supplement, amendment or other modification or waiver of or consent to departure
      from any Guaranty, or any other guaranty, for all or any of the Obligations,
      or
      any settlement or compromise of any of such Obligations; 

     

    (d) Any
      manner of application of the Collateral, or any other collateral, or proceeds
      thereof, to all or any of the Obligations of the Company secured or guaranteed
      by the Security Documents, or any manner of sale or other disposition of any
      Collateral or such other collateral or any other assets of the Company;

     

    (e) Any
      exercise or failure to exercise any rights by or against any Secured Creditor;
      

     

    (f) Any
      change, restructuring or termination of the corporate structure of the Company
      or any of its Subsidiaries (including, without limitation, Acura Pharmaceutical
      Technologies, Inc. and Axiom Pharmaceutical Corporation); or 

     

    (g) Any
      other
      circumstance (including, without limitation, any statute of limitations) that
      might otherwise constitute a defense available to, or a discharge of, any
      Grantor, any Guarantor, any borrower, any Secured Creditor or any other secured
      creditor (irrespective of such creditor being subordinated whether in priority
      of its liens on or security interest in collateral, in right of payment or
      otherwise). 

     

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

    This
      Agreement shall continue to be effective or be reinstated, as the case may
      be,
      if at any time any payment of any Obligation is rescinded or must otherwise
      be
      returned by any Secured Creditor upon the initiation of any Bankruptcy
      Proceedings against any Grantor, or otherwise, all as though such payment had
      not been made. 

     

    SECTION 9.  Appointment
      of Collateral Agents.
      In case
      of the pendency of any Bankruptcy Proceeding or other judicial proceeding
      relative to any Grantor or Guarantor, the Agent shall be entitled and empowered,
      by intervention in such proceeding or otherwise, (a) to file and prove a claim
      for the whole amount of the Obligations and other amounts due under the
      Transaction Documents or this Agreement and to file such other papers or
      documents as may be necessary or advisable in order to have such claims and
      amounts due allowed in such Bankruptcy Proceeding or judicial proceeding, and
      (b) to collect and receive any moneys or other property payable or deliverable
      on any such claims or other amounts due and to distribute the same in accordance
      with the provisions hereof. Nothing in this paragraph shall be deemed to
      authorize the Agent to authorize or consent to or accept or adopt on behalf
      of
      any 2005 Lender any plan or reorganization, arrangement, adjustment or
      composition affecting the Obligations or other amounts due under the Transaction
      Documents or this Agreement, or to authorize the Agent to vote in respect of
      the
      Obligations or other amounts due in any such Bankruptcy Proceeding or judicial
      proceeding. 

     

    SECTION 10.  Representations
      and Warranties.    Each
      of the Watson Holders, the June 2005 Lenders, the September 2005 Lenders, the
      November 2005 Lenders and the January 2006 Lenders represents and warrants
      to
      the other Watson Holders, June 2005 Lenders, September 2005 Lenders, November
      2005 Lenders and January 2006 Lenders party hereto as follows: 

     

    (a) (i)  This
      Agreement has been duly executed and delivered by its duly authorized officer
      and constitutes its legal, valid and binding obligation, enforceable against
      it
      in accordance with the terms hereof; and (ii) the execution, delivery and
      performance by it of this Agreement have been duly authorized by all necessary
      corporate or partnership action, as the case may be, and do not and will not
      (A)
      violate any provision of any law, rule or regulation having applicability to
      it
      or of its (x) charter or articles of association or by-laws or (y) limited
      partnership agreement, as the case may be, (B) result in a breach of or
      constitute a default or an event of default (or any event which, with the giving
      of notice, the lapse of time, or both, would constitute an event of default)
      under any indenture or loan or credit agreement or any other material agreement,
      lease or instrument to which it is a party, or (C) require the consent or
      approval of any governmental authority or arbitrator; 

     

    (b) Each
      of
      the Watson Holders represents and warrants that it has not heretofore
      transferred or assigned its lien on and security interest in any Collateral
      under the Watson Company Security Documents or the Watson Guarantor Security
      Documents; 

     

    
      
        
        

      

      
        25

        
          

        

      

      
        
        

      

    

    (c) Each
      of
      the June 2005 Lenders represents and warrants that it has not heretofore
      transferred or assigned its lien on and security interest in any Collateral
      under the June 2005 Company Security Documents or the June 2005 Guarantor
      Security Documents; and 

     

    (d) Each
      of
      the September 2005 Lenders represents and warrants that it has not heretofore
      transferred or assigned its lien on and security interest in any Collateral
      under the September 2005 Company Security Documents or the September 2005
      Guarantor Security Documents.

     

    (e) Each
      of
      the November 2005 Lenders represents and warrants that it has not heretofore
      transferred or assigned its lien on and security interest in any Collateral
      under the November 2005 Company Security Documents or the November 2005
      Guarantor Security Documents; and 

     

    SECTION 11.  Assignments.    (a)  No
      party hereto shall assign its rights hereunder or any interest herein or any
      of
      its rights or interests pursuant to the respective Security Documents made
      by it
      or in its favor, or any of its obligations hereunder or thereunder, to any
      other
      Person (i) without the prior written consent of the Senior Secured Parties
      holding a majority of the amount of the Obligations to such Senior Secured
      Parties and (ii) in compliance with Section 11(b) below. 

     

    (b) In
      the
      event of any assignment of any Security Document by any party hereto or by
      any
      successor or assignee of any party hereto or by any other party which may now
      or
      hereafter have any rights, title or interest in such Security Document,
      respectively, the terms of such assignment shall provide that, and the assigned
      Security Document shall bear a legend to the effect that (i) all provisions
      of
      such agreement, including provisions relating to the assignment thereof, shall
      be subject to the terms of this Agreement and that in the event of any conflict
      between such agreement and this Agreement, this Agreement shall prevail and
      (ii)
      the assignee of such Security Document shall be bound by all duties and
      obligations of the assignor of such Security Document under this
      Agreement.

     

    (c) Notwithstanding
      anything to the contrary in this Agreement, each party hereto acknowledges
      the
      assignment before the date hereof by Watson to the Watson Holders (and/or the
      Agent) of all of Watson’s rights and interests under the Watson Company Security
      Documents, the Watson Guarantor Security Documents, the Watson Guaranty, the
      Watson Loan Agreement, the Watson Term Loan and the Watson Note. 

     

    SECTION 12.  Continuing
      Agreement; Assignments of Obligations.    (a)  This
      Agreement shall remain in full force and effect until the date on which all
      Obligations shall have been indefeasibly paid in full and no Obligations are
      outstanding. 

     

    (b) This
      Agreement shall be binding upon, and inure to the benefit of and be enforceable
      by, each party hereto and its successors, permitted transferees and assigns.
      

     

    (c) Without
      limiting the generality of Section 12(b) above, except as otherwise provided
      in
      Section 11, nothing in this Agreement shall preclude any Secured Creditor from
      assigning or otherwise transferring all or any porting of its rights and
      obligations under any Transaction Document to any other Person, and such other
      Person shall thereupon become vested with all the rights in respect thereof
      granted to such Secured Creditor herein or otherwise, in each case as provided
      in the respective Transaction Documents. 

     

    
      
        
        

      

      
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    SECTION 13.  Amendment;
      Modification; Waiver of Documents.    (a)  Except
      as otherwise expressly provided herein, no provision of this Agreement may
      be
      supplemented, amended, or otherwise modified or waived other than by a writing
      signed by the parties hereto holding (i) at least fifty percent (50%) of the
      outstanding principal amount of the January 2006 Notes; (ii) at least fifty
      percent (50%) of the outstanding principal amount under the November 2005 Notes;
      (iii) at least sixty percent (60%) of the outstanding principal amount under
      the
      September 2005 Notes, (iv) at least sixty percent (60%) of the outstanding
      principal amount under the June 2005 Notes, and (v) at least sixty percent
      (60%)
      of the outstanding principal amount under the Watson Note. Without limiting
      the
      generality of the foregoing, the parties expressly acknowledge that no
      amendment, waiver or modification of Sections 2 or 3 of this Agreement shall
      require any consent of any Grantor. Furthermore, except as otherwise expressly
      provided herein, no rights of any Secured Creditor in any item of Collateral
      may
      be amended, supplemented, or otherwise modified (whether by virtue of supplement
      or amendment to or other modification of this Agreement, any Transaction
      Document or otherwise) without the prior written consent of such parties as
      would be sufficient to amend this Agreement pursuant to the first sentence
      of
      this Section 13. Anything herein to the contrary notwithstanding (but except
      as
      otherwise specified in the following sentence), each Secured Creditor may make
      supplements or amendments to, or modifications or waivers of the provisions
      of
      its Transaction Documents in accordance with the terms thereof without the
      prior
      written consent of or notice to any other Person, except for any changes in
      the
      definition of "Company Collateral" or "Guarantor Collateral" (or similar terms)
      set forth therein resulting in increase of the rights of such Secured Creditor
      in such item, which changes in such definitions shall require the prior written
      consent of such parties as would be sufficient to amend this Agreement pursuant
      to the first sentence of this Section 13. 

     

    (b) To
      the
      extent any provision of Section 13(a) or (b) hereof requires the consent of
      any
      Secured Creditor under one or more Security Documents to which such Secured
      Creditor is a party, the effectiveness of such consent shall be determined
      in
      accordance with such Security Documents. 

     

    (c) This
      Agreement supersedes in all respects the November 2005 Subordination Agreement.
      

     

    SECTION 14.  Intercreditor
      Agreement for Benefit of Parties Hereto.    Nothing
      in this Agreement, express or implied, is intended or shall be construed to
      confer upon any person or entity other than the Secured Creditors any right,
      remedy or claim by reason of this Agreement or any covenant, condition or
      stipulation hereof; and the covenants, stipulations and agreements contained
      in
      this Agreement are and shall be for the sole and exclusive benefit of the
      parties hereto, and their respective successors and assigns. 

     

    SECTION 15.  Notices.    All
      notices, demands or other communications given hereunder shall be in writing
      and
      shall be sufficiently given if transmitted by facsimile or delivered either
      personally or by a nationally recognized courier service marked for next
      business day delivery or sent in a sealed envelope by first class mail, postage
      prepaid and either registered or certified, return receipt requested, addressed
      as follows:

     

    
      
        
        

      

      
        27

        
          

        

      

      
        
        

      

    

    if
      to any
      Watson Holder, June 2005 Lender, September 2005 Lender or November 2005 Lender,
      to it as set forth opposite its signature on the signature pages hereto;

     

    if
      to the
      Company, to 616 N. North Court, Palatine, Illinois 60067, fax no. (847)
      705-5399, to the attention of Mr. Andrew D. Reddick, Chief Executive Officer;
      

     

    if
      to the
      Grantors and Guarantors, as applicable to: (i) Acura Pharmaceutical
      Technologies, Inc., c/o the Company at the notice address or fax number above;
      or (ii) Axiom Pharmaceutical Corporation, c/o the Company at the notice address
      or fax number above; 

     

    if
      to any
      future Grantor or Guarantor, at such address given by such Grantor or Guarantor
      for notices to it; and 

     

    or
      to
      such other address with respect to any party hereto as such party may from
      time
      to time notify (as provided above) the other parties hereto. 

     

    Any
      such
      notice, demand or communication shall be deemed to have been given (i) on the
      date of delivery, if delivered personally, (ii) on the date of facsimile
      transmission, receipt confirmed, (iii) one business day after delivery to a
      nationally recognized overnight courier service, if marked for next day delivery
      or (iv) five business days after the date of mailing, if mailed.

     

    SECTION 16.  Individual
      Action.    No
      Secured Creditor may require any other Secured Creditor to take or refrain
      from
      taking any action hereunder or with respect to any of the Collateral, except
      as
      and to the extent expressly set forth in this Agreement. Except as otherwise
      specified herein, no Secured Creditor shall be responsible to the other Secured
      Creditors for any recitals, statements, representations or warranties contained
      in this Agreement, any of the Transaction Documents, or any other agreements
      or
      instruments executed and delivered by any Grantor pursuant to any of the
      Transaction Documents or in any certificate of other document referred to or
      provided for in, or received by either of them under, any of the Transaction
      Documents or for the authenticity, accuracy, completeness, value, validity,
      effectiveness, genuineness, enforceability or sufficiency of any of the
      Transaction Documents or any other document referred to or provided for therein
      or any lien under any Transaction Document, or the perfection of any such lien
      or for any failure by any Grantor to perform any of its Obligations under any
      of
      the Transaction Documents. Each Secured Creditor may employ agents and
      attorneys-in-fact and shall not be responsible, except as to money or securities
      received by it or its authorized agents, for the negligence or misconduct of
      any
      such agents or attorneys-in-fact selected by it with reasonable care. No Secured
      Creditor, and none of its directors, officers, employees or agents shall be
      liable or responsible for any action taken or omitted to be taken by it or
      them
      hereunder or in connection herewith, except for its or their own gross
      negligence or willful misconduct. 

     

    SECTION 17.  Reliance.    In
      acting with respect to this Agreement, each of the Secured Creditors shall
      be
      entitled (a) to rely on any communication believed by it to be genuine and
      to
      have been made, sent or signed by the Person by whom it purports to have been
      made, sent or signed and (b) to rely on the advice or services or opinions
      and
      statements of any professional advisor whose advice or services to it seem
      necessary, expedient or desirable and are given or made in connection with
      this
      Agreement. 

     

    
      
        
        

      

      
        28

        
          

        

      

      
        
        

      

    

    SECTION 18.  No
      Waiver; Remedies.    Except
      as otherwise specified herein, no failure on the part of any Secured Creditor
      to
      exercise and no delay in exercising, any right or remedy hereunder shall operate
      as a waiver thereof, nor shall any single or partial exercise of any right
      or
      remedy hereunder preclude any other or further exercise thereof or the exercise
      of any other right. The rights and remedies herein provided are cumulative
      and
      not exclusive of any remedies provided by law. 

     

    SECTION 19.  Severability.    If
      any provision of this Agreement shall be invalid, illegal or unenforceable,
      the
      validity, legality and enforceability of the remaining provisions shall not
      in
      any way be affected or impaired thereby.

     

    SECTION 20.  Governing
      Law.    This
      Agreement and the rights of the parties hereunder shall be governed in all
      respects by the laws of the State of New York wherein the terms of this
      Agreement were negotiated, excluding to the greatest extent permitted by law
      any
      rule of law that would cause the application of the laws of any jurisdiction
      other than the State of New York.

     

    SECTION 21.  Jurisdiction.    (a)  Each
      of the parties hereto hereby irrevocably and unconditionally submits, for itself
      and its property, to the nonexclusive jurisdiction of any New York State court
      or United States Federal court sitting in New York City, and any appellate
      court
      from any thereof, in any action or proceeding arising our of or relating to
      this
      Agreement or any of the other Transaction Documents to which it is a party,
      or
      for recognition or enforcement of any judgment, and each of the parties hereto
      irrevocably and unconditionally agrees that all claims in respect of any such
      action or proceeding may be heard and determined in any such New York State
      court or, to the fullest extent permitted by law, in such United States Federal
      court. Each of the parties hereto agrees that a final judgment in any such
      action or proceeding shall be conclusive and may be enforced in other
      jurisdictions by suit on the judgment or any other manner provided by law.
      Nothing in this Agreement or any other Transaction Document shall affect any
      right that any party may otherwise have to bring any action or proceeding
      relating to this Agreement or any of the other Transaction Documents in the
      courts of any jurisdiction. 

     

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

     

    SECTION 22.  Waiver
      of Jury Trial.    EACH
      OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY
      IN
      ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR
      OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY TRANSACTION
      DOCUMENT OR THE ACTIONS OF ANY PARTY IN THE NEGOTIATION, ADMINISTRATION,
      PERFORMANCE OR ENFORCEMENT THEREOF.

     

    
      
        
        

      

      
        29

        
          

        

      

      
        
        

      

    

    SECTION 23.  Titles
      and Subtitles.    The
      titles of the articles, sections and subsections of this Agreement are for
      convenience of reference only and are not to be considered in construing this
      Agreement.

     

    SECTION 24.  Counterparts.    This
      Agreement may be executed in any number of counterparts, including by facsimile
      copy, each of which shall be deemed an original, but all of which together
      shall
      constitute one instrument.

     

    SECTION 25.  Entire
      Agreement.    This
      Agreement constitutes the entire agreement between the parties hereto with
      respect to the subject matter hereof and supersedes all prior representations,
      negotiations, writings, memoranda and agreements. 

     

    [Signature
      pages follow]

     

    
      
        
        

      

      
        30

        
          

        

      

      
        
        

      

    

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

     

    
      	 	
              "GRANTORS"

               

              ACURA
                PHARMACEUTICALS, INC.,

              a
                New York corporation

               

               

              /s/
                Peter A. Clemens  

              By:
                Peter A. Clemens

              Its:
                Sr. VP & CFO

            
	 	
              AXIOM
                PHARMACEUTICAL

              CORPORATION,

              a
                Delaware corporation

               

               

              /s/
                Peter A. Clemens   

              By:
                

              Its:
                

            
	 	
              ACURA
                PHARMACEUTICAL

              TECHNOLOGIES,
                INC.,

              an
                Indiana corporation

               

               

              /s/
                Peter A. Clemens   

              By:
                Peter A. Clemens

              Its:
                Sr. VP & CFO

               

            

    

    

    
      
        
        

      

      
        31

        
          

        

      

      
        
        

      

    

    

    
      	
              GALEN
                PARTNERS III, L.P.

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

              610
                Fifth Avenue, 5th
                Fl.

              New
                York, New York 10019

               

               

              /s/
                Bruce F. Wesson  

              By:
                Bruce F. Wesson

              Its:
                General Partner

            	
              ESSEX
                WOODLANDS HEALTH 

              VENTURES
                V, L.P.

              190
                South LaSalle Street, Suite 2800

              Chicago,
                IL 60603

               

               

              /s/
                Immanuel Thangaraj

              By:
                Immanuel Thangaraj

              Its:
                Managing Director

               

            
	
              GALEN
                PARTNERS INTERNATIONAL, III, L.P.

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

              610
                Fifth Avenue, 5th
                Floor

              New
                York, New York 10020

               

               

              /s/
                Bruce F. Wesson 

              By:
                Bruce F. Wesson

              Its:
                General Partner 

            	
              CARE
                CAPITAL INVESTMENTS II, LP

              By:
                Care Capital II, LLC, as general partner

              47
                Hulfish St., Suite 310

              Princeton,
                NJ 08542

               

               

              By:  /s/
                David R. Ramsay

              Name:
                David R. Ramsay

              Title:
                Authorized Signatory

               

            
	
              GALEN
                EMPLOYEE FUND III, L.P.

              By:
                Wesson Enterprises, Inc.

              610
                Fifth Avenue, 5th
                Floor

              New
                York, New York 10020

               

               

               

              /s/
                Bruce F. Wesson  

              By:
                Bruce F. Wesson 

              Its:
                President

            	
              CARE
                CAPITAL OFFSHORE

              INVESTMENTS
                II, LP

              By:
                Care Capital, L.L.C., as general partner

              47
                Hulfish St., Suite 310

              Princeton,
                NJ 08542

               

               

              By: /s/
                David R. Ramsay

              Name:
                David R. Ramsay

              Title:
                Authorized Signatory

            

    

     

    
      
        
        

      

      
        32

        
          

        

      

      
        
        

      

    

     

    
      	
              MICHAEL
                WEISBROT

              1136
                Rock Creek Road

              Gladwyne,
                Pennsylvania 19035

               

              /s/
                Michael Weisbrot   

            	
              SUSAN
                WEISBROT

              1136
                Rock Creek Road

              Gladwyne,
                Pennsylvania 19035

               

              /s/
                Susan Weisbrot   

               

            
	
              JOHN
                E. HEPPE, JR. 

              237
                W. Montgomery Avenue

              Haverford,
                Pennsylvania 19041

               

               

              /s/
                John Heppe, Jr.   

               

            	
              DENNIS
                ADAMS

              120
                Kynlyn Road

              Radnor,
                Pennsylvania 19312

               

               

              /s/
                Dennis Adams   

            
	
              PETER
                STIEGLITZ

              RJ
                Palmer LLC

              156
                West 56th
                Street, 5th
                Floor

              New
                York, New York 10019

               

               

              /s/
                Peter Stieglitz   

               

            	
              GEORGE
                E. BOUDREAU

              222
                Elbow Lane

              Haverford,
                PA 19041

               

               

               

              /s/
                George Boudreau   

               

            
	 	 

    

    

    

    
      
        
        

      

      33Unassociated Document

     

    COMPANY
      GENERAL SECURITY AGREEMENT

     

    This
      Company General Security Agreement (the “Agreement”)
      is
      dated as of January 31, 2006 by and among Acura Pharmaceuticals, Inc., a New
      York corporation with its principal place of business at 616 N. North Court,
      Palatine, Illinois, 60067 (“Debtor”),
      and
      Galen Partners III, L.P., a Delaware limited partnership with its principal
      place of business at 610 Fifth Avenue, Fifth Floor, New York, New York, 10020,
      acting in its capacity as agent for the Lenders, as defined below (the
“Agent”),
      for
      the benefit of the Lenders.

     

     

    PRELIMINARY
      STATEMENTS

     

    Debtor
      has entered into a Loan Agreement of even date herewith (as the same may be
      amended, modified, supplemented or restated from time to time, the “Loan
      Agreement;”
terms
      which are capitalized in this Agreement and not otherwise defined shall have
      the
      meanings ascribed to them in the Loan Agreement) with the Lenders party thereto
      (the “Lenders”).
      The
      Lenders have required, as a condition precedent to the effectiveness of the
      Loan
      Agreement, that the Debtor (a) grant to the Agent, for the ratable benefit
      of
      the Lenders, a security interest in and to the Collateral (as defined in Section
      2.1 below) and (b) execute and deliver this Agreement in order to secure the
      payment and performance by the Debtor of the obligations owing by the Debtor
      to
      the Lenders under the Loan Agreement, the Notes, the other Transaction Documents
      and each of the agreements, documents and instruments delivered by the Debtor
      pursuant thereto or in connection therewith (collectively, the “Obligations”).

     

     

    AGREEMENT

     

    In
      consideration of the premises and in order to induce the Lenders to enter into
      and perform the Loan Agreement, the Debtor hereby agrees as
      follows:

     

    ARTICLE
      1

     

    CREATION
      OF SECURITY INTEREST

     

    1.1  SECURITY
      INTEREST

     

    The
      Debtor hereby pledges, assigns and grants to the Agent a continuing perfected
      lien and security interest having priority over any and all other security
      interests in all of the Debtor’s right, title and interest in and to the
      Collateral (as defined in Section 2.1 below) in order to secure the payment
      and
      performance of all Obligations owing by the Debtor.

     

    1.2  DEBTOR
      REMAINS LIABLE

     

    Anything
      herein to the contrary notwithstanding, (a) the Debtor shall remain liable
      under
      the contracts and agreements included in the Collateral to the extent set forth
      therein to perform all of its duties and obligations thereunder to the same
      extent as if this Agreement had not been executed, (b) the exercise by the
      Agent
      of any of the rights hereunder shall not release the Debtor from any of its
      duties or obligations under the contracts and agreements included in the
      Collateral and (c) neither the Agent nor any Lender shall have any obligation
      or
      liability under the contracts and agreements included in the Collateral by
      reason of this Agreement, the Loan Agreement or any other Transaction Document,
      nor shall the Agent or any Lender be obligated to perform any of the obligations
      or duties of the Debtor thereunder or to take any action to collect or enforce
      any claim for payment assigned hereunder.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    ARTICLE
      2

     

    COLLATERAL

     

    2.1  COLLATERAL

     

    For
      purposes of this Agreement, the term “Collateral”
shall
      mean all of the assets of the Debtor including all of the kinds and types of
      property described in clauses (a) through (h) of this Section 2.1, whether
      now
      owned or hereafter at any time arising, acquired or created by the Debtor and
      wherever located, and includes all replacements, additions, accessions,
      substitutions, repairs, proceeds and products relating thereto or therefrom,
      and
      all documents, ledger sheets and files of the Debtor relating thereto and all
      Proceeds (as defined in Section 2.2 below) of Collateral:

     

    (a)  all
      of
      the Debtor’s accounts, whether now existing or existing in the future, including
      without limitation (i) all accounts receivable (whether or not specifically
      listed on schedules furnished to the Agent), including, without limitation,
      all
      accounts created by or arising from all of the Debtor’s sales of goods or
      rendition of services made under any of the Debtor’s trade names, or through any
      of its divisions, (ii) all unpaid seller’s rights (including rescission,
      replevin, reclamation and stoppage in transit) relating to the foregoing or
      arising therefrom, (iii) all rights to any goods represented by any of the
      foregoing, including returned or repossessed goods, (iv) all reserves and credit
      balances held by the Debtor with respect to any such accounts receivable or
      account debtors, (v) all health-care-insurance receivables, and (vi) all
      guarantees or collateral for any of the foregoing (all of the foregoing property
      and similar property being hereinafter referred to as “Accounts”);

     

    (b)  all
      of
      the Debtor’s inventory, including without limitation (i) all raw materials, work
      in process, parts, components, assemblies, supplies and materials used or
      consumed in the Debtor’s businesses, wherever located and whether in the
      possession of the Debtor or any other Person; (ii) all goods, wares and
      merchandise, finished or unfinished, held for sale or lease or leased or
      furnished or to be furnished under contracts of service, wherever located and
      whether in the possession of the Debtor or any other person or entity; and
      (iii)
      all goods returned to or repossessed by the Debtor (all of the foregoing
      property being hereinafter referred to as “Inventory”);

     

    (c)  all
      of
      the equipment owned or leased by the Debtor, including, without limitation,
      machinery, equipment, office equipment and supplies, computers and related
      equipment, furniture, furnishings, tools, tooling, jigs, dies, fixtures,
      manufacturing implements, fork lifts, trucks, trailers, motor vehicles, and
      other equipment (all of the foregoing property being hereinafter referred to
      as
“Equipment”);

     

    (d)  all
      of
      the Debtor’s general intangibles (including, without limitation, payment
      intangibles), instruments, securities (including, without limitation, United
      States of America Treasury Bills), credits, claims, demands, documents, letters
      of credit and letter of credit proceeds, documents of title, certificates of
      title, certificates of deposit, warehouse receipts, bills of lading, leases
      which are permitted to be assigned or pledged, deposit accounts, money, tax
      refund claims, and contract rights which are permitted to be assigned or pledged
      (all of the foregoing property being hereinafter referred to as “Intangibles”);

     

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    (e)  all
      of
      the Debtor’s intellectual property, including, without limitation, New Drug
      Applications, Investigatory New Drug Applications, Abbreviated New Drug
      Applications, Alternative New Drug Applications, registrations and quotas as
      issued by the DEA or the Attorney General of the United States pursuant to
      the
      CSA, certifications, permits and approvals of federal and state governmental
      agencies, patents, patent applications, trademarks, trademark applications,
      service marks, service mark applications, trade names, domain names, technical
      knowledge and processes, formal or informal licensing arrangements which are
      permitted to be assigned or pledged, blueprints, technical specifications,
      computer software, programs, databases, copyrights, copyright applications
      and
      all confidential and proprietary information, including, without limitation,
      know-how, trade secrets, manufacturing and production processes and techniques,
      inventions, research and development information, databases and data, including,
      without limitation, technical data, financial and marketing and business data,
      customer lists, supplier lists, pricing and cost information and business and
      marketing plans, and all embodiments thereof, and rights thereto, including,
      without limitation, all of the Debtor’s rights to use the patents, trademarks,
      copyrights, service marks, or other property of the aforesaid nature of other
      Persons now or hereafter licensed to the Debtor, together with the goodwill
      of
      the business symbolized by or connected with the Debtor’s trademarks,
      copyrights, service marks, licenses and the other rights included in this
      Section 2.1(e) (all of the foregoing property being hereinafter referred to
      as
“Intellectual
      Property”);

     

    (f)  all
      interest, dividends, distributions, cash, instruments and other property from
      time to time received, receivable or otherwise distributed in respect of or
      in
      exchange for any or all of the then existing Collateral; 

     

    (g)  all
      deposit accounts, letter-of-credit rights, instruments (including, without
      limitation, promissory notes), investment property and chattel paper;
      and

     

    (h)  all
      of
      the shares of stock or other securities of Acura Pharmaceutical Technologies,
      Inc. (but not shares or securities of Axiom Pharmaceutical Corporation which
      Agent acknowledges will be dissolved, subject to requisite consents), and the
      certificates, if any, representing such shares or other securities, and all
      dividends, distributions, return of capital, cash, instruments and other
      property from time to time received, receivable or otherwise distributed in
      respect of or in exchange for any or all of such shares or securities and all
      subscription warrants, rights or options issued thereon or with respect thereto,
      and all investment property, all, to the extent applicable, as further set
      forth
      in the Stock Pledge Agreement.

     

    2.2  PROCEEDS

     

    For
      purposes of this Agreement, the term “Proceeds”
shall
      include (a) whatever is now or hereafter received by the Debtor upon the sale,
      exchange, collection or other disposition of any item of Collateral, whether
      such proceeds constitute Inventory, Accounts, Intangibles, royalties, payment
      under insurance (whether or not the Agent is the loss payee thereof), or any
      indemnities, warranties or guaranties, payable by reason of loss or damage
      to or
      otherwise with respect to any or the foregoing Collateral, and (b) any such
      items which are now or hereafter acquired by the Debtor with any proceeds of
      Collateral hereunder.

     

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

    ARTICLE
      3

     

    REPRESENTATIONS
      AND WARRANTIES

     

    The
      Debtor represents and warrants as follows:

     

    3.1  ORGANIZATION
      AND EXISTENCE

     

    The
      Debtor is a corporation duly organized, validly existing and in good standing
      under the laws of the State of New York and is qualified to do business in
      such
      other jurisdictions as the nature or conduct of its operations or the ownership
      of its properties require such qualification. The Debtor does not own or lease
      any property or engage in any activity in any jurisdiction that might require
      qualification to do business as a foreign corporation in such jurisdiction
      and
      where the failure to so qualify could reasonably be expected to have a Material
      Adverse Effect or subject the Debtor to a material liability.

     

    3.2  AUTHORIZATION

     

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

     

    (b)  All
      corporate action on the part of the Debtor and its directors and stockholders
      necessary for the authorization, execution,
      delivery and performance by the Debtor of this Agreement and the transactions
      contemplated herein or in any other Transaction Document to which it is a party,
      has been taken.

     

    3.3  PLACES
      OF BUSINESS

     

    The
      Debtor has no places of business, or warehouses in which it leases space, other
      than those set forth on Section
      3.3 of Schedule A,
      a copy
      of which is attached hereto and made a part hereof (“Schedule
      A”).

     

    3.4  LOCATION
      OF COLLATERAL

     

    Except
      for the movement of Collateral from time to time from one place of business
      or
      warehouse listed on Section
      3.3 of Schedule A
      to
      another place of business or warehouse listed on Section
      3.3 of Schedule A,
      the
      Collateral is located at the Debtor’s chief executive office or other places of
      business or warehouses listed on Section
      3.3 of Schedule A,
      and not
      at any other location.

     

    3.5  RESTRICTIONS
      ON COLLATERAL DISPOSITION

     

    Except
      for any restrictions imposed under the Watson Security Agreement, the June
      Bridge Loan Security Agreement, the September Bridge Loan Security Agreement
      and
      the November Bridge Loan Security Agreement (each as hereinafter defined),
      none
      of the Collateral is subject to contractual obligations that may restrict or
      inhibit the Agent’s rights or ability to sell or dispose of the Collateral or
      any part thereof after the occurrence of an Event of Default.

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

    3.6  STATUS
      OF ACCOUNTS

     

    Each
      Account is based on an actual and bona fide rendition of services or sale of
      goods or products to customers, made by the Debtor in the ordinary course of
      its
      business. The Accounts created are the Debtor’s exclusive property and are not
      and shall not be subject to any lien, consignment arrangement, encumbrance,
      security interest or financing statement whatsoever, except (i) the lien in
      favor of the holders of the Senior Note under the Watson Term Loan and the
      documents executed in connection therewith, including, without limitation,
      the
      Watson Security Agreement dated as of March 29, 2000 (the “Watson
      Security Agreement”);
      (ii)
      the lien in favor of the holders of the Secured Promissory Notes issued in
      connection with a bridge loan (the “June
      Bridge Loan”)
      extended
      pursuant to the terms of that certain Loan Agreement, dated June 22, 2005 and
      the documents executed in connection therewith, including, without limitation,
      the Guarantors Security Agreement dated June 22, 2005 (the “June
      Bridge Loan Security Agreement”);
      (iii)
      the lien in favor of the holders of the Secured Promissory Notes issued in
      connection with a bridge loan (the “September
      Bridge Loan”)
      extended
      pursuant to the terms of that certain Loan Agreement, dated September 16, 2005
      and the documents executed in connection therewith, including, without
      limitation, the Guarantors Security Agreement dated September 16, 2005 (the
      “September
      Bridge Loan Security Agreement”);
      and
      (iv) the lien in favor of the holders of the Secured Promissory Notes issued
      in
      connection with a bridge loan (the “November
      Bridge Loan”)
      extended
      pursuant to the terms of that certain Loan Agreement, dated November 9, 2005
      and
      the documents executed in connection therewith, including, without limitation,
      the Guarantors Security Agreement dated November 9, 2005 (the “November
      Bridge Loan Security Agreement”)
      . To
      the best knowledge of the Debtor, the Debtor’s customers have accepted the
      goods, products and services and owe and are obligated to pay the full amounts
      stated in the invoices according to their terms, without any dispute, offset,
      defense or counterclaim.

     

    3.7  COPYRIGHTS,
      TRADEMARKS AND PATENTS

     

    (a)  The
      Debtor owns outright all of the Intellectual Property Rights listed on
Section
      4.12
      of the
      Schedule of Exceptions attached to the Loan Agreement free and clear of all
      liens and encumbrances except for the Permitted Liens and pays no royalty to
      anyone under or with respect to any of them. 

     

    (b)  The
      Debtor has not licensed to anyone the use of any of such Intellectual Property
      Rights and has no knowledge of the infringing use by the Debtor or any Guarantor
      of any Intellectual Property Rights of third parties.

     

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

     

    (d)  The
      Debtor has made or performed all filings, recordings and other acts and has
      paid
      all required fees and taxes to maintain and protect its interest in each and
      every item of Intellectual Property in full force and effect throughout the
      world, and to protect and maintain its interest therein including, without
      limitation, recordations of any of its interests in patents and trademarks
      with
      the U.S. Patent and Trademark Office and in corresponding national and
      international patent offices, and recordation of any of its interests in any
      copyrights with the U.S. Copyright Office and in corresponding national and
      international copyright offices. The Debtor has used proper statutory notice
      in
      connection with its use of each patent, trademark and copyright.

     

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

    3.8  INVENTORY

     

    All
      Inventory of the Debtor consists of a quality and quantity usable and salable
      in
      the ordinary course of business, except for obsolete items and items of
      below-standard quality, all of which have been or will be written off or written
      down to net realizable value on the consolidated balance sheet of the Debtor
      and
      its Subsidiaries as of March 31, 2005. The quantities of each type of Inventory
      (whether raw materials, work-in-process, or finished goods) are not excessive,
      but are reasonable and warranted in the present circumstances of the
      Debtor.

     

    3.9  OWNERSHIP

     

    The
      Debtor is the legal and beneficial owner of its Collateral free and clear of
      any
      lien, claim, option or right of others, except for the security interest created
      under this Agreement, the Watson Security Agreement, the June Bridge Loan
      Security Agreement, the September Bridge Loan Security Agreement and the
      November Bridge Loan Security Agreement. No effective financing statement or
      other instrument similar in effect covering all or any part of such Collateral
      or listing the Debtor or any trade name of the Debtor is on file in any
      recording office, except such as may have been filed relating to the Watson
      Term
      Loan, the June Bridge Loan, the September Bridge Loan and the November Bridge
      Loan. The Agent has, for the benefit of the Lenders, a valid and perfected
      security interest in the Collateral which security interest has priority over
      any and all other security interests in such Collateral.

     

    ARTICLE
      4

     

    COVENANTS

     

    The
      Debtor agrees as follows:

     

    4.1  DEFEND
      AGAINST CLAIMS

     

    The
      Debtor will defend the Collateral against all claims and demands of all Persons
      at any time claiming the same or any interest therein unless both the Agent
      and
      the Debtor determine that the claim or demand is not material and that,
      consequently, such defense would not be consistent with good business judgment.
      The Debtor will not permit any lien notices with respect to the Collateral
      or
      any portion thereof to exist or be on file in any public office except for
      those
      in favor of the Agent and those permitted under the terms of the Loan
      Agreement.

     

    4.2  CHANGE
      IN COLLATERAL LOCATION

     

    The
      Debtor will not (a) change its corporate name, (b) change the location of its
      chief executive office or establish any place of business other than those
      specified in Section
      3.3 of Schedule A,
      or (c)
      move or permit movement of the Collateral from the locations specified therein
      except from one such location to another such location, unless in each case
      the
      Debtor shall have given the Agent at least thirty (30) days prior written notice
      thereof, and shall have, in advance, executed and caused to be filed or
      delivered to the Agent any financing statements or other documents required
      by
      the Agent to perfect the security interest of the Agent in the Collateral in
      accordance with Section 4.3 of this Agreement, all in form and substance
      satisfactory to the Agent.

     

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

    4.3  ADDITIONAL
      FINANCING STATEMENTS

     

    Promptly
      upon the reasonable request of the Agent, the Debtor will execute and deliver
      or
      use its best efforts to procure any document, give any notices, execute and
      file
      any financing statements, mortgages or other documents, all in form and
      substance satisfactory to the Agent, mark any chattel paper, deliver any chattel
      paper or instruments to the Agent and take any other actions that are necessary
      or, in the opinion of the Agent, desirable to perfect or continue the perfection
      and the first priority of the Agent’s security interest in the Collateral, to
      protect the Collateral against the rights, claims, or interests of third
      persons, or to effect the purposes of this Agreement. The Debtor will pay the
      costs incurred in connection with any of the foregoing.

     

    4.4  ADDITIONAL
      LIENS; TRANSFERS

     

    Without
      the prior written consent of the Agent, the Debtor will not, in any way,
      hypothecate or create or permit to exist any lien, security interest, charge
      or
      encumbrance on or other interest in the Collateral, other than those permitted
      under the terms of the Loan Agreement and the liens in favor of the holders
      of
      the Senior Note pursuant to (i) the Watson Term Loan and documents relative
      thereto; (ii) the June Bridge Loan and the documents relative thereto; (iii)
      the
      September Bridge Loan and the documents relative thereto; and (iv) the November
      Bridge Loan and the documents relative thereto, and the Debtor will not sell,
      transfer, assign, pledge, collaterally assign, exchange or otherwise dispose
      of
      the Collateral, other than the sale of Inventory in the ordinary course of
      business and the sale of obsolete or worn out Equipment. Notwithstanding the
      foregoing, if the proceeds of any such sale consist of notes, instruments,
      documents of title, letters of credit or chattel paper, such proceeds shall
      be
      promptly delivered to the Agent to be held as Collateral hereunder. If the
      Collateral, or any part thereof, is sold, transferred, assigned, exchanged,
      or
      otherwise disposed of in violation of these provisions, the security interest
      of
      the Agent shall continue in such Collateral or part thereof notwithstanding
      such
      sale, transfer, assignment, exchange or other disposition, and the Debtor will
      hold the proceeds thereof for the benefit of the Agent, and promptly transfer
      such proceeds to the Agent in kind.

     

    4.5  CONTRACTUAL
      OBLIGATIONS

     

    The
      Debtor will not enter into any contractual obligations which may restrict or
      inhibit the Agent’s rights or ability to sell or otherwise dispose of the
      Collateral or any part thereof after the occurrence or during the continuance
      of
      an Event of Default.

     

    4.6  AGENT’S
      RIGHT TO PROTECT COLLATERAL

     

    Upon
      the
      occurrence or continuance of an Event of Default, the Agent shall have the
      right
      at any time to make any payments and do any other acts the Agent may deem
      necessary to protect the security interests of the Lenders in the Collateral,
      including, without limitation, the rights to pay, purchase, contest or
      compromise any encumbrance, charge or lien which, in the reasonable judgment
      of
      the Agent, appears to be prior to or superior to the security interests granted
      hereunder, and appear in and defend any action or proceeding purporting to
      affect its security interests in, or the value of, the Collateral. The Debtor
      hereby agrees to reimburse the Agent for all payments made and expenses incurred
      under this Agreement including reasonable fees, expenses and disbursements
      of
      attorneys and paralegals acting for the Agent, including any of the foregoing
      payments under, or acts taken to protect its security interests in, the
      Collateral, which amounts shall be secured under this Agreement, and agrees
      it
      shall be bound by any payment made or act taken by the Agent hereunder absent
      the Agent’s gross negligence or willful misconduct. The Agent shall have no
      obligation to make any of the foregoing payments or perform any of the foregoing
      acts.

     

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

    4.7  FURTHER
      OBLIGATIONS WITH RESPECT TO ACCOUNTS

     

    In
      furtherance of the continuing assignment and security interest in the Accounts
      of the Debtor granted pursuant to this Agreement, upon the creation of Accounts,
      upon the Agent’s request, the Debtor will execute and deliver to the Agent in
      such form and manner as the Agent may require, solely for its convenience in
      maintaining records of Collateral, such confirmatory schedules of Accounts,
      and
      other appropriate reports designating, identifying and describing the Accounts
      as the Agent may reasonably require. In addition, upon the Agent’s request, the
      Debtor shall provide the Agent with copies of agreements with, or purchase
      orders from, the customers of the Debtor and copies of invoices to customers,
      proof of shipment or delivery and such other documentation and information
      relating to such Accounts and other Collateral as the Agent may reasonably
      require. Furthermore, upon the Agent’s request, the Debtor shall deliver to the
      Agent any documents or certificates of title issued with respect to any property
      included in the Collateral, and any promissory notes, letters of credit or
      instruments related to or otherwise in connection with any property included
      in
      the Collateral, which in any such case came into the possession of the Debtor,
      or shall cause the issuer thereof to deliver any of the same directly to the
      Agent, in each case with any necessary endorsements in favor of the Agent.
      Failure to provide the Agent with any of the foregoing shall in no way affect,
      diminish, modify or otherwise limit the security interests granted herein.
      The
      Debtor hereby authorizes the Agent to regard the Debtor’s printed name or rubber
      stamp signature on assignment schedules or invoices as the equivalent of a
      manual signature by the Debtor’s authorized officers or agents.

     

    4.8  INSURANCE

     

    The
      Debtor agrees to maintain public liability insurance, third party property
      damage insurance and replacement value insurance on the Collateral under such
      policies of insurance, with such insurance companies, in such amounts and
      covering such risks as are at all times satisfactory to the Agent in its
      commercially reasonable judgment. All policies covering the Collateral are
      to
      name the Agent as an additional insured and the loss payee in case of loss,
      and
      are to contain such other provisions as the Agent may reasonably require to
      fully protect the Agent’s interest in the Collateral and to any payments to be
      made under such policies. Without limiting the generality of the foregoing,
      all
      such policies shall contain standard lender’s loss payable clauses in favor of
      the Agent and shall provide that the same may not be cancelled, terminated
      or
      revised without giving the Agent at least 30 days prior written notice of such
      cancellation, termination or revision. Proceeds of such insurance policy or
      policies will be applied to the Obligations unless written consent to the
      contrary is obtained from the Agent. The Debtor will furnish the Agent with
      certificates of insurance or such other evidence satisfactory to the Agent
      so as
      to evidence compliance with the provisions of this Section.

     

    
      
         

      

      
        8

        
          

        

      

      
         

      

    

    4.9  TAXES

     

    The
      Debtor agrees to pay, when due, all taxes lawfully levied or assessed against
      the Debtor or any of the Collateral before any penalty or interest accrues
      thereon; provided,
      however,
      that,
      unless such taxes have become a federal tax or ERISA lien on any of the assets
      of the Debtor, no such tax need be paid if the same is being contested, in
      good
      faith, by appropriate proceedings promptly instituted and diligently conducted
      and if an adequate reserve or other appropriate provision shall have been made
      therefor as required in order to be in conformity with GAAP.

     

    4.10  COMPLIANCE
      WITH LAWS

     

    The
      Debtor agrees to comply in all material respects with all Legal Requirements
      applicable to the Collateral or any part thereof, or to the operation of its
      business or its assets generally, unless the Debtor contests in good faith,
      by
      appropriate legal, administrative or other proceedings promptly instituted
      and
      diligently conducted, any such Legal Requirements in a reasonable manner and
      in
      good faith. The Debtor agrees to maintain in full force and effect, its
      respective licenses and permits granted by any governmental authority as may
      be
      necessary or advisable for the Debtor to conduct its business in all material
      respects. 

     

    4.11  MAINTENANCE
      OF PROPERTY

     

    The
      Debtor agrees to keep all property useful and necessary to its business in
      good
      working order and condition (ordinary wear and tear excepted) and not to commit
      or suffer any waste with respect to any of its properties. Notwithstanding
      anything to the contrary in this Agreement, the dissolution of Axiom
      Pharmaceutical Corporation shall not be a breach of this Agreement.

     

    4.12  ENVIRONMENTAL
      AND OTHER MATTERS

     

    The
      Debtor will conduct its business so as to comply in all respects with all
      environmental, land use, occupational, safety or health Legal Requirements
      in
      all jurisdictions in which it is or may at any time be doing business, except
      to
      the extent that the Debtor is contesting, in good faith by appropriate legal,
      administrative or other proceedings, promptly instituted and diligently
      conducted, any such Legal Requirement; provided,
      further,
      that
      the Debtor shall comply with the order of any court or other governmental
      authority relating to such Legal Requirements unless the Debtor shall currently
      be prosecuting an appeal, proceedings for review or administrative proceedings
      and shall have secured a stay of enforcement or execution or other arrangement
      postponing enforcement or execution pending such appeal, proceedings for review
      or administrative proceedings.

     

    4.13  INTELLECTUAL
      PROPERTY

     

    With
      respect to each item of its Intellectual Property, the Debtor agrees to take,
      at
      its expense, all necessary steps, including, without limitation, in the U.S.
      Patent and Trademark Office, the U.S. Copyright Office and any other
      governmental authority, to (a) maintain the validity and enforceability of
      such
      Intellectual Property and maintain such Intellectual Property in full force
      and
      effect, and (b) pursue the registration and maintenance of each patent,
      trademark, or copyright registration or application, now or hereafter included
      in such Intellectual Property of the Debtor, including, without limitation,
      the
      payment of required fees and taxes, the filing of responses to office actions
      issued by the U.S. Patent and Trademark Office, the U.S. Copyright Office or
      other governmental authorities, the filing of applications for renewal or
      extension, the filing of affidavits under Sections 8 and 15 of the U.S.
      Trademark Act, the filing of divisional, continuation, continuation-in-part,
      reissue and renewal applications or extensions, the payment of maintenance
      fees
      and the participation in interference, reexamination, opposition, cancellation,
      infringement and misappropriation proceedings. The Debtor shall not, without
      the
      prior written consent of the Agent, discontinue use of or otherwise abandon
      any
      Intellectual Property, or abandon any right to file an application for any
      patent, trademark or copyright, unless the Debtor shall have previously
      determined that such use or the pursuit or maintenance of such Intellectual
      Property is no longer desirable in the conduct of the Debtor’s business and that
      the loss thereof would not be reasonably likely to have a Material Adverse
      Effect, in which case, the Debtor will give prompt notice of any such
      abandonment to the Agent.

     

    
      
         

      

      
        9

        
          

        

      

      
         

      

    

    4.14  FURTHER
      ASSURANCES

     

    The
      Debtor shall take all such further actions and execute all such further
      documents and instruments (including, but not limited to, collateral assignments
      of Intellectual Property and Intangibles or any portion thereof) as the Agent
      may at any time reasonably determine in its sole discretion to be necessary
      or
      desirable to further carry out and consummate the transactions contemplated
      by
      the Loan Agreement and the documentation relating thereto, including this
      Agreement, and to perfect or protect the liens (and the priority status thereof)
      of the Agent in the Collateral.

     

    ARTICLE
      5

     

    REMEDIES

     

    5.1  OBTAINING
      COLLATERAL UPON DEFAULT

     

    If
      any
      Event of Default shall have occurred and be continuing, then and in every such
      case, subject to the terms of the Loan Agreement regarding the exercise of
      remedies and any mandatory requirements of applicable law then in effect, the
      Agent, in addition to any rights now or hereafter existing under applicable
      law,
      shall have all rights as a secured creditor under the Uniform Commercial Code
      in
      all relevant jurisdictions and may:

     

    (a)  personally,
      or by agents or attorneys, immediately retake possession of the Collateral
      or
      any part thereof, from the Debtor or any other Person who then has possession
      of
      any part thereof, with or without notice or process of law, and for that purpose
      may enter upon the Debtor’s premises where any of the Collateral is located and
      remove the same and use in connection with such removal any and all services,
      supplies, aids and other facilities of the Debtor;

     

    (b)  instruct
      the obligor or obligors on any agreement, instrument or other obligation
      (including, without limitation, the Accounts) constituting the Collateral to
      make any payment required by the terms of such instrument or agreement directly
      to the Agent;

     

    (c)  withdraw
      all monies, securities and instruments held pursuant to any pledge arrangement
      for application to the Obligations;

     

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

     

    
      
         

      

      
        10

        
          

        

      

      
         

      

    

    (e)  take
      possession of the Collateral or any part thereof, by directing the Debtor in
      writing to deliver the same to the Agent at any place or places designated
      by
      the Agent, in which event the Debtor shall at its own expense:

     

    (1)  forthwith
      cause the same to be moved to the place or places so designated by the Agent
      and
      there delivered to the Agent,

     

    (2)  store
      and
      keep any Collateral so delivered to the Agent at such place or places pending
      further action by the Agent as provided in Section 5.2, and

     

    (3)  while
      the
      Collateral shall be so stored and kept, provide such guards and maintenance
      services as shall be necessary to protect the same and to preserve and maintain
      the Collateral in good condition;

     

    it
      being
      understood that the Debtor’s obligation to so deliver the Collateral is of the
      essence of this Agreement and that, accordingly, upon application to a court
      of
      equity having jurisdiction, the Agent shall be entitled to a decree requiring
      specific performance by the Debtor of said obligation.

     

    5.2  DISPOSITION
      OF COLLATERAL

     

    Any
      Collateral repossessed by the Agent under or pursuant to Section 5.1 and any
      other Collateral whether or not so repossessed by the Agent may be sold,
      assigned, leased or otherwise disposed of under one or more contracts or as
      an
      entirety, and without the necessity of gathering at the place of sale the
      property to be sold, and in general in such manner, at such time or times,
      at
      such place or places and on such terms as the Agent may, in compliance with
      any
      mandatory requirements of applicable law, determine to be commercially
      reasonable. Any of the Collateral may be sold, leased or otherwise disposed
      of,
      in the condition in which the same existed when taken by the Agent or after
      any
      overhaul or repair which the Agent shall determine to be commercially
      reasonable. Any such disposition which shall be a private sale or other private
      proceedings permitted by such requirements shall be made upon not less than
      ten
      (10) days’ written notice to the Debtor specifying the time at which such
      disposition is to be made and the intended sale price or other consideration
      therefor, and shall be subject, for the ten (10) days after the giving of such
      notice, to the right of the Debtor or any nominee of the Debtor to acquire
      the
      Collateral involved at a price or for such other consideration at least equal
      to
      the intended sale price or other consideration so specified. Any such
      disposition which shall be a public sale permitted by such requirements shall
      be
      made upon not less than ten (10) days’ written notice to the Debtor specifying
      the time and place of such sale and, in the absence of applicable requirements
      of law, shall be by public auction (which may, at the option of the Agent,
      be
      subject to reserve), after publication at least once in The
      New York Times
      not less
      than ten (10) days prior to the date of sale. If The
      New York Times
      is not
      then being published, publication may be made in lieu thereof in any newspaper
      then being circulated in the City of New York, New York, as the Agent may elect.
      All requirements of reasonable notice under this Section 5.2 shall be met if
      such notice is mailed, postage prepaid at least ten (10) days before the time
      of
      such sale or disposition, to the Debtor at its address set forth herein or
      such
      other address as the Debtor may have, in writing, provided to the Agent. The
      Agent may, if it deems it reasonable, postpone or adjourn any sale of any
      Collateral from time to time by an announcement at the time and place of the
      sale to be so postponed or adjourned without being required to give a new notice
      of sale. The proceeds realized from the sale of any Collateral shall be applied
      as follows: first, to the reasonable costs, expenses and attorneys’ fees and
      expenses incurred by Agent for collection and for acquisition, completion,
      protection, removal, storage, sale and delivery of the Collateral; second,
      to
      interest due on any of the Obligations and any fees payable under this
      Agreement; and third, to the principal of the Obligations. If any deficiency
      shall arise, the Debtor shall remain liable to Agent and Lenders
      therefor.

     

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

    5.3  POWER
      OF ATTORNEY

     

    The
      Debtor hereby irrevocably authorizes and appoints the Agent, or any Person
      or
      agent the Agent may designate, as the Debtor’s attorney-in-fact, at the Debtor’s
      cost and expense, subject to the terms of the Loan Agreement regarding the
      exercise of remedies, to exercise all of the following powers upon and at any
      time after the occurrence and during the continuance of an Event of Default,
      which powers, being coupled with an interest, shall be irrevocable until all
      of
      the Obligations owing by the Debtor shall have been paid and satisfied in
      full:

     

    (a)  accelerate
      or extend the time of payment, compromise, issue credits, bring suit or
      administer and otherwise collect Accounts or proceeds of any
      Collateral;

     

    (b)  receive,
      open and dispose of all mail addressed to the Debtor and notify postal
      authorities to change the address for delivery thereof to such address as the
      Agent may designate;

     

    (c)  give
      customers indebted on Accounts notice of the Agent’s interest therein, or to
      instruct such customers to make payment directly to the Agent for the Debtor’s
      account;

     

    (d)  convey
      any item of Collateral to any purchaser thereof;

     

    (e)  give
      any
      notices or record any liens under Section 4.3 hereof; and 

     

    (f)  make
      any
      payments or take any acts under Section 4.6 hereof.

     

    The
      Agent’s authority under this 5.3 shall include, without limitation, the
      authority to execute and give receipt for any certificate of ownership or any
      document, transfer title to any item of Collateral, sign the Debtor’s name on
      all financing statements or any other documents deemed necessary or appropriate
      to preserve, protect or perfect the security interest in the Collateral and
      to
      file the same, prepare, file and sign the Debtor’s name on any notice of lien,
      assignment or satisfaction of lien or similar document in connection with any
      Account and prepare, file and sign the Debtor’s name on a proof of claim in
      bankruptcy or similar document against any customer of the Debtor, and to take
      any other actions arising from or incident to the rights, powers and remedies
      granted to the Agent in this Agreement. This power of attorney is coupled with
      an interest and is irrevocable by the Debtor.

     

    5.4  WAIVER
      OF CLAIMS

     

    Except
      as
      otherwise provided in this Agreement, THE DEBTOR HEREBY WAIVES, TO THE EXTENT
      PERMITTED BY APPLICABLE LAW, NOTICE AND JUDICIAL HEARING IN CONNECTION WITH
      THE
      AGENT’S OR ANY LENDER’S TAKING POSSESSION OF OR DISPOSING OF ANY OF THE
      COLLATERAL, INCLUDING, WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICE AND HEARING
      FOR ANY PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT WHICH THE DEBTOR
      WOULD
      OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR
      OF
      ANY STATE, and the Debtor hereby further waives, to the extent permitted by
      law:

     

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

    (a)  all
      damages occasioned by such taking of possession except any damages which are
      the
      direct result of the Agent’s or Lender’s gross negligence or willful
      misconduct;

     

    (b)  all
      other
      requirements as to the time, place and terms of sale or other requirements
      with
      respect to the enforcement of the Agent’s or Lender’s rights hereunder, except
      as expressly provided herein; and

     

    (c)  all
      rights of redemption, appraisement, valuation, stay, extension or moratorium
      now
      or hereafter in force under any applicable law in order to prevent or delay
      the
      enforcement of this Agreement or the absolute sale of the Collateral or any
      portion thereof, and the Debtor, for itself and all who may claim under it,
      insofar as it or they now or hereafter lawfully may, hereby waives the benefit
      of all such laws.

     

    Any
      sale
      of, or the grant of options to purchase, or any other realization upon any
      Collateral shall operate to divest all right, title, interest, claim and demand,
      either at law or in equity, of the Debtor therein and thereto, and shall be
      a
      perpetual bar both at law and in equity against the Debtor and against any
      and
      all persons claiming or attempting to claim the Collateral so sold, optioned
      or
      realized upon, or any part thereof, from, through and under the
      Debtor.

     

    5.5  REMEDIES
      CUMULATIVE

     

    Each
      and
      every right, power and remedy hereby specifically given to the Agent shall
      be in
      addition to every other right, power and remedy specifically given under this
      Agreement, under the Loan Agreement or under other documentation relating
      thereto or now or hereafter existing at law or in equity, or by statute, and
      each and every right, power and remedy whether specifically herein given or
      otherwise existing may be exercised from time to time or simultaneously and
      as
      often and in such order as may be deemed expedient by the Agent. All such
      rights, powers and remedies shall be cumulative and the exercise or the
      beginning of exercise of one shall not be deemed a waiver of the right to
      exercise of any other or others. No delay or omission of the Agent in the
      exercise of any such right, power or remedy and no renewal or extension of
      any
      of the Obligations shall impair any such right, power or remedy or shall be
      construed to be a waiver of any default or Event of Default or any acquiescence
      therein.

     

    ARTICLE
      6

     

    MISCELLANEOUS
      PROVISIONS

     

    6.1  NOTICES

     

    All
      notices, approvals, consents or other communications required or desired to
      be
      given hereunder shall be delivered in person, by facsimile transmission followed
      promptly by first class mail, by a nationally recognized courier service marked
      for next business day delivery or by overnight mail, and delivered if to the
      Agent, then to the attention of Bruce F. Wesson, c/o Galen Partners III, L.P.,
      610 Fifth Avenue, Fifth Floor, New York, New York, 10020, fax no. (212)
      218-4990, with a copy to George N. Abrahams, Esq., c/o Blank Rome, LLP, Chrysler
      Building, 405 Lexington Avenue, New York, New York 10174, fax no. (917)
      332-3763, and if to the Debtor, then to the attention of Mr. Andrew D. Reddick,
      616 N. North Court, Suite 120, Palatine, Illinois 60067, with a copy to John
      P.
      Reilly, Esq., St. John & Wayne, L.L.C., 2 Penn Plaza East, Newark, New
      Jersey, 07105, fax no. (973) 491-3555.

     

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

    6.2  HEADINGS

     

    The
      headings in this Agreement are for purposes of reference only and shall not
      affect the meaning or construction of any provision of this
      Agreement.

     

    6.3  SEVERABILITY

     

    The
      provisions of this Agreement are severable, and if any clause or provision
      shall
      be held invalid or unenforceable in whole or in part in any jurisdiction, then
      such invalidity or unenforceability shall affect, in that jurisdiction only,
      such clause or provision, or part thereof, and shall not in any manner affect
      such clause or provision in any other jurisdiction or any other clause or
      provision of this Agreement in any jurisdiction.

     

    6.4  AMENDMENTS,
      WAIVERS AND CONSENTS

     

    Any
      amendment or waiver of any provision of this Agreement and any consent to any
      departure by the Debtor from any provision of this Agreement shall be effective
      only if made or given in writing signed by the Agent.

     

    6.5  INTERPRETATION
      OF AGREEMENT

     

    All
      terms
      not defined herein or in the Loan Agreement shall have the meaning set forth
      in
      the applicable Uniform Commercial Code. Acceptance of or acquiescence in a
      course of performance rendered under this Agreement shall not be relevant in
      determining the meaning of this Agreement even though the accepting or
      acquiescing party had knowledge of the nature of the performance and opportunity
      for objection.

     

    6.6  CONTINUING
      SECURITY INTEREST

     

    This
      Agreement shall create a continuing security interest in the Collateral and
      shall (a) remain in full force and effect, (b) be binding upon the Debtor,
      and
      its successors and assigns and (b) inure to the benefit of the Agent and its
      successors and assigns.

     

    6.7  REINSTATEMENT

     

    To
      the
      extent permitted by law, this Agreement shall continue to be effective or be
      reinstated if at any time any amount received by the Agent in respect of the
      Obligations owing by the Debtor is rescinded or must otherwise be restored
      or
      returned by the Agent upon the occurrence or during the pendency of any Event
      of
      Default, all as though such payments had not been made.

     

    6.8  SURVIVAL
      OF PROVISIONS

     

    All
      representations, warranties and covenants of the Debtor contained herein shall
      survive the execution and delivery of this Agreement, and shall terminate only
      upon the full and final indefeasible payment and performance by the Debtor
      of
      the Obligations secured hereby.

     

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

    6.9  SETOFF

     

    The
      Agent
      shall have all rights of setoff available at law or in equity.

     

    6.10  POWER
      OF ATTORNEY

     

    In
      addition to the powers granted to the Agent under Section 5.3, the Debtor hereby
      irrevocably authorizes and appoints the Agent, or any Person or agent the Agent
      may designate, as the Debtor’s attorney-in-fact, at the Debtor’s cost and
      expense, to exercise all of the following powers, which being coupled with
      an
      interest, shall be irrevocable until all of the Obligations shall have been
      indefeasibly paid and satisfied in full:

     

    (a)  after
      the
      occurrence of an Event of Default, to receive, take, endorse, sign, assign
      and
      deliver, all in the name of the Agent or the Debtor, any and all checks, notes,
      drafts, and other documents or instruments relating to the Collateral;
      and

     

    (b)  to
      request, at any time from customers indebted on Accounts, verification of
      information concerning the Accounts and the amounts owing thereon.

     

    6.11  INDEMNIFICATION;
      AUTHORITY OF AGENT

     

    Neither
      the Agent or any Lender nor any director, officer, employee, attorney or agent
      of the Agent or any Lender shall be liable to the Debtor for any action taken
      or
      omitted to be taken by it or them hereunder, except for its or their own gross
      negligence or willful misconduct, nor shall the Agent or any Lender be
      responsible for the validity, effectiveness or sufficiency of this Agreement
      or
      of any document or security furnished pursuant hereto. The Agent, the Lenders
      and their respective directors, officers, employees, attorneys and agents shall
      be entitled to rely on any communication, instrument or document reasonably
      believed by it or them to be genuine and correct and to have been signed or
      sent
      by the proper person or persons. The Debtor agrees to indemnify and hold
      harmless the Agent, the Lenders and any other person from and against any and
      all costs, expenses (including reasonable fees, expenses and disbursements
      of
      attorneys and paralegals (including, without duplication, reasonable charges
      of
      inside counsel)), claims or liability incurred by the Agent , any Lender or
      such
      person hereunder, unless such claim or liability shall be due to willful
      misconduct or gross negligence on the part of the Agent, the Lender or such
      person.

     

    6.12  RELEASE;
      TERMINATION OF AGREEMENT

     

    Subject
      to the provisions of Section 6.7 of this Agreement, this Agreement shall
      terminate upon full and final indefeasible payment and performance of all the
      Obligations owing by the Debtor. At such time, the Agent shall, at the request
      of the Debtor, reassign and redeliver to the Debtor all of the Collateral
      hereunder which has not been sold, disposed of, retained or applied by the
      Agent
      in accordance with the terms hereof. Such reassignment and redelivery shall
      be
      without warranty by or recourse to the Agent, except as to the absence of any
      prior assignments by the Agent of its interest in the Collateral, and shall
      be
      at the expense of the Debtor.

     

    
      
         

      

      
        15

        
          

        

      

      
         

      

    

    6.13  COUNTERPARTS

     

    This
      Agreement may be executed in one or more counterparts, including by facsimile
      copy, each of which shall be deemed an original but all of which shall together
      constitute one and the same agreement.

     

    6.14  GOVERNING
      LAW

     

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

     

    6.15  SUBMISSION
      TO JURISDICTION

     

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

     

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

     

    6.16  SERVICE
      OF PROCESS

     

    THE
      DEBTOR HEREBY IRREVOCABLY AGREES THAT SERVICE OF PROCESS IN ANY LEGAL ACTION
      OR
      PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE EFFECTED BY MAILING A COPY
      THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE DEBTOR AT
      ITS
      ADDRESS SET FORTH IN SECTION 6.1 HEREOF. 

     

    6.17  LIMITATION
      OF LIABILITY

     

    THE
      AGENT
      AND THE LENDERS SHALL NOT HAVE ANY LIABILITY TO THE DEBTOR (WHETHER SOUNDING
      IN
      TORT, CONTRACT, OR OTHERWISE) FOR LOSSES SUFFERED BY THE DEBTOR IN CONNECTION
      WITH, ARISING OUT OF, OR IN ANY WAY RELATED TO THE TRANSACTIONS OR RELATIONSHIPS
      CONTEMPLATED BY THIS AGREEMENT, OR ANY ACT, OMISSION OR EVENT OCCURRING IN
      CONNECTION THEREWITH, UNLESS IT IS DETERMINED BY A FINAL AND NONAPPEALABLE
      JUDGMENT OR COURT ORDER BINDING ON THE AGENT OR LENDER, AS APPLICABLE, THAT
      THE
      LOSSES WERE THE RESULT OF ACTS OR OMISSIONS CONSTITUTING GROSS NEGLIGENCE OR
      WILLFUL MISCONDUCT.

     

    
      
         

      

      
        16

        
          

        

      

      
         

      

    

    6.18  DELAYS;
      PARTIAL EXERCISE OF REMEDIES

     

    No
      delay
      or omission of the Agent to exercise any right or remedy hereunder, whether
      before or after the happening of any Event of Default, shall impair any such
      right or shall operate as a waiver thereof or as a waiver of any such Event
      of
      Default. No single or partial exercise by the Agent of any right or remedy
      shall
      preclude any other or further exercise thereof, or preclude any other right
      or
      remedy.

     

    6.19  JURY
      TRIAL

     

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

     

    

    [SIGNATURE
      PAGE TO FOLLOW]

    
      
         

      

      
        17

        
          

        

      

      
         

      

    

    IN
      WITNESS WHEREOF,
      the
      Debtor has caused this Company General Security Agreement to be duly executed
      and delivered as of the date first written above.

     

    
      	 	 	 
	 	ACURA
              PHARMACEUTICALS, INC.
	 
 	 
 	 
 
	 	By:  	/s/ Andrew
              D.
              Reddick
	 	
              
Name:
              Andrew D. Reddick
	 	Title:
              President and Chief Executive Office

    

    

    By
      its
      acceptance hereof, as of the day and year first above written, the Agent agrees
      to be bound by the provisions hereof applicable to it.

     

    
      	 	 	 
	 	GALEN
              PARTNERS III, L.P.
	 
 	 
 	 
 
	 	  	By:
              Claudius, L.L.C, General Partner
	 	610 Fifth Avenue, 5th
              Fl.
	 	New
              York, New York 10019
	 	 
	 	By:/s/
              Bruce F. Wesson 
	 	Name: Bruce F. Wesson, its General
              Partner 

    
      
         

      

      
        18

        
          

        

      

      
         

      

    

    

    SCHEDULE
      A

    

    Section
      3.3  Places
      of Business

    

    616
      N.
      North Court, Suite 120, Palatine, Illinois 60067

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