Document:

Exhibit
      4.2

    THE
      SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
      ACT
      OF 1933 OR ANY APPLICABLE STATE SECURITIES OR “BLUE-SKY” LAWS AND MAY NOT BE
      SOLD, TRANSFERRED, ASSIGNED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF UNLESS
      REGISTERED UNDER SUCH ACT OR UNDER SUCH LAWS, OR PURSUANT TO AN EXEMPTION FROM
      SUCH REGISTRATION.

    

    

    WARRANT
      AGREEMENT

    

    This
      WARRANT AGREEMENT is dated and entered into as of October
      25, 2006,
      by and
      between DISCOVERY LABORATORIES, INC., a Delaware corporation (the “Company”),
      and PHARMABIO DEVELOPMENT INC., a North Carolina corporation, doing business
      as
      NovaQuest (“NovaQuest”). Capitalized terms herein that are not otherwise defined
      shall have the respective meanings set forth in the Loan Agreement (as defined
      below).

    

    WHEREAS,
      the Company and NovaQuest, have entered into the
      Amended
      and Restated Loan Agreement dated
      as of
      December 10, 2001, and amended and restated
      as of
      the date hereof (as amended, the “Loan Agreement”), and other agreements dated
      as of the date hereof; and

    

    WHEREAS,
      the Company desires to grant to NovaQuest the rights set forth in this Warrant
      Agreement;

     

    NOW,
      THEREFORE, for good and valuable consideration, the receipt and sufficiency
      of
      which are hereby acknowledged, the parties, intending to be legally bound,
      agree
      as follows:

    

    1. The
      Warrant.
      The
      Company hereby agrees to issue and sell to NovaQuest, its designees or assigns
      (the “Holder”) up to One Million Five Hundred Thousand (1,500,000) shares (the
“Warrant Shares”) of the Company’s
      common stock, par value $0.001 per share (“Common Stock”), at an exercise price
equal
      to
      Three Dollars
      and Fifty-Eight and Thirteen One-Hundredths Cents ($3.5813) per share (the
“Exercise Price”) (such
      Exercise Price having been calculated as follows: the average of the
      volume-weighted average price (VWAP) (as reported by Bloomberg, L.P.) for the
      ten (10) trading days prior to the date hereof, multiplied by 130%),
      and
      upon the terms and conditions set forth herein.
      The
      Exercise Price and the number of Warrant Shares purchasable upon exercise of
      this Warrant Agreement
      are
      subject to adjustment from time to time as provided in Section 4 of this Warrant
      Agreement. 

     

    2. Expiration
      Date.
      This
      Warrant Agreement, and the Holder’s right to purchase any of the Warrant Shares,
      will expire at 5:00 p.m. Eastern Time on the seventh anniversary of the date
      of
      this Warrant Agreement (the “Expiration Date”).

    

    
      
        
        

      

      
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    3. Exercise
      of this Warrant Agreement.
      The
      Holder may exercise this Warrant Agreement at any time from and after the date
      hereof and prior to the Expiration Date, in whole or in part, as adjusted from
      time to time as provided in Section 4 of this Warrant Agreement, by: (a) the
      surrender of this Warrant Agreement, with the Exercise Form substantially in
      the
      form attached hereto as Annex A properly completed and executed, at the
      principal office of the Company on a Business Day (as defined below), and (b)
      upon payment by (i) the delivery on a Business Day of a certified check or
      official bank check or wire transfer of immediately available funds, payable
      to
      the order of the Company, (ii) cancellation of an amount of indebtedness of
      the
      Company under the Loan Agreement,
      or (iii)
      a combination of (i) and (ii), in an amount equal to the aggregate purchase
      price for the Warrant Shares being purchased upon such exercise. Upon receipt
      thereof by the Company, the Holder will be deemed to be the holder of record
      of
      the Warrant Shares issuable upon such exercise as of the close of business
      on
      the date of such receipt by the Company, and the Company will promptly execute
      or cause to be executed and delivered to the Holder a certificate or
      certificates representing the aggregate number of Warrant Shares specified
      in
      the Exercise Form. If this Warrant Agreement is exercised only in part, the
      Company will, at the time of delivery of said stock certificate or certificates,
      deliver to the Holder a new Warrant Agreement of like tenor evidencing the
      right
      of the Holder to purchase the remaining Warrant Shares then covered by this
      Warrant Agreement. Upon exercise of this Warrant Agreement and payment of the
      purchase price by the Holder, all Warrant Shares deliverable and issued
      hereunder will be duly authorized, duly and validly issued and outstanding,
      fully paid and nonassessable, and free from taxes, liens or charges. “Business
      Day” shall mean any day other than a Saturday, Sunday or legal holiday on which
      banks in North Carolina and New York are open for the conduct of their banking
      business.

    

    4. Certain
      Adjustments.
      The
      Exercise Price at which Warrant Shares may be purchased and the number of
      Warrant Shares to be purchased upon exercise of this Warrant Agreement are
      subject to change or adjustment from time to time as follows:

    

    (a) Merger,
      Sale of Assets, etc.
      If at
      any time while this Warrant Agreement, or any portion hereof, is outstanding
      and
      unexpired there shall be (i) a reorganization (other than a combination,
      reclassification, exchange or subdivision of shares otherwise provided for
      herein), (ii) a merger or consolidation of the Company with or into another
      corporation or entity in which the Company is not the surviving entity, or
      a
      share exchange or reverse triangular merger in which the Company is the
      surviving entity but the shares of the Company’s capital stock outstanding
      immediately prior to the merger or share exchange are exchanged or converted
      by
      virtue of the merger or share exchange into other property, whether in the
      form
      of securities, cash, or otherwise,
      or (iii)
      a sale, lease, license or other transfer of all or substantially all of the
      Company’s properties or assets to any other person or entity, then, as a part of
      such reorganization, merger, consolidation, exchange or transfer, lawful
      provision shall be made so that the Holder shall thereafter be entitled to
      receive upon exercise of this Warrant Agreement, during the period specified
      herein and upon payment of the Exercise Price then in effect, the number of
      shares of stock or other securities or property resulting from such
      reorganization, merger, consolidation, exchange or transfer that a holder of
      the
      shares deliverable upon exercise of this Warrant Agreement would have been
      entitled to receive in such reorganization, merger, consolidation, exchange
      or
      transfer if this Warrant Agreement had been exercised immediately before the
      record date of (or the date of, if no record date is fixed) such reorganization,
      merger, consolidation, exchange or transfer, all subject to further adjustment
      as provided in this Section 4. The foregoing provisions of this Section
      4(a) shall similarly apply to successive reorganizations, consolidations,
      mergers, exchanges and transfers and to the stock or securities of any other
      corporation that are at the time receivable upon the exercise of this Warrant
      Agreement. If the per-share consideration payable to the Holder hereof for
      shares in connection with any such transaction is in a form other than cash
      or
      marketable securities, then the value of such consideration shall be reasonably
      determined in good faith by the Company’s Board of Directors. In all events,
      appropriate adjustment (as reasonably determined in good faith by the Company’s
      Board of Directors) shall be made in the application of the provisions of this
      Warrant Agreement with respect to the rights and interests of the Holder after
      the transaction, to the end that the provisions of this Warrant Agreement shall
      be applicable after that event, as near as reasonably may be, in relation to
      any
      shares or other property deliverable after that event upon exercise of this
      Warrant Agreement.

    

    
      
        
        

      

      
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    (b) Reclassification,
      etc.
      If the
      Company, at any time while this Warrant Agreement, or any portion hereof,
      remains outstanding and unexpired, by reclassification of securities or
      otherwise, shall change any of the securities as to which purchase rights under
      this Warrant Agreement exist into the same or a different number of securities
      of any other class or classes, this Warrant Agreement shall thereafter represent
      the right to acquire such number and kind of securities as the Holder would
      have
      received if this Warrant Agreement had been exercised in full immediately prior
      to such reclassification or other change or immediately prior to the record
      date
      with respect thereto and the Exercise Price therefor shall be appropriately
      adjusted, all subject to further adjustment as provided in this Section 4.
      The
      foregoing provisions of this Section 4(b) shall similarly apply to successive
      reclassifications or other changes.

    

    (c) Split,
      Subdivision or Combination of Shares.
      If the
      Company, at any time while this Warrant Agreement, or any portion hereof,
      remains outstanding and unexpired, shall split, subdivide or combine the
      securities as to which purchase rights under this Warrant Agreement exist,
      into
      a different number of securities of the same class, the Exercise Price for
      such
      securities shall be proportionately decreased in the case of a split or
      subdivision or proportionately increased in the case of a combination. Upon
      each
      adjustment in the Exercise Price pursuant to this subsection, the number of
      shares of such securities purchasable hereunder shall be adjusted, to the
      nearest whole share, to the product obtained by multiplying the number of shares
      purchasable immediately prior to such adjustment in the Exercise Price by a
      fraction, the numerator of which shall be the Exercise Price immediately prior
      to such adjustment and the denominator of which shall be the Exercise Price
      immediately thereafter.

    

    (d) Adjustments
      for Dividends in Stock or Other Securities or Property.
      If
      while this Warrant Agreement, or any portion hereof, remains outstanding and
      unexpired, the holders of the securities as to which purchase rights under
      this
      Warrant Agreement exist at the time shall have received, or, on or after the
      record date fixed for the determination of eligible stockholders, shall have
      become entitled to receive, without payment therefor, other or additional stock
      or other securities or property (other than cash) by way of dividend, then
      and
      in each case, this Warrant Agreement shall represent the right to acquire,
      in
      addition to the number of shares of the security receivable upon exercise of
      this Warrant Agreement and, in addition, without payment of any additional
      consideration therefor, the amount of such other or additional stock or other
      securities or property (other than cash) that such holder would hold on the
      date
      of such exercise had it been the holder of record of the security receivable
      upon exercise of this Warrant Agreement on the date hereof and had thereafter,
      during the period from the date hereof to and including the date of such
      exercise, retained such shares and/or all other additional stock or other
      securities or property (other than cash) available by or to it as aforesaid
      during such period, giving effect to all adjustments called for during such
      period by the provisions of this Section 4.

     

    
      
        
        

      

      
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    (e) Certificate
      as to Adjustments.
      Upon
      the occurrence of each adjustment pursuant to this Section 4, the Company at
      its
      expense shall promptly compute such adjustment in accordance with the terms
      hereof and furnish to each Holder of this Warrant Agreement a certificate signed
      by its Chief Financial Officer setting forth such adjustment and showing in
      detail the event requiring the adjustment, the amount of such adjustment, the
      method by which such adjustment was calculated, the Exercise Price at the time
      in effect, and the number of shares and the amount, if any, of the property
      that
      at the time would be received upon the exercise of this Warrant Agreement,
      together with the facts upon which such adjustment is based. The Company shall,
      upon the reasonable written request of any such Holder, furnish or cause to
      be
      furnished to such Holder a like certificate setting forth: (i) all such previous
      adjustments; (ii) the Exercise Price at the time in effect; and (iii) the number
      of shares and the amount, if any, of other property that at the time would
      be
      received upon the exercise of this Warrant Agreement.

    

    (f) No
      Impairment.
      The
      Company will not, by amendment of its certificate of incorporation or through
      any reorganization, recapitalization, reclassification, transfer of assets,
      consolidation, merger, business combination, dissolution, issuance or sale
      of
      securities or any other voluntary action, avoid or seek to avoid the intent
      of
      this Section 4 or the observance or performance of any of the terms to be
      observed or performed by the Company under this Section 4 or the other terms
      of
      this Warrant Agreement, but will at all times in good faith assist in the
      carrying out of all the provisions of this Section 4 and in the taking of all
      such action as may be necessary or appropriate in order to protect the rights
      of
      the holder of this Warrant Agreement against impairment. In case any event
      shall
      occur as to which the other provisions of this Section 4 are not strictly
      applicable but as to which the failure to make any adjustment would not fairly
      protect the purchase rights represented by this Warrant Agreement in accordance
      with the essential intent and principles hereof, then, in each such case, the
      Board of Directors of the Company shall in good faith determine the adjustment,
      if any, on a basis consistent with the purchase rights represented by this
      Warrant Agreement. Upon such determination, the Company will promptly deliver
      a
      copy thereof to the Holder and shall make the adjustments described
      therein.

    

    (g) No
      Adjustment.
      No
      adjustment in the Exercise Price shall be required unless such adjustment would
      require an increase or decrease of at least
      $0.05
      per
      share of
      Common Stock; provided,
      however,
      that
      any adjustments which by reason of this Section 4(g) are not required to be
      made
      shall be carried forward and taken into account in any subsequent adjustment.
      All calculations under this Section 4 shall be made to the nearest cent or
      to
      the nearest 1/100th
      of a
      share, as the case may be.

    

    5. Fractional
      Shares.
      Upon
      the exercise of this Warrant Agreement, fractional shares may be issued by
      the
      Company, but the Company may, in lieu of issuing such fractional shares, pay
      a
      sum in cash equal to the excess of the fair market value of such fractional
      share (determined in such reasonable manner as may be prescribed by the Board
      of
      Directors of the Company in its discretion) over the proportional part of the
      per share purchase price represented by such fractional share.

    

    
      
        
        

      

      
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    6. Notices
      of Certain Events.

    

    In
      case:

    

    (a)
      the
      Company shall take a record of the holders of its Common Stock (or other stock
      or securities at the time receivable upon the exercise of this Warrant
      Agreement) for the purpose of entitling them to receive any dividend or other
      distribution, or stock subdivision or combination, or any right to subscribe
      for
      or purchase any shares of stock of any class or any other securities, or to
      receive any other right;
      or

    

    (b)
      of
      any reorganization or recapitalization of the Company, any reclassification
      of
      the capital stock of the Company, any consolidation, merger, share exchange
      or
      other business combination of the Company with or into another corporation
      or
      entity, or any sale, lease, license or other transfer of all or substantially
      all of the assets of the Company to another corporation or entity;
      or

     

    (c)
      of
      any voluntary dissolution, liquidation or winding-up of the Company, 

    

    then,
      and
      in each such case, the Company will cause written notice thereof to be delivered
      to the Holder specifying, as the case may be, (i) the date on which a record
      is
      to be taken for the purpose of such dividend, distribution or right, and stating
      the amount and character of such dividend, distribution or right or (ii) the
      date on which such reorganization, recapitalization, reclassification,
      consolidation, merger, share exchange, business combination, transfer,
      dissolution, liquidation or winding-up is to take place, and the time, if any
      is
      to be fixed, as of which the holders of record of Common Stock (or such stock
      or
      securities at the time receivable upon the exercise of this Warrant Agreement)
      shall be entitled to exchange their shares of Common Stock (or such other stock
      or securities) for securities or other property deliverable upon such
      reorganization, reclassification, recapitalization, consolidation, merger,
      share
      exchange, business combination, transfer, dissolution, liquidation or
      winding-up. Such notice shall be delivered at least fifteen (15) Business Days
      prior to the date required to be specified therein pursuant to this Section
      6(c).

    

    7. Reservation
      of Shares; Listing.
      (a) The
      Company will at all times until the date of exercise of this Warrant Agreement
      in full (the “Exercise Date”) reserve and keep available out of its authorized
      but unissued stock, for the purpose of effecting the exercise of this Warrant
      Agreement, such number of its duly authorized shares of capital stock for which
      this Warrant Agreement is exercisable, and such number of shares of any stock
      into which such stock is convertible, if applicable, as will from time to time
      be sufficient to effect the exercise of this Warrant Agreement. The Company
      will
      from time to time take all steps necessary to amend its certificate of
      incorporation to provide at all times prior to the Exercise Date sufficient
      reserves of shares of capital stock issuable upon exercise of this Warrant
      Agreement and the conversion of such stock, if applicable. If the number of
      authorized but unissued shares of capital stock shall not be sufficient to
      effect the exercise the entire amount of this Warrant Agreement on the Exercise
      Date or the conversion of such stock, if applicable, then in addition to such
      other remedies as shall be available to the Holder, the Company shall take
      all
      such corporate action as is necessary to increase its authorized but unissued
      shares of capital stock to such number of shares as shall be sufficient for
      such
      purposes. 

    

    
      
        
        

      

      
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    (b) The
      Company will at all times use its best efforts to keep the Warrant Shares
      authorized for listing on the NASDAQ
      Global Select Market, NASDAQ Global Market (formerly the NASDAQ National Market)
      or the NASDAQ Capital Market (formerly the NASDAQ Small Cap Market),
      or any
      national securities exchange on which its Common Stock is traded.

    

    8. No
      Rights as Stockholder; Limitation of Liability.
      This
      Warrant Agreement, as distinct from the shares for which this Warrant Agreement
      is exercisable, will not entitle the Holder to any of the rights of a
      stockholder of the Company, including without limitation any right to vote
      on or
      consent to or receive notice as a stockholder of the Company, as such, in
      respect of any matters whatsoever. No provision of this Warrant Agreement,
      prior
      to the exercise of this Warrant Agreement, and no mere enumeration herein of
      the
      rights or privileges of the Holder, will give rise to any liability of the
      Holder for the purchase price or as a stockholder of the Company, whether such
      liability is asserted by the Company or by creditors of the
      Company.

    

    9. Transfer
      Restriction.
      Neither
      this Warrant Agreement nor the securities issuable upon exercise hereof have
      been registered under
      the
      Securities Act of 1933,
      as
      amended (the
      “Securities Act”), or the securities or
“blue
      sky” laws
      of
      any state. Neither this Warrant Agreement nor
      the
      securities issuable upon exercise hereof nor any interest or participation
      herein or therein may be sold, assigned, pledged, hypothecated, encumbered
      or in
      any other manner transferred or disposed of except in compliance with the
      Securities Act and the securities laws of each relevant state. Notwithstanding
      anything
      in this
      Warrant Agreement to the contrary,
      the
      Holder
      may
      pledge the
      Warrant Agreement and the Warrant Shares
      in
      connection with bona fide loan transactions in which the
      Holder
      or its
      affiliate is the borrower,
      provided
      that no such pledge shall occur knowingly, after reasonable investigation and
      inquiry, to any person or entity which actively sells, distributes, markets,
      develops, or produces a pharmaceutical product or device which directly competes
      with the Product.

    

    10. Registration
      Rights.

    

    (a) Required
      Registration.
      Not
      later than forty-five (45) days following the date hereof (the “Filing Date”),
      the Company shall prepare and file with the Securities and Exchange Commission
      (“SEC”) a registration statement on Form S-3 (except if the Company is not then
      eligible to use Form S-3, in which case such registration statement shall be
      on
      another appropriate form) (the “Registration Statement”) covering the resale of
      all of the Registrable Securities (as defined below) in an offering to be made
      on a continuous basis pursuant to Rule 415 of the Securities Act. The Company
      shall use its commercially reasonable best efforts to cause such registration
      statement to become effective as soon as practicable and in any event not later
      than ninety (90) days following the date hereof and remain effective for the
      period specified in Section 10(d) below. Subject to any modifications that
      are
      responsive to comments, rules or regulations of the SEC, the Registration
      Statement will include a Plan of Distribution, which shall be no more
      restrictive than that included in the Company’s registration statement on Form
      S-3, SEC File No. 333-121297. For purposes of this Agreement, the term
“Registrable Securities” means the Warrant Shares, together with any securities
      issued or issuable upon any stock split, dividend or other distribution,
      recapitalization or similar event with respect to any Registrable Securities.
      Until such time as the Registration Statement is effective, the Company shall
      not grant any registration rights or other rights to register securities under
      the Securities Act that are senior to the rights of the Holder under this
      Section 10(a) or that have the effect of delaying a sale or limiting the number
      of securities which may be sold by the Holder pursuant to the Registration
      Statement or otherwise adversely affect the rights of the Holder under this
      Section 10(a); provided, however, that the foregoing shall not affect any
      pre-existing rights granted to any persons or entities.

    

    
      
        
        

      

      
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    (b) Registration
      Expenses.
      The
      Company shall pay all Registration Expenses (as defined below) in connection
      with any registration, qualification or compliance hereunder. At any time during
      the ninety (90) days following the effective date of the Registration Statement
      (and provided that the Registration Statement has not been withdrawn, suspended
      or otherwise become not effective), the Company may present to the Holder an
      accounting of its reasonable “Registration
      Expenses
      and,
      within thirty (30) days thereafter, the Holder shall reimburse the Company
      for
      such expenses up to an aggregate amount not to exceed Twenty Thousand Dollars
      ($20,000). “Registration Expenses” shall mean all expenses incurred by the
      Company in complying with the registration provisions herein described,
      including without limitation all registration, qualification, notification
      and
      filing fees, printing expenses, fees and disbursements of counsel and
      accountants for the Company, and blue sky fees and expenses. 

    

    (c) Holder
      Review of Registration Statement.
      Upon
      request received by the Company from the Holder within a reasonable time in
      advance, the Company shall, on or prior to the third trading day prior to the
      filing of the Registration Statement or any related prospectus or any amendment
      or supplement thereto, (i) furnish to the Holder copies of all such documents
      proposed to be filed (including documents incorporated or deemed incorporated
      by
      reference to the extent requested by such person), which documents will be
      subject to the review of the Holder, and (ii) cause its officers and directors,
      counsel and independent certified public accountants to respond to such
      inquiries as shall be necessary, in the reasonable opinion of respective
      counsel, to conduct a reasonable investigation within the meaning of the
      Securities Act.

     

    (d) Certain
      Company Obligations During Effectiveness of Registration
      Statement.
      From
      the date of effectiveness of the Registration Statement, the Company will use
      its best efforts to: (i) keep such registration effective until the earlier
      of
      (A) such date as all of the Registrable Securities have been resold or (B)
      such
      date as all Registrable Securities may be sold pursuant to Rule 144(k) (or
      any
      successor rule) (collectively, the “Effectiveness Period”); (ii) promptly
      prepare and file with the SEC such amendments and supplements to the
      Registration Statement and the prospectus used in connection with the
      Registration Statement as may be necessary to comply with the provisions of
      the
      Securities Act with respect to the disposition of all securities covered by
      the
      Registration Statement; (iii) furnish such number of prospectuses and other
      documents incident thereto, including any amendment of or supplement to the
      prospectus, as the Holder from time to time may reasonably request; (iv) cause
      the Registrable Securities to be quoted or listed on each stock market or stock
      exchange on which the Common Stock of the Company is then quoted or listed;
      (v)
      provide a transfer agent and registrar for all securities registered pursuant
      to
      the Registration Statement and a CUSIP number for all such securities; (vi)
      avoid the issuance of, or, if issued, promptly notify the Holder and obtain
      the
      withdrawal of, any order suspending the effectiveness of a Registration
      Statement; (vii) promptly notify the Holder of the issuance by the SEC or any
      other federal or state governmental authority of any stop order suspending
      the
      effectiveness of the Registration Statement or the initiation of any proceedings
      for that purpose; (viii) promptly notify the Holder of the occurrence of any
      event or passage of time that makes the financial statements included in the
      Registration Statement ineligible for inclusion therein or any statement made
      in
      the Registration Statement or prospectus or any document incorporated or deemed
      to be incorporated therein by reference untrue in any material respect or that
      requires any revisions to the Registration Statement, prospectus or other
      documents so that, in the case of the Registration Statement or the prospectus,
      as the case may be, it will not contain any untrue statement of a material
      fact
      or omit to state any material fact required to be stated therein or necessary
      to
      make the statements therein, in light of the circumstances under which they
      were
      made, not misleading; (ix) promptly furnish to the Holder, without charge,
      at
      least one conformed copy of the Registration Statement and each amendment
      thereto, including financial statements and schedules, all documents
      incorporated or deemed to be incorporated therein by reference to the extent
      requested by such person, and all exhibits to the extent requested by such
      person (including those previously furnished or incorporated by reference)
      promptly after the filing of such documents with the SEC, provided, that if
      such
      documents are available on the Internet free of charge, then the Company instead
      may satisfy the requirement of this Section 10(d)(ix) by promptly notifying
      the
      Holder of the availability
      of such
      documents (other than periodic financial statements, reports of quarterly
      conference calls and press releases);
      and (x)
      file the documents required of the Company and otherwise use its best efforts
      to
      maintain any required blue sky clearance in North Carolina and such other states
      of the United States specified in writing by the Holder; provided, however,
      that
      the Company shall not be required to qualify to do business in any state in
      which it is not now so qualified or has not so consented.

    

    
      
        
        

      

      
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    (e) Suspension
      of Use of Prospectus.
      The
      Holder hereby acknowledges that there may occasionally be times when the Company
      must suspend the use of the prospectus forming a part of the Registration
      Statement until such time as an amendment to the Registration Statement has
      been
      filed by the Company and declared effective by the SEC or until the Company
      has
      amended or supplemented such prospectus. The Holder hereby covenants that it
      will not sell any securities pursuant to said prospectus during the period
      commencing at the time at which the Company gives the Holder notice of the
      suspension of the use of said prospectus and ending at the time the Company
      gives the Holder notice that Holder thereafter may effect sales pursuant to
      said
      prospectus. Notwithstanding anything herein to the contrary, the Company shall
      not suspend use of the prospectus forming a part of the Registration Statement
      by the Holder unless in the good faith opinion of the Company (after
      consultation with its counsel) or its counsel such suspension is required by
      the
      federal securities laws, including without limitation, the rules and regulations
      promulgated thereunder; provided, however, that in the event that such
      suspension is required by the need for an amendment or supplement to the
      Registration Statement or the prospectus forming a part thereof, the Company
      shall use its best efforts to file as soon as practicable such required
      amendments or supplements as shall be necessary for the disposition of the
      Registrable Securities to recommence.

    

    (f) Holder
      Information for Registration Statement.
      As a
      condition to the inclusion of its Registrable Securities, the Holder shall
      furnish to the Company such information regarding the Holder and the
      distribution proposed by the Holder as the Company may reasonably request in
      order to comply with any applicable law or regulation in connection with any
      registration, qualification or compliance referred to in this Section
      10.

    

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

    (g) Indemnification
      and Contribution. 

    

    (1)
      To
      the extent permitted by applicable law, the Company will indemnify and hold
      harmless each seller of Registrable Securities that were registered pursuant
      to
      the Registration Statement, each underwriter of such Registrable Securities
      thereunder and each other person, if any, who controls such seller or
      underwriter within the meaning of Section 5 of the Securities Act, against
      any
      losses, claims, damages or liabilities, joint or several, to which such seller,
      underwriter or controlling person may become subject under the Securities Act
      or
      other applicable federal or state securities or “blue sky” laws, to the extent
      that such losses, claims, damages or liabilities (or actions in respect thereof)
      arise out of or are based upon any untrue statement or alleged untrue statement
      of any material fact contained in the Registration Statement under which such
      Registrable Securities were registered under the Securities Act, any preliminary
      prospectus or final prospectus contained therein, or any amendment or supplement
      thereof, or arise out of or are based upon the omission or alleged omission
      to
      state therein a material fact required to be stated therein or necessary to
      make
      the statements therein not misleading, and will reimburse each such seller,
      each
      such underwriter and each such controlling person for any legal or other
      expenses reasonably incurred by them in connection with investigating or
      defending any such loss, claim, damage, liability or action; provided,
      however,
      that
      the Company will not be liable, to any such indemnitee if and to the extent
      that
      any such loss, claim, damage or liability arises out of or is based upon an
      (i)
      untrue statement or alleged untrue statement or omission or alleged omission
      so
      made in conformity with information furnished by or on behalf of such indemnitee
      in writing specifically for use in such registration statement or prospectus
      or
      (ii) such untrue statement or alleged untrue statement or omission or alleged
      omission was contained in a preliminary or earlier effective prospectus and
      corrected in a final or amended prospectus, and such holder of Registrable
      Securities failed to deliver a copy of the final or amended prospectus at or
      prior to the confirmation of the sale of the Registrable Securities to the
      buyer
      of such Registrable Securities; provided,
      further,
      that
      the indemnity agreement contained in this Section 10(g)(1) shall not apply
      to
      amounts paid in settlement of any such loss, claim, damage, liability or action
      if such settlement is effected without the consent of the Company, which consent
      shall not be unreasonably withheld, provided that such consent shall not be
      required if the settlement shall include as an unconditional term thereof the
      giving by the claimant or plaintiff to such indemnified party of a release
      of
      the Company from all liability in respect of such claim or
      litigation.

    

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    (2) To
      the
      extent permitted by applicable law, each seller of Registrable Securities that
      were registered pursuant to the Registration Statement, severally and not
      jointly, will indemnify and hold harmless the Company, each person, if any,
      who
      controls the Company within the meaning of Section 15 of the Securities Act,
      each officer of the Company who signs the Registration Statement, each director
      of the Company, each underwriter and each person who controls any underwriter
      within the meaning of the Securities Act, against all losses, claims, damages
      or
      liabilities, joint or several, to which the Company or such officer, director,
      underwriter or controlling person may become subject under the Securities Act
      or
      other applicable federal or state securities or “blue sky” laws, to the extent
      that such losses, claims, damages or liabilities (or actions in respect thereof)
      arise out of or are based upon any untrue statement or alleged untrue statement
      of any material fact contained in the Registration Statement under which such
      Registrable Securities were registered under the Securities Act, any preliminary
      prospectus or final prospectus contained therein, or any amendment or supplement
      thereof, or arise out of or are based upon the omission or alleged omission
      to
      state therein a material fact required to be stated therein or necessary to
      make
      the statements therein not misleading, and will reimburse the Company and each
      such officer, director, underwriter and controlling person for any legal or
      other expenses reasonably incurred by them in connection with investigating
      or
      defending any such loss, claim, damage, liability or action; provided,
      however,
      that
      such seller will be liable hereunder in any such case if and only to the extent
      that any such loss, claim, damage or liability arises out of or is based upon
      an
      untrue statement or alleged untrue statement or omission or alleged omission
      made in reliance upon and in conformity with information pertaining to such
      seller, as such, furnished in writing to the Company by or on behalf of such
      seller specifically for use in such registration statement or prospectus, and
      provided,
      further,
      that
      the indemnity agreement contained in this Section 10(g)(2) shall not apply
      to
      amounts paid in settlement of any such loss, claim, damage, liability or action
      if such settlement is effected without the consent of such seller, which consent
      shall not be unreasonably withheld, provided that such consent shall not be
      required if the settlement shall include as an unconditional term thereof the
      giving by the claimant or plaintiff to such indemnified party of a release
      of
      such seller from all liability in respect of such claim or litigation;
provided,
      further,
      that
      the liability of each seller hereunder shall be limited to the net proceeds
      received for the account of such seller from the sale of Registrable Securities
      covered by such registration statement.

    

    (3) Promptly
      after receipt by an indemnified party hereunder of notice of the commencement
      of
      any action, such indemnified party shall, if a claim in respect thereof is
      to be
      made against the indemnifying party hereunder, notify the indemnifying party
      in
      writing thereof, but the omission to so notify the indemnifying party shall
      not
      relieve it from any liability which it may have to such indemnified party other
      than under this Section 10(g) and shall only relieve it from any liability
      which
      it may have to such indemnified party under this Section 10(g) if and to the
      extent the indemnifying party is prejudiced by such omission. In case any such
      action shall be brought against any indemnified party and it shall notify the
      indemnifying party of the commencement thereof, the indemnifying party shall
      be
      entitled to participate in and, to the extent it shall wish, to assume and
      undertake the defense thereof with counsel reasonably satisfactory to such
      indemnified party, and, after notice from the indemnifying party to such
      indemnified party of its election so to assume and undertake the defense
      thereof, the indemnifying party shall not be liable to such indemnified party
      under this Section 10(g) for any legal expenses subsequently incurred by such
      indemnified party in connection with the defense thereof other than reasonable
      costs of investigation and of liaison with counsel so selected, provided,
      however,
      that,
      if the defendants in any such action include both the indemnified party and
      the
      indemnifying party, and the indemnified party shall have reasonably concluded
      that there may be reasonable defenses available to it that are different from
      or
      additional to those available to the indemnifying party or if the interests
      of
      the indemnified party reasonably may be deemed to conflict with the interests
      of
      the indemnifying party, the indemnified party shall have the right to select
      a
      separate counsel and to assume and undertake such legal defenses and otherwise
      to participate in the defense of such action, with the reasonable expenses
      and
      fees of such separate counsel and other expenses related to such participation
      to be reimbursed by the indemnifying party as incurred; provided, further,
      that
      the Company shall not have any reimbursement obligation for the expenses and
      fees of more than one such separate counsel for all indemnitees.

    

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    (4) In
      order
      to provide for just and equitable contribution to joint liability under the
      Securities Act in any case in which either (i) any holder of Registrable
      Securities exercising rights under this Agreement, or any controlling person
      of
      any such holder, makes a claim for indemnification pursuant to this Section
      10(g) but it is judicially determined (by the entry of a final judgment or
      decree by a court of competent jurisdiction and the expiration of time to appeal
      or the denial of the last right of appeal) that such indemnification may not
      be
      enforced in such case notwithstanding the fact that this Section 10(g) provides
      for indemnification in such case, or (ii) contribution under the Securities
      Act
      may be required on the part of any such selling holder or any such controlling
      person in circumstances for which indemnification is provided under this Section
      10(g); then, and in each such case, the Company and such holder will contribute
      to the aggregate losses, claims, damages or liabilities to which they may be
      subject (after contribution from others) in such proportion as is appropriate
      to
      reflect the relative fault of the indemnifying party on the one hand and of
      the
      indemnified party on the other, as well as any other relevant equitable
      considerations. The relative fault of the parties shall be determined by
      reference to, among other things, whether the untrue or alleged untrue statement
      of a material fact or the omission to state a material fact relates to
      information supplied by the indemnifying party or by the indemnified party
      and
      the parties’ relative intent, knowledge, access to information and opportunity
      to correct or prevent such statement or omission; provided,
      however,
      that,
      in any such case, (A) no such holder will be required to contribute any amount
      in excess of the public offering price of all such Registrable Securities
      offered by it pursuant to such registration statement; and (B) no person or
      entity guilty of fraudulent misrepresentation (within the meaning of Section
      11(f) of the Securities Act) will be entitled to contribution from any person
      or
      entity who was not guilty of such fraudulent misrepresentation.

    

    11. Rule
      144 Reporting.
      With a
      view to making available the benefits of certain rules and regulations of the
      SEC that may permit the sale of securities to the public without registration,
      the Company agrees to use
      commercially
      reasonable
      best
      efforts to make and keep public information regarding the Company
      available as contemplated by Rule 144 under the Securities Act and file with
      the
      SEC in a timely manner all reports and other documents required to be
      filed
      by the Company under the Securities Act and the Securities Exchange Act of
      1934,
      as
      amended (the “Exchange Act”),
      and
      furnish a
      written
      report to the Holder upon written request as to the Company’s compliance with
      the reporting requirements of Rule 144 and of the Securities Act and the
      Exchange Act.

    

    12. SEC
      and Other Information.
      So long
      as this Warrant Agreement is in effect, the Company shall, upon written
      request,
      provide to the Holder,
      within
      three
      (3) Business Days of
      receipt of such written request,
      a copy
      of any publicly available forms, reports or other documents filed
      by the
      Company
      with the
      SEC if such documents are not available on the Internet free of charge. If
      for
      any reason at any time the Company is not required to file annual, quarterly
      and
      other periodic reports with the SEC pursuant to the terms of the Exchange Act,
      then the Company shall make available at no charge to the Holder financial
      statements no later than the time they would be filed with the SEC if the
      Company was required to file such annual, quarterly and other periodic
      reports.

    

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    13. Additional
      Provisions.
      (a) The
      Holder represents, by accepting this Warrant Agreement, that it understands
      that
      this Warrant Agreement and any securities obtainable upon exercise of this
      Warrant Agreement have not been registered for sale under federal or state
      securities or “blue sky” laws and are being offered and sold to the Holder
      pursuant to one or more exemptions from the registration requirements of such
      securities laws. In the absence of an effective registration of such securities
      or an exemption therefrom, any certificates for such securities shall bear
      a
      legend substantially similar to the legend set forth on the first page of this
      Warrant Agreement. The Holder understands that it must bear the economic risk
      of
      its investment in this Warrant Agreement and any securities obtainable upon
      exercise of this Warrant Agreement for an indefinite period of time, as this
      Warrant Agreement and such securities have not been registered under federal
      or
      state securities or blue sky laws and therefore cannot be sold unless
      subsequently registered under such laws, unless an exemption from such
      registration is available. 

    

    (b) The
      Holder agrees and acknowledges that this Warrant Agreement, or any portion
      hereof, and any such securities will not be sold, transferred, assigned,
      hypothecated or otherwise disposed of unless (i) a registration statement with
      respect to such transfer is effective under the Securities Act and any
      applicable state securities or blue sky laws or (ii) such sale or transfer
      is
      made pursuant to one or more exemptions from the Securities Act.

    

    (c) The
      Holder represents that it has been afforded (i) the opportunity to ask such
      questions as it has deemed necessary of, and to receive answers from,
      representatives of the Company concerning the terms and conditions of this
      Warrant Agreement or the exercise of this Warrant Agreement and the finance
      operations and business of the Company and (ii) the opportunity to request
      such
      additional information which the Company possesses or can acquire without
      unreasonable effort or expense. Nothing contained in this Section 11(c) shall
      alter, amend or change the Holder’s reliance on the representations, covenants
      or warranties contained herein.

    

    (d) The
      Holder represents that it did not (i) receive or review any advertisement,
      article, notice or other communication published in a newspaper or magazine
      or
      similar media or broadcast over television or radio, whether closed circuit,
      or
      generally available; or (ii) attend any seminar, meeting or investor or other
      conference whose attendees were, to such Holder’s knowledge, invited by any
      general solicitation or general advertising.

    

    (e) The
      Holder represents that it is an “accredited investor” within the meaning of
      Regulation D promulgated under the Act. Such Holder is acquiring this Warrant
      Agreement for its own account and not with a present view to, or for sale in
      connection with, any distribution thereof in violation of the registration
      requirements of the Act.

    

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

    (f) The
      Holder represents that it, either by reason of the Holder’s business or
      financial experience or the business or financial experience of its professional
      advisors (who are unaffiliated with and who are not compensated by the Company
      or any affiliate, finder or selling agent of the Company, directly or
      indirectly), has such sophistication, knowledge and experience in financial
      and
      business matters as to be capable of evaluating the merits and risks of its
      investment in the Company.

    

    (g) The
      Holder represents that it has the ability to bear the economic risks of its
      investment for an indefinite period of time and could afford a complete loss
      of
      its investment.

    

    (h) The
      Holder agrees and acknowledges that the representations and warranties made
      by
      the Holder in this Section 13 shall be deemed also to be made at the time of
      the
      exercise of this Warrant Agreement.

    

    (i) Nothing
      in this Section 13 shall affect in any way the Holder’s obligations under any
      agreement to comply with all applicable securities laws upon resale of the
      Warrant Shares.

    

    14. Miscellaneous.

    

    (a) Amendments
      and Waivers.
      This
      Warrant Agreement and any provision hereof may be amended, changed, waived,
      discharged or terminated only by an instrument in writing signed by the party
      against which enforcement of the same is sought.

    

    (b) Successors
      and Assigns.
      This
      Warrant Agreement is binding upon, and inures to the benefit of, the parties
      and
      their respective successors and assigns, provided that the Holder shall not
      assign or transfer any or all of its rights under this Warrant Agreement,
      knowingly, after reasonable investigation and inquiry, to any person or entity
      which actively sells, distributes, markets, develops, or produces a
      pharmaceutical product or device which directly competes with the Product.
      Any
      assignment or attempted assignment in violation of this Section 14(b) shall
      be
      null and void.

    

    (c) Loss,
      Theft, Destruction or Mutilation.
      Upon
      receipt by the Company of evidence reasonably satisfactory to it that this
      Warrant Agreement has been lost, stolen, destroyed or mutilated, and in the
      case
      of any lost, stolen or destroyed Warrant Agreement, an indemnity reasonably
      satisfactory to the Company, or in the case of a mutilated Warrant Agreement,
      upon surrender and cancellation hereof, the Company will execute and deliver
      in
      the name of the registered holder of this Warrant Agreement, in exchange and
      substitution for the Warrant Agreement so lost, stolen, destroyed or mutilated,
      a new Warrant Agreement of like tenor and amount.

    

    (d) Warrant
      Exchangeable for Different Denominations.
      This
      Warrant Agreement is exchangeable, upon the surrender hereof by the Holder
      at
      the principal office of the Company for new Warrant Agreements of like tenor
      representing in the aggregate the right to purchase the number of shares which
      may be purchased hereunder, each of such new Warrant Agreements to represent
      the
      right to purchase such number of Warrant Shares as shall be designated by said
      Holder hereof at the time of such surrender. 

    

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

    (e) Law
      Governing.
      This
      Warrant Agreement will be governed by, and construed and enforced in accordance
      with, the internal laws of the State of Delaware. The Holder and the Company
      waive their respective rights to a jury trial with respect to any action, claim,
      or other proceeding arising out of any dispute in connection with this Warrant
      Agreement, any rights or obligations hereunder, or the performance of such
      rights and obligations. The Holder and the Company agree that disputes relating
      to this Warrant Agreement shall be subject to the provisions of the Loan
      Agreement entitled “Internal Review” and “Arbitration” set forth in Sections
      8.14 and
      8.15
thereof,
      respectively, after modifying such Sections so that any references to “Loan
      Documents” or the “Agreement” shall mean this Warrant Agreement and any
      references to the “Borrower” or “Lender” shall mean the Company or the Holder,
      respectively.

    

    (f) Entire
      Agreement.
      This
      Warrant Agreement constitutes the full and entire understanding and agreement
      among the parties with regard to the subject matter of this Warrant Agreement,
      and supersedes all prior agreements, understandings, inducements or conditions,
      express or implied, oral or written, with respect to the subject matter of
      this
      Warrant Agreement.

    

    (g) Notices.
      Unless
      otherwise provided herein, all notices, requests, demands and other
      communications required or permitted under this Warrant Agreement shall be
      in
      writing and will be deemed to have been duly made and received: (i) upon
      personal delivery; (ii) three (3) Business Days after deposit with the United
      States Post Office, by registered or certified mail or by first class mail,
      postage prepaid, addressed as set forth below; or (iii) one (1) Business Day
      after deposit with a nationally recognized, overnight courier (for next business
      day delivery), shipping prepaid, addressed as set forth below:

    

    
      	
            	(i)	
              If
                to the Company, then to:

            

    

     

    Discovery
      Laboratories, Inc.

    2600
      Kelly Road, Suite 100

    Warrington,
      Pennsylvania 18976-3622

    Attn:
      Chief Executive Officer and General Counsel

     

    with
      a
      copy to (which shall not constitute notice):

    

    Dickstein
      Shapiro Morin & Oshinsky LLP

    1177
      Avenue of the Americas

    New
      York,
      NY 10036-2714

    Attn:
      Ira
      L. Kotel

     

    
      	
            	(ii)	
              If
                to NovaQuest, then to:

            

    

    

    PharmaBio
      Development Inc. (d/b/a NovaQuest)

    4709
      Creekstone Drive

    Riverbirch
      Building

    Suite
      200

    Durham,
      NC 27703

    Attn:
      President

    

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

    with
      a
      copy to (which shall not constitute notice):

    

    PharmaBio
      Development Inc. (d/b/a NovaQuest)

    4709
      Creekstone Drive

    Riverbirch
      Building

    Suite
      200

    Durham,
      NC 27703

    Attn:
      General Counsel

    

    Either
      party may change the address to which communications are to be sent by giving
      five (5) Business Days’ advance notice of such change of address to the other
      party in conformity with the provisions of this Section 14(g).

    

    (h) Execution;
      Counterparts.
      This
      Warrant Agreement may be executed in counterparts, each of which will be deemed
      to be an original, and all of which will together constitute one and the same
      instrument. The exchange of copies of this Warrant Agreement or amendments
      thereto and of signature pages by facsimile transmission or by email
      transmission in portable digital format, or similar format, shall constitute
      effective execution and delivery of such instrument(s) as to the parties and
      may
      be used in lieu of the original Warrant Agreement or amendment for all purposes.
      Signatures of the parties transmitted by facsimile or by email transmission
      in
      portable digital format, or similar format, shall be deemed to be their original
      signatures for all purposes.

    

    [Rest
      of page intentionally left blank; signatures on following
      page]

     

    
 

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

       

    

    [Signature
      Page to Warrant Agreement]

    

    IN
      WITNESS WHEREOF, the parties have caused this Warrant Agreement to be duly
      executed and delivered as of the day and year first written above.

    

    

     

    

    

    
      	 	DISCOVERY LABORATORIES, INC.
	 	 
	 	 
	 	By: /s/ John G. Cooper
	 	Name: John G. Cooper
	 	
              Title: Executive Vice President and Chief Financial Officer

            
	 	 
	 	 
	 	 
	 	PHARMABIO DEVELOPMENT INC.
	 	(d/b/a NovaQuest)
	 	 
	 	 
	 	By: /s/ Tom Perkins
	 	Name: Tom Perkins
	 	
              Title: Senior Vice President, Corporate
                Development

            

    

    

     

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

    

    ANNEX
      A

    

    

    EXERCISE
      FORM

    

    TO
      BE
      EXECUTED BY THE REGISTERED HOLDER

    TO
      EXERCISE THE ATTACHED WARRANT AGREEMENT OF

    

    DISCOVERY
      LABORATORIES, INC.

    

    

    
 

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

       

    

    SUBSCRIPTION

    

    The
      undersigned, ___________________, pursuant to the provisions of the foregoing
      Warrant Agreement, hereby elects to exercise such Warrant Agreement by agreeing
      to subscribe for and purchase ____________________ shares (the “Warrant Shares”)
      of Common Stock, par value $0.001 per share, of Discovery Laboratories, Inc.
      (the “Company”), and hereby (i) makes payment of $___________ by certified or
      official bank check in payment of the exercise price therefor, and (ii) agrees
      to cancel indebtedness of the Company under the Loan Agreement in an amount
      equal to $___________.

    

    As
      a
      condition to this subscription, the undersigned hereby represents and warrants
      to the Company that the representations and warranties of Section 13 of the
      Warrant Agreement are true and correct as of the date hereof as if they had
      been
      made on such date with respect to the Warrant Shares. The undersigned further
      acknowledges that the sale, transfer, assignment or hypothecation of the Warrant
      Shares to be issued upon exercise of the Warrant Agreement is subject to the
      terms and conditions contained in Sections 4, 9 and 13 of the Warrant
      Agreement.

     

    
      	Dated:_______________________________	Signature:	_______________________________
	 	Address:	_______________________________
	 	 	_______________________________

     

    ASSIGNMENT

    

    FOR
      VALUE
      RECEIVED _______________ hereby sells, assigns and transfers unto
      ____________________ the foregoing Warrant Agreement and all rights evidenced
      thereby, and does irrevocably constitute and appoint _____________________,
      attorney, to transfer said Warrant Agreement on the books of Discovery
      Laboratories, Inc. (the “Company”). As a condition to this assignment, the
      Holder acknowledges that its assignee must deliver a written instrument to
      the
      Company that the representations and warranties of Section 13 of the Warrant
      Agreement are true and correct as of the date hereof as if they had been made
      by
      such assignee on such date.

    
       

      
        	Dated:_______________________________	Signature:	_______________________________
	 	Address:	_______________________________
	 	 	_______________________________

       

    

    PARTIAL
      ASSIGNMENT

    

    FOR
      VALUE
      RECEIVED _______________ hereby assigns and transfers unto ____________________
      the right to purchase _______ shares of the Common Stock, par value $.001 per
      share, of Discovery Laboratories, Inc. (the “Company”), as set forth in the
      foregoing Warrant Agreement, and a proportionate part of said Warrant Agreement
      and the rights evidenced thereby, and does irrevocably constitute and appoint
      ____________________, attorney, to transfer that part of said Warrant Agreement
      on the books of the Company. As a condition to this assignment, the Holder
      acknowledges that its assignee must deliver a written instrument to the
      Company that
      the
      representations and warranties of Section 13 of the Warrant Agreement are true
      and correct as of the date hereof as if they had been made by such assignee
      on
      such date.

     

    
      
        	Dated:_______________________________	Signature:	_______________________________
	 	Address:	_______________________________
	 	 	_______________________________

       

       

      
        
          
          

        

        
          18Exhibit
      10.1

    SECOND
      AMENDED AND RESTATED

    LOAN
      AGREEMENT

    

    THIS
      LOAN
      AGREEMENT (this “Agreement”)
      is
      dated as of December 10, 2001, and amended and restated as of October 25, 2006
      (the “Restatement
      Date”),
      by
      and between DISCOVERY LABORATORIES, INC., a Delaware corporation (“Borrower”),
      and
      PHARMABIO DEVELOPMENT INC., a North Carolina corporation, d/b/a NovaQuest
      (“Lender”).

    

    WHEREAS,
      Borrower and Lender entered into the
      Loan
      Agreement dated
      as
      of
December
      10, 2001 (the “Original
      Date”),
      as
      amended by the Amended and Restated Loan Agreement (the “Amended
      and Restated Loan Agreement”)
      dated
      as of November 3, 2004;

    

    WHEREAS,
      Lender has advanced to Borrower an aggregate principal amount of Eight Million,
      Five Hundred Thousand Dollars ($8,500,000) under the terms of the Amended and
      Restated Loan Agreement, all of which, together with accrued interest in the
      amount of $222,652.78 as of September 30, 2006, remains outstanding and payable
      to Lender as of the Restatement Date (such principal and interest, the
“Loan”);

    

    WHEREAS,
      Borrower and Lender wish to amend and restate the Amended and Restated Loan
      Agreement in its entirety as set forth in this Agreement; and

    

    NOW,
      THEREFORE, for good and valuable consideration, the receipt and sufficiency
      of
      which are hereby acknowledged by the parties, the parties hereby amend and
      restate the Amended and Restated Loan Agreement
      in its
      entirety
      and
      hereby agree as follows:

    

    

    ARTICLE
      I

    DEFINITIONS

    

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

    

    

    ARTICLE
      II

    AMOUNT
      AND TERMS OF LOAN

    

    2.01 Term
      Loan.
      

    

    (a) Subject
      to and upon the terms and conditions set forth herein, Lender agrees to continue
      to make the Loan available to Borrower as of the Restatement Date. Borrower
      acknowledges that the Loan satisfies Lender’s obligation to make available loans
      or advances, and Lender has no obligation under the terms of this Agreement
      to
      make any additional future loans or advances to Borrower.

    

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

    2.02
       
      [Intentionally Omitted.]

    

    2.03 Note.
      Borrower’s obligation to pay the principal of, and interest on, the Loan made by
      Lender shall be evidenced by a single promissory note (the “Note”)
      duly
      executed and delivered by Borrower in the form of Exhibit
      B
      attached
      hereto dated as of the Original Date and amended and restated as of the
      Restatement Date. Any prepayments made by Borrower to Lender shall be recorded
      by Lender and shall be endorsed on the grid attached to the Note.

    

    2.04
       Repayment;
      Interest; Prepayments.
      

    

    (a) Borrower
      shall pay the aggregate outstanding principal amount of the Loan and all accrued
      interest on or before April 30, 2010 (the “Maturity
      Date”),
      unless
      any such
      amount becomes
      due and
      payable sooner pursuant to the provisions of this Agreement. Borrower may prepay
      all or a portion of the Loan at any time and from time to time
      without
      penalty, on the following terms and conditions: (i) Borrower shall give Lender
      at least three (3) Business Days’ prior notice of its intent to prepay and of
      the amount of the prepayment and (ii) each prepayment shall not be less than
      $250,000. Any prepayments shall be credited first to accrued and unpaid interest
      and then to principal.

    

    (b) Interest
      on the Loan shall accrue beginning October 1, 2006, and be payable at a rate
      per
      annum (the “Base
      Rate”)
      equal
      to the Prime Rate in effect from time to time, or, if less, the maximum rate
      permitted by law. Interest shall be calculated on the basis of a 360-day year
      for the actual number of days elapsed. All
      interest shall compound annually and be payable on the Maturity Date.

     

    (c) The
      outstanding principal amount of the Loan and any accrued interest thereon that
      are not paid when due shall accrue interest on a daily basis at the lesser
      of
      (i) three percent (3.00%) in excess of the Base Rate, or (ii) the maximum rate
      permitted by law, such accrual beginning on the date payment is due and
      continuing until the date payment is made in full. All
      such
      interest shall compound as set forth in Section 2.04(b). 

    

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

    

    

    ARTICLE
      III

    CONDITIONS
      PRECEDENT

    

    3.01 Conditions
      Precedent to this
      Agreement.
      The
      obligation of Lender to execute
      and
      deliver
      this
      Agreement
      to
      Borrower
      is
      subject to the conditions precedent that Lender shall have received from
      Borrower each
      of the
      following documents on the Restatement Date: 

    

    (a) The
      Note
      duly executed by Borrower;

    

    (b) A
      Security
      Agreement in a
      form
      acceptable to the parties (the “Security
      Agreement”),
      the
      related financing statement and one or more appropriate instruments to be
      recorded with the United States Patent and Trademark Office, each in
a
      form
      acceptable to the parties, in each case duly executed by Borrower;

    

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    (c) A
      Warrant
      Agreement in a form acceptable to the parties and dated as of the Restatement
      Date (the “Warrant”),
      duly
      executed by Borrower;

    

    (d) Copies
      of
      resolutions of the Board of Directors of Borrower approving this Agreement,
      the
      Note, the Security Agreement, the Warrant and any other documents required
      or
      necessary to consummate the transactions contemplated in this Agreement
      (the Agreement, the Note, and the Security Agreement (including any amendment,
      modification, extension, refinancing, or restructuring thereof) shall be
      referred to, collectively, as the “Loan
      Documents”;
      the
      Loan Documents and the Warrant shall be referred to, collectively, as the
“Transaction
      Documents”),
      certified by an appropriate officer of Borrower; 

    

    (e) A
      certificate of the appropriate officers of Borrower certifying (i) that the
      representations and warranties contained in Article IV are true and correct
      in
      all material respects,
      (ii)
      that
      Borrower has performed, satisfied and complied with, in all material respects,
      all covenants, agreements and conditions required by this Agreement to be
      performed, satisfied or complied with on or prior to the date of this
      Agreement,
      and
      (iii)
      that no
      event has occurred and is continuing, which constitutes an Event of Default
      or
      would
      constitute an Event of Default but for the requirement that notice be given
      or
      time elapse or both;

    

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

    

    (g) A
      subordination agreement in a form acceptable to Lender and executed by Borrower
      and General Electric Capital Corporation.

    

    ARTICLE
      IV

    REPRESENTATIONS
      AND WARRANTIES
      OF
      BORROWER

    

    For
      purposes of this Agreement and the Security Agreement, with respect to Borrower,
      all references to “knowledge”, “knowingly” and similar words should be construed
to
      refer
      to the knowledge of the executive officers of Borrower (including the Chief
      Executive Officer, Chief Financial Officer, General Counsel, and Executive
      Vice
      Presidents or any comparable officer),
      after
      reasonable investigation and inquiry. Borrower
      represents,
      warrants
      and
      covenants
      to
      Lender,
      as of
      the Restatement Date,
      as
      follows:

    

    4.01 Corporate
      Status.
      Borrower is a corporation duly organized, validly existing and in good standing
      under the laws of the State of Delaware, and Borrower is qualified to do
      business as a foreign corporation in each jurisdiction in which qualification
      is
      required, except where failure to so qualify will not violate any provision
      of
      the organizational documents of Borrower, and would not have a material adverse
      effect on the financial condition, properties, business or results of operations
      of Borrower (a “Material
      Adverse Effect”).
      Except for Acute Therapeutics, Inc., a wholly owned subsidiary of Borrower
      that
      is presently inactive
      and has
      no material assets (“ATI”),
      Borrower does not own or control, directly or indirectly, any interest in any
      other corporation, partnership, limited liability company,
      association, or other business entity. Except
      as
      set forth in the SEC Reports, Borrower
      is not a participant in any joint venture, partnership, or similar
      arrangement. Borrower has all requisite corporate power and authority to carry
      on its business as now conducted.

    

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    4.02 Issuance,
      Sale and Delivery of the Securities.
      The
Warrant
      is,
      and
      the
      Warrant Shares, when issued and paid for pursuant to the terms of the Warrant,
      will be,
      duly and
      validly authorized, duly issued and outstanding, fully paid, nonassessable
      and
      free and clear of all pledges, liens, encumbrances and restrictions (other
      than
      restrictions arising under federal or state securities or “blue sky” laws). The
      issuance of the Warrant is
      not,
and
      the
      issuance of
      the
      Warrant Shares by Borrower (hereinafter such securities are sometimes
      collectively referred to as the “Securities”)
      will
      not
      be,
      subject
      to any preemptive or other similar rights. No further approval or authority
      of
      the stockholders or the Board of Directors of Borrower
      will be
      required for the issuance and sale of the Securities to be sold by Borrower
      as
      contemplated herein.

    

    4.03 Due
      Execution, Delivery and Performance of the Agreements.
      Borrower has full legal right, corporate power and authority to enter into
      the
      Transaction Documents and to perform the transactions contemplated under the
      Transaction Documents. The
      Transaction Documents have been duly authorized, executed and delivered by
      Borrower. Except
      as
      set forth herein, the
      making
      and performance of the Transaction Documents by Borrower and the consummation
      of
      the transactions contemplated therein will not result in the creation of any
      lien, charge, security interest or encumbrance upon any assets of Borrower
      pursuant to the terms
      or
      provisions of, or will not conflict with, result in the breach or violation
      of,
      or constitute, either by itself or upon notice or the passage of time or both,
      a
      default under any agreement, mortgage, deed of trust, lease, franchise, license,
      indenture, permit or other instrument to which Borrower is a party or by which
      Borrower or its properties may be bound or affected and in each case which
      would
      have a Material Adverse Effect or violate any statute or any authorization,
      judgment, decree, order, rule or regulation of any court or any regulatory
      body,
      administrative
      agency or other governmental body, applicable to Borrower or any of its
      properties. Except
      for any required notifications or qualifications under the federal and state
      securities or “blue sky” laws and regulations with respect to the issuance of
      the Warrant, the Warrant Shares and the Note, no
      consent,
      approval, authorization or other order of any court, regulatory body,
      administrative agency or other governmental body, or any other party, is
      required for the execution and delivery of the Transaction Documents or the
      consummation in the U.S. of the transactions contemplated thereby.
      The Transaction Documents constitute valid and binding obligations of Borrower,
      enforceable in
      the
      U.S. in
      accordance with their respective terms except as such enforceability may be
      limited by bankruptcy, insolvency, moratorium, reorganization or other similar
      laws affecting the enforcement of creditors’ rights generally and as to
      limitations on the enforcement of the remedy of specific performance and other
      equitable remedies.

    

    4.04 Financial
      Statements and Reports.
      Unless
      available on the Internet free of charge, Borrower has made available to Lender
      true and complete copies of the SEC Reports. As of their respective filing
      dates, the SEC Reports were prepared in all material respects in accordance
      with
      the requirements of the Securities Act or the Exchange Act, as the case may
      be,
      and the rules and regulations of the SEC promulgated thereunder applicable
      to
      such SEC Reports. The SEC Reports, when read as a whole, do not contain any
      untrue statements of a material fact and do not omit to state a material fact
      necessary to make the statements therein, in light of the circumstances under
      which they were made, not misleading. The audited consolidated financial
      statements and unaudited interim financial statements of Borrower included
      in
      the SEC Reports have been prepared in accordance with United States generally
      accepted accounting principles (“GAAP”)
      applied on a consistent basis (except as may be indicated therein or in the
      notes thereto) and fairly present, in all material respects, the financial
      position of Borrower as at the dates thereof and the results of its operations
      and cash flows for the periods then ended subject, in the case of the unaudited
      interim financial statements, to normal year-end adjustments and any other
      adjustments described in such financial statements. Since January 1, 2006,
      Borrower has filed with the SEC on a timely basis, or received a valid extension
      of such time of filing, all forms, reports and documents required to be filed
      by
      it under the Exchange Act. 

    

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

    4.05 No
      Defaults.
      Except
      as to defaults, violations and breaches which individually or in the aggregate
      would not have a Material Adverse Effect, Borrower is not in violation or
      default of any provision of its certificate of incorporation or bylaws, or
      other
      organizational documents, or in breach of or default with respect to any
      provision of any agreement, judgment, decree, order, mortgage, deed of trust,
      lease, franchise, license, indenture, permit or other instrument to which it
      is
      a party or by which it or any of its properties are bound; and there does not
      exist any state of fact which, with notice or lapse of time or both, would
      constitute an event of default or default on the part of Borrower as defined
      in
      such documents, except such defaults which individually or in the aggregate
      would not have a Material Adverse Effect.

    

    4.06 Contracts.
      

    

    (a)
      The
      contracts and agreements of Borrower described in the SEC Reports and in
Schedule
      3(e)(ii)
      and
Schedule
      3(e)(iii)
      of the
      Security Agreement, including without limitation Borrower’s licenses
      and
      options
      for licenses, are in full force and effect as of the Restatement Date and
      Borrower is not, nor to Borrower’s knowledge is any other party, in breach of or
      default under any of such contracts or agreements which would have a Material
      Adverse Effect, except such contracts or agreements as may have expired in
      accordance with their terms. All such contracts and agreements constitute valid
      and binding obligations of Borrower, enforceable in accordance with their
      respective terms except as such enforceability may be limited by bankruptcy,
      insolvency, moratorium, reorganization or other similar laws affecting the
      enforcement of creditors’ rights generally and as to limitations on the
      enforcement of the remedy of specific performance and other equitable
      remedies.

    

    (b)
      Without limiting the generality of Section 4.06(a), Borrower makes the following
      representations and warranties in this Section 4.06(b) regarding (i) the
      Sublicense Agreement dated October 28, 1996 (as in effect on the Restatement
      Date, the “Sublicense”)
      among
      Johnson & Johnson and Ortho Pharmaceutical Corporation, as licensors
      (collectively, “Licensor”),
      and
ATI,
      as
      licensee, and (ii) the Research Funding and Option Agreement dated March 1,
      2000
      (the “Research
      Agreement”)
      between the Scripps Research Institute and Borrower:

    

    (1) Borrower
      is the successor to
      ATI
      under
      the
      Sublicense.

    

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

    (2) The
      Sublicense is in full force and effect, and Borrower is not, nor to Borrower’s
      knowledge is the Licensor, in breach or default under the Sublicense in any
      material respect or in any manner that would permit a party to terminate the
      Sublicense. To Borrower’s knowledge, no event or condition exists or has
      occurred which would permit a party to terminate the Sublicense.
      The Sublicense is a valid and binding agreement, enforceable in accordance
      with
      its terms
      except
      as such enforceability may be limited by bankruptcy, insolvency, moratorium,
      reorganization or other similar laws affecting the enforcement of creditors’
rights generally and as to limitations on the enforcement of the remedy of
      specific performance and other equitable remedies.
      Borrower has not received any notice or other communication from the Licensor
      under the Sublicense regarding any actual, alleged or potential violation,
      breach, default or termination of the Sublicense or any material change in
      the
      rights of Borrower under the Sublicense.

    

    (3) To
      Borrower’s knowledge,
      (x)
      the
      representations and warranties of the Licensor
      under
      Section 12 of the Sublicense are true and correct and (y) the Scripps Agreement
      (as defined in the Sublicense) is in full force and effect.

    

    (4) Borrower
      has achieved all milestones required to be achieved under the Sublicense by
      the
      dates required thereunder (including without limitation under Section 6.2 of
      the
      Sublicense), taking into account any valid and binding extensions obtained
      by
      Borrower.

    

    (5) The
      Research Agreement is not a material contract of Borrower with respect to its
      financial condition, results of operations, prospects, or products. Borrower
      has
      not exercised any option under the Research Agreement.

     

    4.07 No
      Actions.
      Except
      as set forth on Schedule 4.07, there are no legal or governmental actions,
      suits, proceedings, arbitrations or investigations pending or, to Borrower’s
      knowledge, threatened,
      to which
      Borrower is or may be a party or of which property owned, leased or licensed
      by
      Borrower is or may be the subject, or related to environmental or discrimination
      matters, which actions, suits, proceedings or investigations, individually
      or in
      the aggregate, might prevent or might reasonably be expected to have a material
      adverse effect on the transactions contemplated by this Agreement or result
      in a
      material adverse change in the financial condition, properties, business, or
      results of operations of Borrower (a “Material
      Adverse Change”);
      and
      no labor disturbance by the employees of Borrower exists or is imminent, to
      Borrower’s knowledge, which might reasonably be expected to have a Material
      Adverse Effect. Borrower is not a party to or subject to the provisions of
      any
      material injunction, judgment, decree or order of any court, regulatory body
      administrative agency or other governmental body.

    

    4.08 Properties.
      Borrower has good and marketable title to all the properties and assets
      reflected as owned by it in the SEC Reports, subject to no lien, mortgage,
      pledge, charge or encumbrance of any kind except Permitted Liens. Borrower
      holds
      its leased properties under valid and binding leases. Borrower owns, leases
      or
      licenses all such properties necessary for the conduct of its business (as
      described in the SEC Reports).

    

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

    4.09 No
      Material
      Change.
      Except
      as disclosed in the SEC Reports, since June 30, 2006:
      (i)
      Borrower has not incurred any material liabilities or obligations,
      indirect,
      or
      contingent, or entered into any material
      verbal
      or written agreement or other transaction which is not in the ordinary course
      of
      business or which could reasonably be expected to result in a material reduction
      in the future earnings of Borrower; (ii) Borrower has not sustained any material
      loss or interference with its business or properties from fire, flood,
      windstorm, accident or other calamity not covered by insurance; (iii) Borrower
      has not paid or declared any dividends or other distributions with respect
      to
      its capital stock and Borrower is not in default in the payment of principal
      or
      interest on any outstanding debt obligations; (iv) except as disclosed in the
      SEC Reports and on Schedule 4.09, there has not been any change in the capital
      stock of Borrower, other than options issued pursuant to employee equity
      incentive plans or purchase plans approved by Borrower’s Board of Directors
      (including the issuance of capital stock under Borrower’s 401(k) Plan), or
      indebtedness material to Borrower; and (v) except for the operating losses
      and
      negative cash flow Borrower has continued to incur, there has not been any
      Material Adverse Change. 

    

    4.10 Intellectual
      Property.

    

    (a)
       Borrower
      owns or has obtained valid rights to use the Intellectual Property necessary
      for
      the conduct of Borrower’s business (as described in the SEC
      Reports).

    

    (b)
       To
      Borrower’s knowledge: (i) there are no third parties who have any ownership
      rights to any Intellectual Property that is owned by, or has been licensed
      to,
      Borrower for the product indications described in the SEC Reports that would
      preclude Borrower from conducting its business (as described in the SEC
      Reports), except for the ownership rights of the owners of the Intellectual
      Property licensed or optioned by Borrower; (ii) there are currently no sales
      of
      any products that would constitute an infringement by third parties of any
      Intellectual Property owned, licensed or optioned by Borrower; (iii) there
      is no
      pending or threatened action, suit, proceeding or claim by others challenging
      the rights of Borrower in or to any Intellectual Property owned, licensed or
      optioned by Borrower; (iv) there is no pending or threatened action, suit,
      proceeding or claim by others challenging the validity or scope of any
      Intellectual Property owned, licensed or optioned by Borrower; (v) there is
      no
      pending or threatened action, suit, proceeding or claim by others that Borrower
      infringes or otherwise violates any patent, trademark, copyright, trade secret
      or other proprietary right of others; and (vi) Borrower is not subject to any
      judgment, order, writ, injunction or decree of any court or any Federal, state,
      local, foreign or other governmental department, commission, board, bureau,
      agency or instrumentality, domestic or foreign, or any arbitrator, and Borrower
      has not entered into or is a party to any contract which restricts or impairs
      the use of any such Intellectual Property in a manner which would have a
      Material Adverse Effect. 

    

    4.11 Compliance.
      Borrower has been and is in compliance
      with,
      in
      all
      material respects,
      all
      applicable laws, rules, regulations and orders,
      in
      respect
      of the
      conduct of its business and the ownership of its properties, including without
      limitation with respect to the FFDCA, environmental issues,
      and
      taxes and other governmental charges.

    

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

    4.12 Taxes.
      Borrower has filed all federal, state, local and foreign income and other tax
      returns required to be filed by it and has paid or accrued all taxes shown
      as
      due thereon, and, except as set forth on Schedule 4.12, Borrower has no
      knowledge of a tax deficiency which has been or might be asserted or threatened
      against it.

    

    4.13 Insurance.
      Borrower maintains insurance with sound and reputable insurance companies of
      the
      types and in the amounts that Borrower reasonably believes is adequate for
      its
      business, including, but not limited to, insurance covering all real and
      personal property owned or leased by Borrower against all risks customarily
      insured against by similarly situated companies, all of which insurance is
      in
      full force and effect.

    

    4.14 No
      Undisclosed Liabilities.

    

    (a)
       Neither
      Borrower nor any of its subsidiaries has any liabilities, obligations, claims
      or
      losses (whether liquidated or unliquidated, secured or unsecured, absolute,
      accrued, contingent or otherwise) that would be required to be disclosed on
      a
      balance sheet of Borrower or any subsidiary (including the notes thereto) in
      accordance with GAAP and are not disclosed in the SEC Reports other than those
      incurred in the ordinary course of Borrower’s or its subsidiaries’ respective
      businesses since June 30, 2006, and which, individually or in the aggregate,
      do
      not or would not have a Material Adverse Effect.

    

    (b) Set
      forth
      on Schedule
      6.03(e)
      attached
      hereto is a true and complete list and description of all Debt of Borrower
      and
      its subsidiaries outstanding on the Restatement Date.

     

    (c) Set
      forth
      on Schedule
      6.04(i) attached
      hereto is a true and complete list and description of all Liens of Borrower
      and
      its subsidiaries outstanding on the Restatement Date, other
      than Liens existing under Sections 6.04(a), 6.04(b), 6.04(c), 6.04(g) or
      6.04(h).

    

    4.15 No
      Undisclosed Events or Circumstances.
      To
      Borrower’s knowledge, no event or circumstance has occurred or exists with
      respect to Borrower or its subsidiaries or their respective businesses,
      properties, operations or financial condition, which, under applicable law,
      rule
      or regulation, requires public disclosure or announcement by Borrower but which
      has not been so publicly announced or disclosed and which, individually or
      in
      the aggregate, do not or would not have a Material Adverse Effect.

    

    4.16 Disclosure.
      To
      Borrower’s knowledge, as of the Restatement Date, the Transaction Documents
      contain no untrue statement of a material fact or omit to state a material
      fact
      necessary in order to make the statements made herein or therein, in the light
      of the circumstances under which they were made herein or therein, not
      misleading.

    

    4.17 Material
      Non-Public Information.
      Except
      for this Agreement and the transactions contemplated hereby, neither Borrower
      nor its agents have disclosed to Lender any material non-public information
      that, according to applicable law, rule or regulation, should have been
      disclosed publicly by Borrower prior to the Restatement Date but which has
      not
      been so disclosed. 

    

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

    4.18  Fixed
      Assets.
      Set
      forth on Schedule
      4.18
      attached
      hereto is a true and complete list and description, including the book value,
      of
      all material fixed assets of Borrower.

    

    ARTICLE
      V

    REPRESENTATIONS
      AND WARRANTIES OF LENDER

    

    Lender
      represents and warrants to Borrower, as of the Restatement Date as
      follows:

    

    5.01 Corporate
      Status.
      Lender
      is a corporation duly organized, validly existing and in good standing under
      the
      laws of the State of North Carolina. Lender has all requisite corporate power
      and authority to carry on its business as now conducted.

    

    5.02 Due
      Execution, Delivery and Performance of Agreement.
      Lender
      and its Affiliates have full legal right, corporate power and authority to
      enter
      into the Transaction Documents and to perform the transactions contemplated
      thereunder. This Agreement has been duly authorized, executed and delivered
      by
      Lender. This Agreement constitutes the valid and binding obligation of Lender
      enforceable in accordance with its terms. 

    

    5.03 Investment.
      Lender
      is acquiring the Note, the Warrant and the Warrant Shares for Lender’s own
      account, and not with a view to, or for resale in connection with, any
      distribution or public offering thereof within the meaning of the Securities
      Act. Lender acknowledges having access to the SEC Reports. Lender has been
      afforded (i) the opportunity to ask such questions as it has deemed necessary
      of, and to receive answers from, representatives of Borrower concerning the
      business affairs and financial condition of Borrower and (ii) the opportunity
      to
      request such additional documents and information which Borrower possesses
      or
      can acquire without unreasonable effort or expense and has had access to and
      has
      acquired sufficient information about Borrower to reach an informed and
      knowledgeable decision to acquire the Securities to be purchased hereunder.
      Lender, either by reason of its own business or financial experience or the
      business or financial experience of its professional advisors (who are
      unaffiliated with and who are not compensated by Borrower or any Affiliate,
      finder or selling agent of Borrower, directly or indirectly), has such business
      and financial experience as is required to give it the capacity to utilize
      the
      information received, to evaluate the risks involved in purchasing such
      securities, to make an informed decision about purchasing the Securities and
      is
      able to bear the risks of an investment in the Securities. Lender is able to
      bear the economic risk of holding the Securities for an indefinite period of
      time and can afford a complete loss of its investment. Lender is not a “broker”
or a “dealer” as defined in the Exchange Act and is not an “affiliate” of
      Borrower as defined in Rule 405 promulgated under the Securities
      Act.

    

    5.04 Accredited
      Investor.
      Lender
      is an “accredited investor” within the meaning of Rule 501 of Regulation D
      promulgated under the Securities Act.

    

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

    5.05 Note,
      the Warrant and the Warrant Shares Not Registered.
      Lender
      understands that the Note, the Warrant and the Warrant Shares are not registered
      under the Securities Act or registered or qualified under any state securities
      or “blue sky” laws in reliance on specific exemptions therefrom. Lender
      acknowledges and agrees that it shall not directly or indirectly, offer, sell,
      pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase
      or otherwise acquire or take a pledge of) the Note, the Warrant and the Warrant
      Shares, except in compliance with the Securities Act and state securities or
      “blue sky” laws and the rules and regulations promulgated thereunder and with
      this Agreement and the Warrant. Lender understands that unless and until the
      Warrant and the Warrant Shares have been registered for resale by Borrower
      or
      Lender in compliance with applicable securities laws, the certificates
      evidencing the Warrant and the Warrant Shares will be imprinted with a legend
      (in accordance with Section 5.06) that prohibits the transfer of the Warrant
      and
      the Warrant Shares unless (a) such transaction is registered or such
      registration is not required or (b) if the transfer is pursuant to an
      exemption from registration, upon the reasonable request of Borrower, an opinion
      of counsel reasonably satisfactory to Borrower is obtained to the effect that
      the transaction is not required to be registered or is so exempt.
      Notwithstanding anything in this Agreement to the contrary, Lender may pledge
      the Note, the Warrant, and the Warrant Shares in connection with bona fide
      loan
      transactions in which Lender or its Affiliate is the borrower, provided that
      no
      such pledge shall occur
      knowingly,
      after
      reasonable investigation and inquiry,
      to any
      person or entity which actively sells, distributes, markets, develops, or
      produces a pharmaceutical product or device which directly competes with the
      Product.

     

    5.06 Legend.
      To the
      extent applicable, each certificate evidencing the Warrant and the Warrant
      Shares, shall be endorsed with the legend substantially in the form set forth
      below:

     

    
      	
              “THE
                SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
                SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES OR "BLUE-SKY"
                LAWS AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, ENCUMBERED
                OR
                OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER SUCH ACT OR UNDER SUCH
                LAWS,
                OR PURSUANT TO AN EXEMPTION FROM SUCH
                REGISTRATION.”

            

    

    

    

    ARTICLE
      VI

    COVENANTS
      OF BORROWER

    

    So
      long
      as any or all of the Loan or other obligations of Borrower under the Loan
      Documents shall remain unpaid, Borrower shall comply with the following
      covenants:

    

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

    

    6.02 Transfers
      of Assets.
      Borrower shall not, and shall not permit any of its subsidiaries to, sell,
      convey, transfer, lease, license,
      assign
      or
      otherwise dispose of (whether in one transaction or in a series of transactions)
      (a) all or substantially all of its assets or properties (whether now owned
      or
      hereafter acquired) to any entity or person, (b) without Lender’s written
      consent (which consent shall not be unreasonably withheld), any material assets,
      properties or rights relating to the Product,
      or (c)
      any of its assets or properties except
      in the
      ordinary course of business and, in the case of this clause (c), so long as
      such
      action is not likely to have
      a
      Material Adverse Effect or a material adverse effect on Lender’s
      rights
      hereunder.

    

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

    6.03 Debt.
      Borrower shall not create or incur or allow to be created, incurred or exist,
      or
      permit any of its subsidiaries to create or incur or allow to be created,
      incurred or exist, any Debt, except
      each
      of
      the following forms of Debt, individually and not in the aggregate:

    

    (a)
       accounts
      payable incurred or created in the ordinary course of Borrower’s
      business;

    

    (b)
       Debt
      incurred or created in the ordinary course of Borrower’s business and which does
      not exceed $5,000,000
      in
      the
      aggregate
      (which
      shall not include any Debt described in clauses (c)
      and
      (d));

    

    (c) Debt
      incurred or created solely for the purpose of financing the acquisition of
      property (other than real property), leasehold improvements and equipment for
      use in Borrower’s business and which does not exceed $15,000,000
      in the
      aggregate;

    

    (d)
       Debt
      which is junior and subordinate in right of payment to Borrower’s obligations to
      Lender under the Loan Documents (“Junior
      Debt”)
      so
      long as, prior to the creation of such Junior Debt, unless
      such Junior Debt is described in clauses (a) through (c) above, Lender
      has consented in writing to such Junior Debt (such consent not to be
      unreasonably
      withheld), and Lender and the holder of such Junior Debt have entered into
      a
      subordination agreement in form and substance reasonably satisfactory to Lender
      providing for the subordination of the Junior Debt to the obligations of
      Borrower under the Loan Documents; and

    

    (e) Debt
      existing on the Restatement Date and set forth on Schedule
      6.03(e)
      attached
      hereto. For the avoidance of doubt, Schedule
      6.03(e)
      includes
      a true and complete list and description of all Debt of Borrower existing on
      the
      Restatement Date, regardless of whether any such Debt is permitted by clauses
      (a) through (d) above.

    

    6.04 Liens,
      Etc.
      Borrower shall not create or incur or allow to be created, incurred or exist,
      or
      permit any of its subsidiaries to create or incur or allow to be created,
      incurred or exist, any Lien upon or with respect to any of Borrower’s or its
      subsidiaries’ assets or properties, except each of the following (collectively,
“Permitted
      Liens”):
      

    

    (a)
       Liens
      for
      taxes, assessments or other governmental charges in the ordinary course of
      business and for which no interest, late charge or penalty is attaching or
      which
      are being contested in good faith by appropriate proceedings;

    

    (b)
       Liens,
      not delinquent, created by statute in connection with worker’s compensation,
      unemployment insurance, social security and similar statutory
      obligations;

    

    (c)
       Liens
      of
      mechanics, materialmen, carriers, warehousemen or other like statutory or common
      law liens securing obligations incurred in good faith in the ordinary course
      of
      business that are not due and payable or which are being contested in good
      faith; provided that Borrower has set aside reserves reasonable under the
      circumstances for any such liens being contested in good faith;

    

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

    (d) Purchase
      money Liens upon property and equipment of Borrower acquired for use in
      Borrower’s business, securing the purchase price thereof or securing Debt
      incurred solely for the purpose of financing the acquisition thereof, and all
      of
      which Liens in the aggregate do not secure Debt in excess of $15,000,000 at
      any
      time outstanding;

    

    (e)
       Liens
      securing capital lease obligations under which the lessor’s
      recourse is limited to the leased property;

    

    (f) Liens
      securing indebtedness which is junior and subordinate in right of payment to
      Borrower’s obligations to Lender under the Loan Documents (“Junior
      Liens”)
      so
      long as, prior to the creation of such Junior Liens,
      unless
      such Junior Liens are described in clauses (a) through (e) above,
      Lender
      has consented in writing to
      such
      Junior Liens (such consent not to be unreasonably withheld), and Lender and
      the
      holder of such Junior Liens have entered into a subordination agreement in
      form
      and substance reasonably satisfactory to Lender providing for the subordination
      of the indebtedness secured by the Junior Liens to the obligations of Borrower
      under the Loan Documents;

    

    (g)
       any
      rights reserved to or vested in any municipality or public authority to control
      or regulate the use of the real property used and occupied by Borrower in any
      manner; easements, rights-of-way, servitudes, restrictions and other defects,
      encumbrances and irregularities in title to the real property used and occupied
      by Borrower which could not, individually or in the aggregate, materially and
      adversely affect the condition or operation of such real property; rights of
      landlords under real property leases; so long as, in any case under this clause
      (g), any lienholder’s recourse is limited to the related real
      property; 

    

    (h) statutory
      purchase-money Liens, including without limitation under Article 2 of the
      Uniform Commercial Code securing obligations related to the acquisition of
      goods
      and services incurred in good faith in the ordinary course of business that
      are
      not due and payable or which are being contested in good faith; provided that
      Borrower has set aside reserves reasonable under the circumstances for any
      such
      liens being contested in good faith; and

    

    (i)
      Liens, other than Liens existing under clauses (a) through (c) and (g) and
      (h)
      above, existing on the Restatement Date and set forth on Schedule
      6.04(i) attached
      hereto; provided,
      however,
      that no
      such Liens may be modified, extended, or otherwise amended in any way that
      adversely affects, including by reason of delay, the perfection or priority
      of
      Borrower’s security interest in the Collateral unless Lender has consented to
      such amendment in writing. For the avoidance of doubt, Schedule
      6.04(i)
      includes
      a true and complete list and description of all Liens of Borrower existing
      on
      the Restatement Date, other than Liens existing under clauses (a) through (c)
      and (g) and (h) above, regardless of whether any such Lien is permitted by
      clauses (d) through (f) above.

    

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

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

    

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

    

    6.07 SEC
      and Other Information.

    

    (a) Upon written
      request,
      Borrower will provide to Lender,
      within
      three
      (3) Business Days of
      receipt of such written request,
      a copy
      of any publicly available forms, reports or other documents filed
      by
      Borrower
      with the
      SEC if such documents
      are not
      available on the Internet free of charge. If for any reason at any time Borrower
      is not required to file annual, quarterly and other periodic reports with the
      SEC pursuant to the terms of the Exchange Act, then Borrower shall make
      available at no charge to Lender financial statements no later than the time
      they would be filed with the SEC if Borrower was required to file such annual,
      quarterly and other periodic reports. Any audited consolidated financial
      statements and unaudited interim financial statements prepared pursuant to
      the
      preceding sentence shall be prepared in accordance with GAAP applied on a
      consistent basis (except as may be indicated therein or in the notes thereto)
      during the periods involved, and shall fairly present in all material respects
      the financial position of Borrower as of the dates thereof and the results
      of
      its operations and cash flows for the periods then ended (subject, in the case
      of unaudited interim financial statements, to normal year-end audit
      adjustments).

    

    (b)
       Borrower
      will
      permit officers and designated representatives of Lender,
      at
      reasonable times and intervals during
      normal business hours, and upon reasonable prior notice, to
      visit
      and inspect, under guidance of officers of Borrower
      and in
      accordance with Borrower’s quality and standard operating procedures,
      any of
      the properties of Borrower, and to examine the Collateral and the books of
      record and account of Borrower and discuss the affairs, finances and accounts
      of
      Borrower with, and be advised as to the same by, Borrower’s officers;
      provided,
      that
(i)
      so
      long as Lender shall not have any reasonable basis for insecurity with respect
      to Borrower, the Loan or the Collateral, such visitations and inspections shall
      not occur more than twice in any fiscal year of Borrower, and (ii) Lender
      shall, in
      accordance with the Confidentiality and Non-Disclosure Agreement, dated July
      11,
      2006, between Lender and Borrower (the “Confidentiality
      Agreement”),
      cause
      its
      Affiliates and representatives to, treat
      all
nonpublic
      information made available
      to
it
      in
      strict confidence and disclose such
      information
      only on a need-to-know basis to Affiliates, subcontractors and employees who
      are
      under a written obligation to maintain the confidentiality of the
      information.
      Lender
shall
      be
      responsible for any disclosure of such information by its Affiliates,
      subcontractors and employees.

    

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

    

    
      
        
        

      

      
        13

        
          

        

      

      
        
        

      

    

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

    

    6.10 Insurance.
      Borrower shall maintain in full force and effect insurance with sound and
      reputable insurance companies of the types and in the amounts that Borrower
      reasonably believes is adequate for its business, including, but not limited
      to,
      insurance covering all real and personal property owned or leased by Borrower
      against all risks customarily insured against by similarly situated
      companies.

    

    

    ARTICLE
      VII

    EVENTS
      OF
      DEFAULT

    

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

    

    (a) Borrower
      shall fail to pay all principal and interest due under this Agreement on or
      before the Maturity Date; 

    

    (b) Any
      representation or warranty made by Borrower under this Agreement or any other
      Transaction Document shall prove to have been incorrect or untrue when made
      or
      deemed made and such incorrect or untrue representation or warranty has a
      Material Adverse Effect; 

    

    (c) Borrower
      shall fail to perform or observe any term, covenant or agreement contained
      in
      this Agreement required to be performed or observed by Borrower (other than
      Section 6.02, 6.03 or 6.04) and such failure to perform or observe such term,
      covenant or agreement has a Material Adverse Effect and is not cured within
      thirty (30) days after receipt of notice thereof by Borrower;

    

    (d) Borrower
      shall fail to perform or observe the provisions of Section 6.02, 6.03 or 6.04,
      except, in the case of Section 6.04, if an Event of Default is based on a tax
      lien, judgment lien or materialman’s lien, such lien shall continue without
      discharge or stay for a period of sixty (60) days; 

    

    (e) One
      or
      more judgments, decrees or orders for the payment of money shall be entered
      against Borrower or any of its subsidiaries involving in the aggregate a
      liability of $300,000 or more in excess of any applicable insurance proceeds
      (or, in the case of shareholder class actions, $600,000 or more), and any such
      judgment, decree or order shall continue without discharge or stay for a period
      of sixty (60) days;

    

    
      
        
        

      

      
        14

        
          

        

      

      
        
        

      

    

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

    

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

    

    (h) A
      Change
      of Control shall occur; provided,
      however, that a Change of Control, as defined in clauses (ii) and (iii) of
      the
      definition of Change of Control, shall not be an Event of Default if Lender
      shall have consented to such Change of Control in writing (such consent not
      to
      be unreasonably withheld
      and
      taking into account, without limitation, the business strategy and adequacy
      of
      collateral for the Loan following such Change of Control);

    

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

    

    (j) Borrower
      shall fail to perform or observe any term, covenant or agreement under the
      Security Agreement in any material respect, or the Security Agreement or any
      material provision thereof shall cease to be in full force and
      effect;

    

    (k) There
      shall have been a Material Adverse Change (other than with respect to matters
      relating to general economic conditions on Borrower’s industry as a whole)
      which, taken as a whole, materially adversely affects Borrower’s ability to
      satisfy its obligations under the Loan Documents; provided,
      however,
      that in
      no event shall a Material Adverse Change be deemed to have occurred by virtue
      of
      the incurrence by Borrower or its Affiliates of any debt or other obligations
      permitted by this Agreement;

    

    (l) the
      Common Stock shall not be listed or quoted on an Eligible Market;

    

    
      
        
        

      

      
        15

        
          

        

      

      
        
        

      

    

    (m) The
      Sublicense shall have been terminated or expired, or cease to be in full force
      and effect for the benefit of Borrower;

    

    (n) Borrower
      shall withdraw, terminate, or abandon the NDA to market the Product for the
      indication prevention of respiratory distress syndrome in premature infants
      (RDS);

    

    (o) The
      Product Launch Date for the indication prevention of RDS shall not have occurred
      within one hundred eighty (180) days after the related FDA Approval
      Date;

    

    (p) Following
      the Product Launch Date, Borrower shall withdraw the Product for the indication
      prevention of RDS from the market; or

     

    (q) Borrower
      shall receive a Not Approvable Letter.

    

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

    

    

    ARTICLE
      VIII

    MISCELLANEOUS

    

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

    

    8.02 Notices.
      All
      notices and other communications provided for hereunder shall be in writing,
      shall specifically refer to this Agreement, shall be addressed to the receiving
      party’s address set forth below or to such other address as a party may
      designate by notice hereunder, and shall be deemed to have been sufficiently
      given for all purposes if (i) mailed by first class certified or registered
      mail, postage prepaid, (ii) sent by nationally recognized overnight courier
      for
      next Business Day delivery, (iii) personally delivered,
      or (iv)
      made by telecopy or facsimile transmission with confirmed receipt. 

    

    
      	
            	If
              to Borrower:	
              Discovery
                Laboratories, Inc.

            

    

    2600
      Kelly Road, Suite 100 

    Warrington,
      PA 18976

    Attn:
      Chief Executive Officer and General Counsel

    Facsimile:
      (215) 488-9301 

    

    
      
        
        

      

      
        16

        
          

        

      

      
        
        

      

    

    

    
      	
            	with
              a copy to:	
              Dickstein
                Shapiro LLP

            

    

    1177
      Avenue of the Americas

    New
      York,
      NY 10036-2714 

    Attn:
      Ira
      L. Kotel

    Facsimile:
      (212) 277-6501

     

    
      	
            	If
              to Lender:	
              PharmaBio
                Development Inc. d/b/a NovaQuest

            

    

    4709
      Creekstone Drive

    Riverbirch
      Bldg., Suite 200

    Durham,
      NC 27703

    Attn:
      President

    Facsimile:
      (919) 998-2090

    

    
      	
            	with
              a copy to:	
              Smith,
                Anderson, Blount, Dorsett, Mitchell & Jernigan,
                L.L.P.

            

    

    2500
      Wachovia Capitol Center

    Raleigh,
      NC 27601

    Attn:
      Christopher B. Capel

    Facsimile:
      (919) 821-6800

    

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

    

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

    

    8.05 Binding
      Effect; Assignment.
      This
      Agreement shall be binding upon and inure to the benefit of Borrower and Lender
      and their respective successors and permitted assigns, provided that (a)
      Borrower shall not assign or transfer any or all of its rights or obligations
      under any of the Loan Documents, and (b) so long as no Event of Default shall
      have occurred, Lender shall not assign or transfer any or all of its rights
      or
      obligations under the Loan Documents, provided,
      however,
      that
      the foregoing shall not limit Lender’s right to assign or transfer the right to
      receive money or proceeds under the Loan Documents or any comparable arrangement
      so long as Lender remains the party to the Loan Documents and provided that
      Borrower shall continue to deal solely and directly with Lender in connection
      with Lender’s rights and obligations under the Loan Documents. Lender shall not
      assign or transfer any or all of its rights or obligations under the Warrant
      or
      the Warrant Shares knowingly, after reasonable investigation and inquiry, to
      any
      person or entity which actively sells, distributes, markets, develops, or
      produces a pharmaceutical product or device which directly competes with the
      Product. Notwithstanding the foregoing, Lender may assign any or all of its
      rights or obligations under any of the Loan Documents to an Affiliate of Lender,
      provided, that any such Affiliate shall agree in writing to be subject to the
      foregoing limitations. Any assignment or attempted assignment in violation
      of
      this Section 8.05 shall be null and void.

    

    
      
        
        

      

      
        17

        
          

        

      

      
        
        

      

    

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

    

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

    

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

    

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

    

    8.10 Publicity.
      Except
      as otherwise required by applicable law or by obligations pursuant to any
      listing agreement with or rules of any securities exchange or automated
      quotation system, each party shall, and shall cause its respective Affiliates
      to, not, issue any press release or make any other public statement relating
      to,
      connected with or arising out of this Agreement or the matters contained herein
      without the other parties’ prior written approval of the contents and the manner
      of presentation and publication thereof (which approval shall not be
      unreasonably withheld or delayed).

    

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

    

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

    

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

    

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

    

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

    

    8.15 Arbitration.
      

    

    (a)
       If
      the
      parties are unable to resolve any Dispute under Section 8.14,
      then
      either party may require the matter to be settled by final and binding
      arbitration by sending written notice of such election to the other party
      clearly marked “Arbitration Demand”. Thereupon
      such Dispute shall be arbitrated in accordance with the terms and conditions
      of
      this Section 8.15.
      Notwithstanding
      the
      foregoing, either party may apply to a court of competent jurisdiction for
      a
      temporary restraining order, a preliminary injunction, or other equitable relief
      to preserve the status quo or prevent irreparable harm.

    

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

    

    (c)
       Nothing
      contained herein shall operate to prevent either party from asserting
      counterclaim(s) in any arbitration commenced in accordance with this
      agreement, and any such party need not comply with the procedural provisions
      of
      this Section 8.15
      in
      order to
      assert such counterclaim(s).

    

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

    

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

    

    (i)
       The
      arbitrators shall have the sole authority to decide whether or not any Dispute
      between the parties is arbitrable and whether the party presenting the issues
      to
      be arbitrated has satisfied the conditions precedent to such party’s right to
      commence arbitration as required by this Section
      8.15. 

    

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

    

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

    

    (iv)
       The
      parties shall bear their own costs
      in
      preparing for and participating in the resolution of any Dispute pursuant to
      this Section 8.15,
      and
      the
      costs of the arbitrator(s) shall be equally divided between the parties;
provided,
      however,
      that
      each party shall bear the costs incurred in connection with any Dispute brought
      by such party that the arbitrators determine to have been brought in bad
      faith.

    

    (e)
      Except as provided in the last sentence of Section
      8.15(a),
      the
      provisions of this Section 8.15
      shall be
      a complete defense to any suit, action or proceeding instituted in any federal,
      state or local court or before any administrative tribunal with respect to
      any
      Dispute arising with regard to this Agreement. Any party commencing a lawsuit
      in
      violation of this Section 8.15
      shall
      pay the costs of the other party, including, without limitation,
      reasonable attorney’s fees and defense costs.

    

    [Rest
      of page intentionally left blank; signatures on following
      page]

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

    [Signature
      page to
      Second Amended and Restated
      Loan
      Agreement] 

    

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

     

    

    
      	 	BORROWER:
	 	 
	 	DISCOVERY LABORATORIES, INC.
	 	 
	 	 
	 	By: /s/ John G.
              Cooper 
	 	Name: John G. Cooper 
	 	Title: Executive Vice President and
              Chief
              Financial Officer
	 	 
	 	 
	 	 
	 	LENDER:
	 	 
	 	PHARMABIO DEVELOPMENT INC.
	 	d/b/a NOVAQUEST
	 	 
	 	 
	 	By: /s/ Tom Perkins
	 	Name: Tom Perkins
	 	Title: Senior Vice President, Corporate
              Development

    

     

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

       

    

    EXHIBIT
      A

    DEFINITIONS

    

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

    

    “ATI”
      shall have the meaning set forth in Section 4.01.

    

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

    

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

    

    “Collateral”
      shall have the meaning set forth in the Security Agreement.

    

    “Common
      Stock” shall mean the common stock, par value $0.001 per share, of
      Borrower.

    

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

    

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

    “Eligible
      Market” means any national securities exchange, the NASDAQ Global Select Market,
      the NASDAQ Global Market or the NASDAQ Capital Market.

    

    “Event
      of
      Default” shall have the meaning set forth in Section 7.01.

    

    “Exchange
      Act” shall mean the Securities Exchange Act of 1934, as amended.

    

    “FDA”
      shall mean the United States Food and Drug Administration or its
      successor.

    

    “FDA
      Approval Date” shall mean the first date on which the FDA approves an
      application to market the Product.

    

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

    

    “Intellectual
      Property” shall have the meaning set forth in the Security
      Agreement.

    

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

    

    “Loan”
      shall have the meaning set forth in Section 2.01(a).

    

    “Loan
      Documents” shall have the meaning set forth in Section 3.01(d).

    

    “Material
      Adverse Change” shall have the meaning set forth in Section 4.07.

    

    “Material
      Adverse Effect” shall have the meaning set forth in Section 4.01.

    

    “Maturity
      Date” shall have the meaning set forth in Section 2.04(a).

     

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

     

    “Not
      Approvable Letter” shall mean a letter from the FDA pursuant to 21 CFR 314.120
      with respect to the NDA for the Product that has been filed with the FDA prior
      to the date hereof, for the indication prevention of
      respiratory distress syndrome in premature infants (RDS).
      

    

     “Note”
      shall have the meaning set forth in Section 2.04.

    

    “Permitted
      Lien” shall have the meaning set forth in Section 6.04.

    

    “Prime
      Rate” shall mean the rate which Wachovia Bank, N.A. (or its successor) announces
      from time to time as its prime lending rate, the Prime Rate to change when
      and
      as such prime lending rate changes.

     

    “Product”
      shall mean the product currently known as Surfaxin, as such name may change
      from
      time to time, for any and all formulations and delivery mechanisms, and for
      any
      and all indications.

    

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

    “Product
      Launch Date” shall mean the first date on which the Product is shipped in the
      United States for commercial sale.

    

    “SEC”
shall
      mean the United
      States
      Securities and Exchange Commission.

    

    “SEC
      Reports” shall mean Borrower’s most recently filed Annual Report on Form
      10-K
      and the Proxy Statement filed in connection with Borrower’s most recent annual
      meeting of stockholders and all Quarterly
      Reports on Form 10-Q and Current Reports on Form 8-K filed by Borrower after
      January 1, 2006.

    

    “Securities”
      shall have the meaning set forth in Section 4.02.

    

    “Securities
      Act” shall mean the Securities Act of 1933, as amended.

    

    “Security
      Agreement” shall have the meaning set forth in Section 3.01(b).

    

    “Sublicense”
      shall have the meaning set forth in Section 4.06(b).

    

    “Transaction
      Documents” shall have the meaning set forth in Section 3.01(d).

    

    “Warrant”
      shall have the meaning set forth in Section 3.01(c).

    

    “Warrant
      Shares” shall mean the shares issuable by Borrower upon the exercise of the
      Warrant.

    

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

    EXHIBIT
      B

    FORM
      OF
      NOTE

    

     

     

    
 

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

       

    

    Schedules

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