U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB

  |X| Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
                               1934 (Fee required)
                   For the fiscal year ended December 31, 1997
                   -------------------------------------------

 |_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
                            of 1934 (No fee required)

          For the transition period from     to
                                             --

                         Commission file number 0-26422
                         ------------------------------

                          DISCOVERY LABORATORIES, INC.
                 (Name of Small Business Issuer in Its Charter)

          DELAWARE                                        94-3171943

(State or Other Jurisdiction of                        (I.R.S. Employer
 Incorporation or Organization)                       Identification No.)

            509 MADISON AVENUE, 14TH FLOOR, NEW YORK, NEW YORK 10022

           (Address of Principal Executive Offices Including Zip Code)

                                 (212) 223-9504

                (Issuer's Telephone Number, Including Area Code)

         Securities registered under Section 12(b) of the Exchange Act:

                                                  Name of Each Exchange
     Title of Each Class                           on Which Registered
     -------------------                           -------------------

           None                                            None

         Securities registered under Section 12(g) of the Exchange Act:

  Common Stock, $.001 par value       Class A Warrants         Class B Warrants

    (Title of Class)                  (Title of Class)         (Title of Class)

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES |X| NO |_|

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
                                              amendment to this Form 10-KSB. |_|

State issuer's revenues for its most recent fiscal year. $ 0.00

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of March 24, 1998: $30,941,882(1)

State the number of shares outstanding of each class of the issuer's common
equity as of March 24, 1998: 3,175,955 shares of Common Stock, par value.

- ----------
(1) Outstanding shares of the issuer's Series B Convertible Preferred Stock, par
value $0.001 per share, are valued on the basis of the number of shares of the
issuer's Common Stock, par value $0.001 per share, into which such preferred
shares are convertible.

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Unless the context otherwise requires, (i) all references to the "Company"
include Discovery Laboratories, Inc. ("Discovery") and its majority-owned
subsidiary, Acute Therapeutics, Inc. ("ATI"), (ii) all references to the
Company's activities, results of operations and financial condition prior to
November 25, 1997 relate to Discovery Laboratories, Inc., a former Delaware
corporation ("Old Discovery"), a predecessor to the Company, insofar as business
activities relating to the SuperVent(TM), Surfaxin(TM) and ST-630 products
described herein are concerned and (iii) all references to the Company's common
stock, par value $.001 per share (the "Common Stock") are to the Company's
Common Stock after giving effect to the 1-for-3 reverse split of the Common
Stock effected on November 25, 1997. See Item 1 and Item 4 in this Annual Report
on Form 10-KSB (this "Report").

When used in this Report, the words "estimate", "project", "intend", "forecast",
"anticipate" and similar expressions are intended to identify forward-looking
statements. In addition, certain other statements set forth in this Report,
including, without limitation, statements concerning the Company's research and
development programs, the possibility of submitting regulatory filings for the
Company's products under development, the seeking of joint development or
licensing arrangements with pharmaceutical companies or others, the research and
development of particular compounds and technologies for particular indications
and the period of time for which the Company's existing resources will enable
the Company to fund its operations and to meet the continuing listing
requirements for the quotation of its securities on the Nasdaq SmallCap Market
and the possibility of contracting with other parties additional licenses to
develop, manufacture and market commercially viable products, are
forward-looking and based upon the Company's current belief as to the outcome,
occurrence and timing of future events or current expectations and plans. All
such statements involve significant risks and uncertainties. Many important
factors affect the Company's ability to achieve the stated outcomes and to
successfully develop and commercialize its product candidates, including, among
other things, the ability to obtain substantial additional funds, obtain and
maintain all necessary patents or licenses, to demonstrate the safety and
efficacy of product candidates at each state of development, to meet applicable
regulatory standards and receive required regulatory approvals, to meet
obligations and required milestones under its license agreements, to be capable
of producing drug candidates in commercial quantities at reasonable costs, to
compete successfully against other products and to market products in a
profitable manner. Although the Company believes that its assumptions underlying
the forward-looking statements are reasonable, any of the assumptions could
prove inaccurate and, therefore, there also can be no assurance that these
statements included in the Report will prove to be accurate. In light of the
significant uncertainties inherent in these statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved; in fact, actual results could differ materially from those
contemplated by such forward-looking statements. The Company does not undertake
any obligation to publicly release any revisions to these forward-looking
statements or to reflect the occurrence of unanticipated events.

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

The Company is a development stage pharmaceutical company that is focused on
acquiring, developing and commercializing proprietary, investigational drugs
that have previously been tested in humans or animals. The Company's strategy is
to conduct preclinical and clinical studies on investigational drugs licensed
from third parties, either alone or in collaboration with corporate partners.
The Company may also seek to enter into collaborations with corporate partners
for manufacturing and marketing of such drugs.

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PRODUCTS AND TECHNOLOGIES UNDER DEVELOPMENT

SuperVent(TM)

The Company is developing SuperVent(TM) as a stable, aerosolized,
multidimensional therapy for airway diseases such as cystic fibrosis ("CF") and
chronic bronchitis, which are characterized by inflammation, injurious oxidation
and excessive sputum. CF is a progressive, lethal respiratory disease that
afflicts approximately 23,000 patients in the United States and a comparable
number in Europe. It is the most common lethal genetic disease among Caucasians.
CF results from a genetic defect in the CFTR gene. The CFTR gene codes for a
membrane protein responsible for the transport of chloride ions. Because of this
genetic defect, CF mucus is excessively viscous and adherent to airway walls.
Destruction of the lungs of CF patients occurs gradually as the inability to
clear mucus from the lungs leads to blockage of the airways usually beginning in
the smaller airways and alveoli. A new therapy which minimizes the pulmonary
complications of CF would have a major impact on the length and quality of life
of its patients.

SuperVent's(TM) active component is tyloxapol, a compound which has been safely
used as an emulsifying agent in drug formulations by the United States
pharmaceutical industry for over 40 years. Experimental research conducted by
consultants to the Company indicates that tyloxapol may possess biological
activities beyond its well-recognized emulsification properties. Tyloxapol is
thought to have three mechanisms of action: anti-inflammatory activity,
anti-oxidant activity and mucolytic activity. This combination of
pharmacological activities is not presently found in any single, safe, effective
therapy for CF or chronic bronchitis in the United States.

The Company's clinical development plan for SuperVent(TM) is to focus first on
CF. In September 1995, the United States Food and Drug Administration (the
"FDA") approved, subject to certain modifications, a physician-sponsored
investigational new drug application ("IND") to begin a clinical trial of
SuperVent(TM) for use in treating CF. The trial, which commenced on March 17,
1997 at the University of Utah Health Sciences Center, is designed to determine
whether aerosolized SuperVent(TM) holds promise as a low toxicity,
anti-inflammatory, anti-oxidant and mucolytic agent for the treatment of CF. The
preliminary results from this clinical trial in normal healthy volunteers have
indicated that the compound had no significant effects on any objective measure
of safety (although coughing was noted by several subjects at the highest doses
tested). Assuming the successful completion of the Phase 1/2 trial, Discovery
intends to commence a multi-center, randomized, double-blinded,
placebo-controlled, Phase 3 clinical trial in CF and to file an additional IND
to commence a Phase 2 clinical trial for the treatment of chronic bronchitis.

Surfaxin(TM)

ATI is developing sinapultide, a proprietary, synthetic lung surfactant that was
invented at The Scripps Research Institute ("Scripps"), under the brand name
"Surfaxin"(TM) for the treatment of several conditions characterized by
insufficient surfactant. Lung surfactants are protein-phospholipid complexes
which coat the alveoli (air sacs) of the lungs. Lung surfactants lower surface
tension in expiration and raise it during inspiration to prevent the collapse of
alveoli. Replacement surfactants are currently used mainly to treat idiopathic
respiratory distress syndrome ("IRDS"). Infants with this condition, as well as
infants born with meconium (a component of the fetal bowel) in their lungs,
which can lead to meconium aspiration syndrome ("MAS"), typically suffer from
insufficient surfactant that can lead to a life-threatening loss of pulmonary
function. Similarly, patients with acute respiratory distress syndrome ("ARDS"),
which can result from trauma, smoke inhalation, head injury and a variety of
other events, typically suffer from surfactant deficiency.

                                                                               4

The potential market for synthetic lung surfactants is substantial. The
incidence of ARDS is approximately 150,000 patients per year in the United
States. IRDS affects 40,000 to 50,000 infants per year in the United States.
Twenty to forty percent of infants with IRDS develop debilitating
bronchopulmonary dysplasia requiring extended ventilatory support and
hospitalization. MAS affects approximately 26,000 newborn infants per year in
the United States.

Surfaxin(TM) is an aqueous suspension of lipid vesicles containing the novel
synthetic peptide sinapultide. Surfaxin(TM) is patterned after human Surfactant
Protein B, shown to have the greatest surfactant activity in humans. The product
was exclusively licensed by Scripps to Johnson & Johnson, Inc. ("J&J"), which,
together with its wholly owned subsidiary, Ortho Pharmaceutical Corporation
("Ortho"), engaged in development activities with respect to sinapultide. ATI
acquired the exclusive worldwide sublicense to the sinapultide technology from
J&J and Ortho in October 1996.

In July 1992, an IND submitted by Scripps relating to the use of Surfaxin(TM) to
treat IRDS was approved by the FDA. J&J subsequently completed a multi-center,
Phase 2 clinical trial of Surfaxin(TM) in 47 infants with IRDS. This trial
demonstrated safety and efficacy comparable to that of the bovine-derived
surfactant, Survanta(TM), marketed by Ross Laboratories. In September 1994, an
IND was submitted by J&J relating to the use of Surfaxin(TM) to treat ARDS and
was subsequently approved by the FDA. Both the IRDS IND and the ARDS IND have
been transferred to ATI. ATI subsequently received FDA approval to amend the
approved ARDS IND and re-initiate Phase 1 clinical trials of Surfaxin(TM) for
the treatment of ARDS. The ARDS trial commenced on August 15, 1997 at Sharp
Memorial Hospital in San Diego, California. ATI amended the existing IRDS IND to
permit the initiation of a Phase 2 clinical trial of Surfaxin(TM) to treat MAS
on May 27, 1997 at Thomas Jefferson University Hospital in Philadelphia.

ATI and Scripps are parties to a sponsored research agreement (the "Sponsored
Research Agreement") pursuant to which ATI will contribute $460,000 to Scripps'
Surfaxin(TM) research efforts through October 1998. ATI has an option to acquire
an exclusive worldwide license to technology developed under the agreement,
which it is required to exercise within 180 days from receipt of notice from
Scripps of the development of such technology. Scripps will own all technology
that it develops pursuant to work performed under the proposed Sponsored
Research Agreement. ATI has the right to receive 50% of the net royalty income
received by Scripps for inventions jointly developed by ATI and Scripps to the
extent ATI does not exercise its option with respect to such inventions. ATI has
entered into consulting agreements with certain key research personnel at
Scripps.

ST-630

ST-630 is being developed by the Company for use in treating postmenopausal
osteoporosis. Postmenopausal osteoporosis is a disease of postmenopausal women
characterized by decreased bone mass which leads to reduced bone strength and an
increased risk of fractures. ST-630 is an analog of the active circulating
vitamin D hormone, calcitriol, modified to increase its potency and lengthen its
circulating half-life. As a class, vitamin D analogs are commonly used therapies
in Europe and Japan for osteoporosis. In aggregate, this class of compounds is
believed to generate several hundred million dollars in worldwide sales for
osteoporosis.

Published studies have confirmed the efficacy of vitamin D analogs in increasing
bone mass and decreasing fractures. Vitamin D analogs, however, have not been
well accepted in the United States due to certain side effects in the compounds
currently marketed. Specifically, prior studies of vitamin D analogs have been
associated with hypercalcemia in a percentage of patients.

                                                                               5

Hypercalcemia is elevated calcium levels in the blood above a generally accepted
range. No vitamin D analogs are currently marketed for osteoporosis in the
United States.

In November 1997, the Company filed an IND with the FDA to initiate Phase 1
clinical studies of ST-630 as a once-daily, orally administered drug for the
treatment of postmenopausal osteoporosis in the United States. On December 5,
1997, the Company initiated an initial safety and dose-ranging study of ST-630
in healthy normal volunteers and postmenopausal women either with or without
osteoporosis at Covance Clinical Research Unit Inc. in Madison, Wisconsin. The
Company has recently completed a Phase 1 clinical study of ST-630 in healthy
normal volunteers and determined that ST-630 does represent a risk of
hypercalcemia at any dosage levels that may prove efficacious for treating
postmenopausal osteoporosis. Based upon the complete results of the dose-ranging
study, the Company may then either seek to further optimize the delivery of
ST-630 by testing one or more alternative means of delivery or, assuming
acceptable results, seek to initiate a large-scale, multi-center clinical trial
in the United States. The Company has access to preclinical data generated by
Sumitomo Pharmaceuticals ("Sumitomo") and Taisho Pharmaceuticals ("Taisho") with
respect to ST-630 pursuant to the terms of the licensing arrangements described
herein.

OTHER TECHNOLOGIES IN PRODUCT PORTFOLIO

In addition to the products under development described above, the Company has
rights to certain drug compounds that are not currently under active development
by the Company.

Apafant Injection

Apafant was originally developed by Boehringer Ingelheim GmbH ("Boehringer
Ingelheim") as an oral treatment for asthma. Boehringer Ingelheim had previously
conducted extensive clinical trials in the United States and in other countries
using the oral form of the drug. In May 1996, the Company entered into a license
agreement with Boehringer Ingelheim pursuant to which the Company has pursued a
development program for an injectable formulation of Apafant ("Apafant
Injection") for the treatment of acute pancreatitis.

Acute pancreatitis is a sudden inflammation of the pancreas caused by, among
other things, gallstones, alcohol abuse and infection. Patients with moderate to
severe pancreatitis receive only supportive care in an intensive care unit.
During an episode of acute pancreatitis, patients are at risk of organ failure
including loss of lung, kidney and liver function. In a significant number of
cases, acute pancreatitis is fatal. There is currently no FDA approved therapy
for the treatment of acute pancreatitis.

Apafant is a platelet activating factor ("PAF") antagonist. PAF is an
inflammatory substance produced in the body that is thought to play a role in
acute pancreatitis. In certain experiments, acute pancreatitis and the resulting
end organ damage and failure can be induced in laboratory animals by the
injection of PAF. Treatment with Apafant has been demonstrated to protect
laboratory animals in certain models of PAF-induced organ damage, as well as
other models of multiple organ system failure. The Company believes that a drug
that can prevent organ damage and failure could be beneficial in treating
patients with acute pancreatitis.

The Company met with the FDA on November 7, 1996 for a pre-IND meeting to
discuss its plans to study Apafant Injection for the treatment of patients with
acute pancreatitis. Discovery filed an IND on September 9, 1997 to initiate a
Phase 1b/2 clinical trial in patients with acute pancreatitis. To support its
IND, Discovery is relying on preclinical and clinical safety data provided by
Boehringer Ingelheim that were obtained with the oral and nasal forms of Apafant
for other indications. There is no assurance that upon review of the IND, the
FDA will approve the Company's proposed

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clinical trial of Apafant. The Company's development activities with respect to
Apafant took place prior to the Company's merger with Old Discovery (see
"History; Completion of Merger"), and the Company's present management team is
evaluating the Apafant program.

AN10

AN10 is a novel analog of butyric acid licensed by Discovery from Bar-Ilan
Research & Development Co., Ltd. ("Bar-Ilan"). Recent animal studies suggest
that the topical form of AN10 ("AN10 Topical") may prove to have potential
utility in reducing chemotherapy-induced alopecia, or hair loss, in patients
with cancer. In addition, an intravenous formulation of AN10, Novaheme
Injection, may have potential for the treatment of beta-hemoglobinopathies as
suggested by limited clinical studies that have demonstrated that agents which
increase cellular levels of fetal hemoglobin may reduce disease symptoms in
patients with sickle-cell anemia, a beta hemoglobinopathy.

Discovery is investigating the possibility of outlicensing the topical form of
AN10 Topical and Novaheme Injection to other companies willing to pursue
development of these products. There can be no assurance that Discovery will
proceed with such plans or will be successful in identifying a suitable
sublicensee. The regulatory status of AN10 and Novaheme Injection, among other
factors, will impact Discovery's ability to enter into such outlicensing
agreements.

LICENSING ARRANGEMENTS; PATENTS AND PROPRIETARY RIGHTS

CMHA License Agreement: SuperVent(TM)/Tyloxapol

The Company has obtained the core technology relating to SuperVent(TM) pursuant
to a license agreement with the Charlotte-Mecklenberg Hospital Authority (the
"CMHA License Agreement"). The CMHA License Agreement grants the Company an
exclusive worldwide license under two issued United States patents (United
States Patent No. 5,474,760 and United States Patent No. 5,512,270) and two
pending United States patent applications held by CMHA, and any later-issued
United States and any foreign patents based on or issuing from the issued
patents and the pending patent applications. The issued United States patents
expire in 2013. The United States patents cover methods of using tyloxapol, the
active compound in SuperVent(TM), to treat cystic fibrosis and methods of
treating diseases caused by oxidant species, such as myocardial infarction,
stroke and ARDS. The two pending United States patent applications relate to the
use of tyloxapol as an anti-inflammatory and anti-oxidant agent.

Tyloxapol, the active compound in SuperVent(TM) was the subject of an issued
United States composition of matter patent which expired in 1965. The patents
and patent applications licensed to the Company differ from the expired patent,
inter alia, in that one patent application covers proprietary pharmaceutical
formulations containing high concentrations of tyloxapol and the other patents
and patent applications cover uses of tyloxapol to treat certain diseases.
Although the Company believes that high concentration formulations of tyloxapol
will represent the most practical means to deliver the active compound, there
can be no assurance that any patent application covering this formulation will
issue or that the compound will not prove similarly effective in lower
concentrations which are not covered by any of the Company patent applications.

J&J License Agreement: Surfaxin(TM)

ATI has received an exclusive, worldwide sublicense from J&J (the "J&J License
Agreement") to commercialize Surfaxin(TM) for the diagnosis, prevention or
treatment of disease. The J&J License Agreement is a sublicense under certain
patent rights previously licensed to J&J by Scripps (the

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"Scripps Patent Rights") and a license under certain other patent rights held by
Ortho (the "Ortho Patent Rights"). The Scripps Patent Rights consist of three
issued United States patents and two pending United States applications. The
three issued patents are United States Patent No. 5,407,914, U.S. Patent No.
5,260,273 and U.S. Patent No. 5,164,369. These patents relate to synthetic
pulmonary surfactants (including Surfaxin(TM)), certain related polypeptides and
a method of treating respiratory distress syndrome with these surfactants. The
first of these patents will expire in 2009. The two pending United States
applications relate to pulmonary surfactants, related polypeptides, liposomal
surfactant compositions and methods of treating respiratory distress syndromes
with these surfactants and compositions. The Ortho Patent Rights consist of
certain pending United States patent applications which relate to methods of
manufacturing certain peptides which may be used in the manufacture of
Surfaxin(TM). J&J is responsible for filing, prosecuting and maintaining the
Ortho Patent Rights.

WARF License Agreement: ST-630

Pursuant to an agreement (the "WARF License Agreement") with the Wisconsin
Alumni Research Foundation ("WARF"), the Company has an exclusive license within
all countries in the Western hemisphere in the field of prevention, treatment,
amelioration or cure of bone disease, under U.S. Patent No. 4,358,406 (the
"ST-630 Patent") covering the compound ST-630 and U.S. Patent No. 5,571,802 (the
"ST-630 Use Patent") covering a method for treating postmenopausal osteoporosis.
In addition, the Company has options to extend the exclusive license to the
remaining countries of the world with the exception of Japan. The Company
options expire on January 1, 2002.

The ST-630 Patent will expire in July 2001, which the Company anticipates will
be prior to receipt of any marketing approval for ST-630 in the United States.
The ST-630 Use Patent, which expires in 2014, is limited to claims relating to a
method of treating postmenopausal osteoporosis in humans having such disease
with an effective dosage of ST-630. These claims do not include claims relating
to the use of ST-630 to treat other metabolic bone disorders, such as
age-related osteoporosis (which occurs in men and women) and renal
osteodystrophy. At the Company's request, WARF filed an application to pursue
additional claims relating to the use of ST-630 to treat other metabolic bone
diseases. However, there can be no assurance that any patent containing such
additional claims will issue in the United States or elsewhere. United States
and foreign patents covering certain processes relating to the manufacture of
vitamin D analogs, which have been nonexclusively licensed to the Company under
the WARF License Agreement, will expire on various dates up to 2005.

Boehringer Ingelheim License: Apafant

In 1996, the Company signed an agreement (the "Boehringer Ingelheim License
Agreement") with Boehringer Ingelheim to acquire the rights in the United States
and the European Union to develop a new intravenous formulation of Apafant for
all clinical indications other than asthma. Pursuant to the agreement, the
Company may be obligated to make future milestone and royalty payments to
Boehringer Ingelheim. However, such license may be required to be reconveyed to
Boehringer Ingelheim in the event that Boehringer Ingelheim exercises an option
granted in the Boehringer Ingelheim License Agreement, following which
Boehringer Ingelheim would have the right to develop and commercialize Apafant
and would be obligated to make milestone and royalty payments to the Company.
Should Boehringer Ingelheim exercise this option and then fail to pursue
development of Apafant on a good faith efforts basis consistent with good
business judgment in any of certain countries, then the rights to Apafant in the
country with respect to which the failure occurs shall again revert to the
Company.

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Bar-Ilan License: AN1O

The Company's rights with respect to the development of AN10 were obtained
pursuant to an exclusive worldwide license with Bar-Ilan (the "Bar-Ilan License
Agreement") to a United States patent and corresponding foreign patents and
patent applications directed to the use of AN10 and other butyric acid analogs
in the fields, among others, of beta-hemoglobinopathies and alopecia.

The Company is aware of the existence of prior art references which may affect
the validity of certain claims in the issued butyrate patent, which claims
broadly cover AN10, among other compounds. Reexamination or reissue of such
patent by the United States Patent & Trademark Office (the "PTO"), in light of
these references, may be necessary in order to obtain valid claims which are
both free of the prior art and which specifically cover AN10. In any event,
given that the already-uncovered prior art references relates to compounds but
not to methods of treatment, the existence of such references would not, as a
matter of United States patent law, be expected to affect any claims directed to
the use of AN10 to treat beta-hemoglobinopathies as covered in United States
Patent No. 5,569,675.

The Company is also aware of other patents (the "Perrine patents") which appear
to cover the administration of butyric acid, during gestation or infancy, to
ameliorate beta-hemoglobinopathies disorders, including sickle cell anemia and
beta-thalassemia, by increasing the level of fetal hemoglobin. To the extent
that AN10 converts to butyric acid and in the event the Company's or its
licensees' commercial activities include administration of AN10 during gestation
and/or infancy, such activities could give rise to issues of infringement of the
Perrine patents.

The existence of prior art references, and the possibility that administration
of AN10 during gestation and/or infancy could suggest issues of patent
infringement, may affect the Company's ability to outlicense AN10 Topical and
Novaheme to other companies for further development of these products.

Risk of Loss of Technology/Technological Uncertainty and Obsolescence

The Company must satisfy the terms and conditions set forth in the license
agreements described above in order to retain its license rights thereunder,
including but not limited to diligent pursuit of product development and the
timely payment of royalty fees (including, with respect to certain such
agreements, minimum royalty payments), milestone payments and other amounts. If
the Company fails to comply with such terms and conditions as set forth in such
license agreements, its rights thereunder for individual product opportunities
could be terminated.

The patent position of firms relying upon biotechnology is highly uncertain and
involves complex legal and factual questions. To date, there has emerged no
consistent policy regarding the breadth of claims allowed in biotechnology
patents or the degree of protection afforded under such patents. The Company's
success will depend, in part, on its ability, and the ability of its
licensor(s), to obtain protection for its products and technologies under United
States and foreign patent laws, to preserve its trade secrets, and to operate
without infringing the proprietary rights of third parties. The Company has
obtained rights to certain patents and patent applications and may, in the
future, seek rights from third parties to additional patents and patent
applications. There can be no assurance that patent applications relating to the
Company's potential products which have been licensed to date, or that it may
license from others in the future, will result in patents being issued, that any
issued patents will afford adequate protection to the Company or not be
challenged, invalidated, infringed or circumvented, or that any rights granted
thereunder will afford additional competitive advantages to the Company.
Furthermore, there can be no assurance that others have not independently
developed, or will not independently develop, similar products and/or
technologies, duplicate any of

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the Company's products or technologies, or, if patents are issued to, or
licensed by, the Company, design around such patents. There also can be no
assurance that the validity of any of the patents licensed to the Company, would
be upheld if challenged by others in litigation or that the Company's activities
would not infringe patents owned by others. The Company could incur substantial
costs in defending itself in suits brought against it or any of its licensors,
or in suits in which the Company may assert, against others, patents in which
the Company has rights. Should the Company's products or technologies be found
to infringe patents issued to third parties, the manufacture, use, and sale of
the Company's products could be enjoined and the Company could be required to
pay substantial damages. In addition, the Company may be required to obtain
licenses to patents or other proprietary rights of third parties, in connection
with the development and use of its products and technologies. No assurance can
be given that any licenses required under any such patents or proprietary rights
would be made available on terms acceptable to the Company, if at all.

The Company also relies on trade secrets and proprietary know-how. The Company
requires all employees to enter into confidentiality agreements that prohibit
the disclosure of confidential information to third parties and require
disclosure and assignment to the Company of rights to their ideas, developments,
discoveries and inventions. In addition, the Company seeks to obtain such
agreements from its consultants, advisors and research collaborators; however,
such agreements may not be possible where such persons are employed by
universities or other academic institutions that require assignment of employee
inventions to them.

THIRD PARTY SUPPLIERS; MANUFACTURING AND MARKETING

To be successful, the Company's products must be manufactured in commercial
quantities under good manufacturing practice ("GMP") requirements set by the FDA
at acceptable costs. The FDA periodically inspects manufacturing facilities in
the United States in order to assure compliance with applicable GMP
requirements. Foreign manufacturers also are inspected by the FDA if their drugs
are marketed in the United States. Failure of the foreign or domestic suppliers
of Discovery's products or failure of the manufacturers of the Company's
products to comply with GMP regulations or other FDA regulatory requirements
would have a material adverse effect on the Company's business, financial
condition and results of operations. The Company does not have any manufacturing
capacity of its own but instead intends to rely on outside manufacturers to
produce appropriate clinical grade material for its use in clinical studies for
certain of its products.

The active compound in SuperVent(TM) is presently manufactured for several third
parties pursuant to GMP standards by an affiliate of Sanofi-Winthrop, Inc.
(Sanofi"), a multinational pharmaceutical company. Sanofi is the sole supplier
of tyloxapol with GMP standard manufacturing capabilities and there are few
alternative non-GMP approved sources of supply. Currently, the Company purchases
bulk tyloxapol from Sanofi on an as-needed basis. Although Sanofi has sold a
quantity of tyloxapol sufficient for the Company's proposed Phase 1/2 clinical
trial of SuperVent(TM), the Company does not have an agreement with Sanofi to
supply any additional material, either in connection with a Phase 3 clinical
trial or, following regulatory approval, for marketing purposes. In addition,
the Company does not intend to enter into an agreement for supply of the
formulated drug containing tyloxapol unless it plans to initiate a Phase 3
clinical trial of tyloxapol for the treatment of CF. There can be no assurance
that the Company will be able to enter into a supply agreement with Sanofi or a
supplier of the formulated drug on terms acceptable to the Company, if at all.
In such case, the Company would be required to seek alternate manufacturing
sources capable of producing tyloxapol and the formulated drug. There can be no
assurance that the Company will be able to identify and contract with
alternative manufacturers on terms acceptable to it, if at all. Any interruption
in the supply of tyloxapol would have a material adverse effect on the Company's
business, financial condition and results of operations.

                                                                              10

ATI has acquired from J&J experimental compounds, the sinapultide and
manufacturing equipment needed to produce and meet its requirements for clinical
supplies of Surfaxin(TM). In March 1997, ATI entered into an agreement with Cook
Imaging Corporation ("Cook") for the manufacture of Surfaxin(TM) to be used in
clinical trials. In February 1998, ATI and Cook entered into an agreement to
provide additional batches of Surfaxin(TM) for further clinical trials. ATI does
not intend to seek a long-term agreement with Cook and is exploring alternatives
for the commercial manufacture of Surfaxin(TM). Failure to identify and reach an
agreement with a third party manufacturer would substantially delay ATI's
development of Surfaxin(TM) and could have a material adverse effect on
Discovery's business, financial condition and results of operations.

Tetrionics, Inc. ("Tetrionics") manufactures, formulates and supplies the
Company with GMP-grade ST-630 for the Company's investigational and commercial
purposes on an as-needed basis. Tetrionics presently manufactures and supplies
ST-630 to Penederm, Inc., in the United States for investigational topical use
for the treatment of psoriasis. The Company does not have a long-term supply
agreement with Tetronics or any other suppliers for ST-630. Any interruption of
the Company's supply of ST-630 could substantially delay the Company's
development efforts with respect to ST-630 and could have a material adverse
effect on the Company's business, financial condition and results of operations.

Pursuant to the Boehringer Ingelheim License Agreement, Boehringer Ingelheim has
in the past provided the Company with quantities of Apafant sufficient to meet
the Company's requirements. However, Boehringer Ingelheim has advised the
Company that it will not be in a position to meet the Company's Apafant
requirements in the future. There can be no assurance that the Company will not
experience delays or other supply problems that may materially adversely affect
the Company's research and development efforts with respect to Apafant or that
The Company will be able to obtain an alternate source of supply on a timely
basis. Apafant Injection is currently manufactured by Pharmaceutical Development
Center ("PDC"). There can be no assurance that PDC will agree to manufacture
these products to meet the Company's future needs to supply its clinical trials.
It is anticipated that prior to marketing, if any, a new commercial manufacturer
of Apafant Injection will need to be identified, qualified under GMP standards,
and its manufacturing process validated in a manner acceptable to regulatory
authorities. There can be no assurance that a new manufacturer can be
identified, qualified and validated on a timely basis.

The active compound (AN10) in The Company's AN10 Topical product has previously
been manufactured by Chemsyn. The Company has no long-term agreement with
Chemsyn for the production of AN10. AN10 Topical is currently manufactured by
PDC. The Company has no long-term agreement with PDC for the production of AN10
Topical or Novaheme.

It is the Company's long-term goal to market SuperVent(TM) for CF and possibly
certain of its other products through a direct sales force (or, in the case of
SuperVent(TM), possibly through the distribution capabilities of the Cystic
Fibrosis Foundation), if and when any necessary regulatory approvals are
obtained. The Company currently has no marketing and sales experience and no
marketing or sales personnel. Unless a sales force is established, the Company
will be dependent on corporate partners or other entities for the marketing and
selling of its products. There can be no assurance that the Company will be able
to enter into any satisfactory arrangements for the marketing and selling of its
products. The inability of the Company to enter into such third party
distribution, marketing and selling arrangements for its anticipated products
could have a material adverse effect on the Company's business, financial
condition and results of operations.

                                                                              11

COMPETITION

The Company is engaged in highly competitive fields of pharmaceutical research.
Competition from numerous existing companies and others entering the fields in
which the Company operates is intense and expected to increase. The Company
expects to compete with, among others, conventional pharmaceutical companies.
Most of these companies have substantially greater research and development,
manufacturing, marketing, financial, technological, personnel and managerial
resources than the Company. Acquisitions of competing companies by large
pharmaceutical or health care companies could further enhance such competitors'
financial, marketing and other resources. Moreover, competitors that are able to
complete clinical trials, obtain required regulatory approvals and commence
commercial sales of their products before The Company could enjoy a significant
competitive advantage. There are also existing therapies that may be expected to
compete with the Company's products under development.

Genentech has marketed Pulmozyme(TM) in the United States and Canada as a CF
therapy since early 1994. Pulmozyme(TM) reduces the viscosity of CF mucus by
cleaving the DNA released from destroyed inflammatory, epithelial and bacterial
cells which collect in mucus and contribute to its abnormal viscosity and
adherence. The approximate yearly cost of Pulmozyme(TM) treatment for an average
patient is $11,000. The Company believe that the high cost of this treatment may
reduce its competitive profile as compared with SuperVent(TM).

Presently, there are no approved drugs that are specifically indicated for MAS
or ARDS. Current therapy consists of general supportive care and mechanical
ventilation. Three products are specifically approved for the treatment of IRDS.
Exosurf(TM), marketed by Glaxo Wellcome, contains only phospholipids and
synthetic organic detergents and no stabilizing protein or peptides.
Survanta(TM), which has been shown to be more effective than Exosurf(TM) in
clinical trials, is an extract of bovine lung that contains the cow version of
Surfactant Protein B. Recently, Forest Laboratories has obtained an approvable
letter from the FDA for its calf lung surfactant, Infasurf(TM), for use in IRDS.
Although none of the three approved surfactants for IRDS is approved for ARDS,
which is a significantly larger market, there are a significant number of other
potential therapies in development for the treatment of ARDS that are not
surfactant related. Any of these various drugs or devices could significantly
impact the commercial opportunity for Surfaxin(TM). The Company believes that
synthetic surfactants such as Surfaxin(TM) will be far less expensive to produce
than the animal-derived products approved for the treatment of IRDS.

There are numerous approved therapies for osteoporosis which will compete with
ST-630. Such therapies include estrogen, which is of proven benefit in treating
osteoporosis in postmenopausal women, but is associated with significant adverse
effects (including increased breast and uterine cancer risk); Fosamax(TM)
(alendronate), a drug of the bisphosphonate class marketed by Merck; Evista(TM)
a selective estrogen receptor modulator marketed by Eli Lilly; and
Miacalcin(TM), a nasally administered calcitonin marketed by Sandoz
Pharmaceuticals. In addition, there are a number of therapies in development for
osteoporosis that potentially will compete with ST-630.

The Company is aware that British Biotech plc ("BBP") is currently developing
lexipafant, another platelet activating factor antagonist, for the treatment of
patients with pancreatitis. BBP is currently engaged in Phase 3 clinical trials
in the United States and had filed for marketing approval in the European Union
although that approval will not be forthcoming pending review of the current
Phase 3 study once completed. If lexipafant is approved prior to Apafant, it may
increase the cost and time required to obtain approval of Apafant, or limit the
indications for which Apafant may be marketed if it is approved. There can be no
assurance that Apafant will prove more efficacious than lexipafant in treating
patients with pancreatitis or, if approved, that Apafant will gain market
acceptance.

                                                                              12

The Company is aware that there are several additional butyrate-related
treatments for blood disorders that would directly compete with the Company's
Novaheme(TM) product under development and, therefore, potentially affect the
Company's ability to outlicense such product.

GOVERNMENT REGULATION

The testing, manufacture, distribution, advertising and marketing of drug
products are subject to extensive regulation by governmental authorities in the
United States and other countries. Prior to marketing, any pharmaceutical
products developed or licensed by the Company must undergo an extensive
regulatory approval process required by the FDA and by comparable agencies in
other countries. This process, which includes preclinical studies and clinical
trials of each pharmaceutical compound to establish its safety and efficacy and
confirmation by the FDA that good laboratory, clinical and manufacturing
practices were maintained during testing and manufacturing, can take many years,
requires the expenditure of substantial resources and gives larger companies
with greater financial resources a competitive advantage over the Company. The
FDA review process can be lengthy and unpredictable, and the Company may
encounter delays or rejections of its applications when submitted. If questions
arise during the FDA review process, approval may take a significantly longer
period of time. Generally, in order to gain FDA approval, a company first must
conduct preclinical studies in a laboratory and in animal models to obtain
preliminary information on a compound's efficacy and to identify any safety
problems. The results of these studies are submitted as part of an IND
application that the FDA must review before human clinical trials of an
investigational drug can start.

Clinical trials are normally done in three phases and generally take two to five
years or longer to complete. Typically, clinical testing involves a three-phase
process. Phase 1 consists of testing the drug product in a small number of
humans to determine preliminary safety and tolerable dose range. Phase 2
involves larger studies to evaluate the effectiveness of the drug product in
humans having the disease or medical condition for which the product is
indicated and to identify possible common adverse effects in a larger group of
subjects. Phase 3 consists of additional controlled testing to establish
clinical safety and effectiveness in an expanded patient population of
geographically dispersed test sites, to evaluate the overall benefit-risk
relationship for administering the product and to provide an adequate basis for
product labeling.

After completion of clinical trials of a new drug product, FDA and foreign
regulatory authority marketing approval must be obtained. A New Drug Application
("NDA") submitted to the FDA generally takes one to three years to obtain
approval. If questions arise during the FDA review process, approval may take a
significantly longer period of time. The testing and approval processes require
substantial time and effort and there can be no assurance that any approval will
be granted on a timely basis, if at all. Even if regulatory clearances are
obtained, a marketed product is subject to continual review, and later discovery
of previously unknown problems or failure to comply with the applicable
regulatory requirements may result in restrictions on the marketing of a product
or withdrawal of the product from the market as well as possible civil or
criminal sanctions. For marketing outside the United States, the Company also
will be subject to foreign regulatory requirements governing human clinical
trials and marketing approval for pharmaceutical products. The requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country. None of the Company's
products under development have been approved for marketing in the United States
or elsewhere. No assurance can be given that the Company will be able to obtain
regulatory approval for any such products under development. Failure to obtain
requisite governmental approvals or failure to obtain approvals of the scope
requested will delay or preclude the Company or its licensees or marketing
partners from marketing their products, or limit the commercial use of the
products, and thereby could have a

                                                                              13

material adverse effect on the Company's business, financial condition and
results of operations.

EMPLOYEES

The Company utilizes a product development strategy that involves contracting
out research, development and manufacturing functions to third parties in order
to minimize the expense and overhead associated with full-time employees.
Consistent with this strategy, the Company has only 13 employees, two of whom
devote only a portion of their time to the business of Discovery. The Company's
future success depends in significant part upon the continued service of its key
scientific personnel and executive officers and its continuing ability to
attract and retain highly qualified scientific and managerial personnel.
Competition for such personnel is intense and there can be no assurance that the
Company can retain its key employees or that it can attract, assimilate or
retain other highly qualified technical and managerial personnel in the future.

HISTORY; COMPLETION OF MERGER

On November 25, 1997, Old Discovery was merged (the "1997 Merger") with and into
the Company pursuant to an Agreement and Plan of Merger (the "1997 Merger
Agreement") dated as of July 16, 1997, between the Company and Old Discovery.
The terms of the 1997 Merger included (i) the change of the name of the Company
(which was named Ansan Pharmaceuticals, Inc. prior to the 1997 Merger) to
Discovery Laboratories, Inc., and (ii) the reconstitution of the Board of
Directors of the Company to initially include seven directors who were formerly
directors of Old Discovery, two existing directors of the Company and one
director nominated by D.H. Blair Investment Banking Corp. (who was also an
existing director of the Company). Immediately following the consummation of the
1997 Merger, the Company effected a 1-for-3 reverse split (the "Reverse Split")
of the outstanding common stock, par value $0.001 per share, of the Company (the
Common Stock").

Concurrently with the execution of the 1997 Merger Agreement, the Company and
Old Discovery entered into a stock purchase agreement pursuant to which Old
Discovery acquired 13,000 shares of the Series A Convertible Preferred Stock of
the Company for a purchase price of $1.3 million (the "Interim Investment").
Such Series A Convertible Preferred Stock was cancelled at the effective time of
the 1997 Merger.

At the time the 1997 Merger Agreement was executed, Titan Pharmaceuticals, Inc.
("Titan"), which held securities representing approximately 44% of the voting
power of the Company prior to Old Discovery's making of the Interim Investment,
entered into an agreement with the Company providing that upon effectiveness of
the 1997 Merger, the Company would sublicense certain rights to certain drug
compounds under the Bar-Ilan License Agreement to Titan in exchange for the
cancellation of all Common Stock owned by Titan and the provision of a 2%
royalty payable by Titan to the Company from net sales of the drug compounds
sublicensed by the Company to Titan. (This agreement was subsequently modified
to permit Titan to enter into a direct license agreement with Bar-Ilan relating
to the rights that would otherwise have been sublicensed by the Company. The
Company is nevertheless entitled to the 2% royalty referenced above.)
Additionally, the 1997 Merger Agreement provided that debt in the amount of
approximately $1,200,000 would be repaid by the Company to Titan at the
effective time of the 1997 Merger.

As a consequence of the 1997 Merger and the Reverse Split, (i) each share of the
common stock, par value $0.001 per share, of Old Discovery ("Old Discovery
Common Stock") was exchanged for 0.389157 shares of new Common Stock of the
Company ("New Common Stock"), (ii) each share of Series A Convertible Preferred
Stock, stated value $10.00 per share, of Old Discovery was exchanged for one
share of Series B Convertible Preferred Stock, stated value $10.00 per share, of
the Company

                                                                              14

("Series B Preferred Stock") and (iii) each share of Series B Preferred Stock,
which was convertible into 4.6698 shares of Common Stock prior to giving effect
to the Reverse Split, became convertible into 1.5566 shares of New Common Stock.

As a consequence of the Reverse Split, (i) each share of Common Stock
outstanding immediately prior to the 1997 Merger was exchanged for 1/3 of a
share of New Common Stock, (ii) each Class A Warrant of the Company outstanding
immediately prior to the 1997 Merger was exchanged for 1/3 of a new Class A
Warrant and (iii) each Class B Warrant of the Company outstanding at such time
was exchanged for 1/3 of a new Class B Warrant. Each new Class A Warrant is
exercisable for one share of New Common Stock and one new Class B Warrant at an
exercise price of $19.50 per new Class A Warrant. Each new Class B Warrant is
exercisable for one share of New Common Stock at an exercise price of $26.25 per
Class B Warrant.

RECENT EVENTS

1998 Merger Agreement

On March 5, 1998, Discovery, ATI Acquisition Corp., a newly-formed, wholly-owned
subsidiary of Discovery ("Acquisition Sub"), and ATI entered into an Agreement
and Plan of Merger (the "1998 Merger Agreement") providing for the acquisition
by Discovery, through a merger of Acquisition Sub with and into ATI (the "1998
Merger"), of the minority interest in ATI presently held by ATI management
members and consultants, the licensor of ATI's Surfaxin product and certain
other parties. The 1998 Merger is subject to a number of conditions, including
approval by the stockholders of Discovery and ATI. Pursuant to the 1998 Merger,
each issued and outstanding share of the Common Stock, par value $0.001 per
share, of ATI (the "ATI Common Stock") as to which appraisal rights are not
perfected in accordance with the Delaware General Corporation Law (the "DGCL")
will be converted into 3.91 shares of Common Stock (the "Exchange Ratio") and
each issued and outstanding share of the Series B Preferred Stock, par value
$0.001 per share, of ATI (the "ATI Series B Preferred Stock") will be converted
into one share of a new series of preferred stock of Discovery (the "Discovery
Series C Preferred Stock"). In addition, Discovery will assume certain
outstanding options to purchase ATI Common Stock. Each such option that is
assumed by Discovery will become exercisable for a number of shares of Common
Stock equal to the number of shares of ATI Common Stock for which such option
was previously exercisable multiplied by the Exchange Ratio at a per share
exercise price equal to the original exercise price divided by the Exchange
Ratio.

It is a condition to the consummation of the 1998 Merger that the following
persons be elected to the Board of Directors of Discovery at Discovery's 1998
Annual Meeting: Steve H. Kanzer (who will continue to be Chairman of the Board
of Discovery), Max Link and Mark Rogers, each of whom are presently directors of
both Discovery and ATI; Richard Sperber, Herbert McDade and David Naveh, each of
whom is presently a director of Discovery; and Robert J. Capetola, Milton
Packer, Marvin Rosenthale and Richard Power, each of whom is presently a
director of ATI. All such directors will serve until their successors have been
duly elected and qualified or otherwise as provided by law.

After the Merger, Dr. Capetola, who is currently the Chairman and Chief
Executive Officer of ATI, will be the Chief Executive Officer of the Company.
Other principal officers of the Company, who are also currently officers of ATI,
will be Harry Brittain, Vice President of Pharmaceutical and Chemical
Development; Laurence B. Katz, Vice President of Project Management and Clinical
Administration; Chris Schaber, Vice President of Regulatory Affairs and Quality
Control; Huei Tsai, Vice President of Biometrics; Thomas E. Wiswell, Vice
President of Clinical Research; and Lisa Mastroianni, Director of Clinical
Research. Evan Myrianthopoulos, who is currently the Chief

                                                                              15

Financial Officer of Discovery, will be Vice President of Finance following the
1998 Merger.

Upon consummation of 1998 the Merger, Dr. Capetola will become the Chief
Executive Officer of the Company and the other members of ATI's management team
(together with Dr. Capetola, the "ATI Management Members") will assume executive
positions with the Company comparable to their present positions with ATI. Dr.
Capetola will receive a $100,000 bonus upon execution of his employment
agreement with the Company (the "New Capetola Employment Agreement") and a
$50,000 bonus upon the execution of each partnering or similar arrangement
involving Surfaxin(TM) having a value in excess of $10 million. He will be
entitled to an initial base salary of $236,250 per annum. The remaining ATI
Management Members will hold positions with Discovery on terms, including
compensation terms, that are substantially similar to the terms of their present
employment with ATI. Upon consummation of the 1998 Merger, options to purchase
338,500 shares of Common Stock will be granted pursuant to the employment
agreements with the ATI Management Members.

The ATI Management Members will be entitled to the following aggregate milestone
incentive payments (in each case in either cash or equity and allocated at the
discretion of the Company's compensation committee following receipt of a
recommendation from Dr. Capetola): $150,000 upon the successful completion of
Phase 2 studies of any portfolio compound; $500,000 upon the successful
completion of Phase 3 studies of any portfolio compound; and $1,000,000 upon the
receipt of marketing approval in the United States for any portfolio compound.
Each of the foregoing milestone payments shall be payable no more than once. In
addition, the ATI Management Members shall be entitled, in the aggregate, to
receive options for the purchase of 175,000 shares of Common Stock at such time
as the market capitalization of the Company (based on the average closing price
and amount of Common Stock outstanding over a 30-trading-day period) exceeds $75
million and options for the purchase of 160,000 shares of Common Stock upon
consummation of a corporate partnering deal involving any portfolio compound
having a total value of at least $20 million.

Management Agreement

Concurrently with the execution of the 1998 Merger Agreement, Discovery and ATI
entered into a management agreement (the "Management Agreement") pursuant to
which the ATI Management Members are managing both Discovery and ATI pending the
closing of the 1998 Merger. In the event the 1998 Merger is not consummated on
or prior to July 15, 1998 due to any breach by Discovery or its stockholders of
their obligations under the 1998 Merger Agreement, Discovery shall pay to ATI on
such date (or any earlier date of the abandonment of the transactions
contemplated hereby) (the "Date of Termination") 50% of the salary expense
attributable to the ATI Management Members from the date of execution of the
1998 Merger Agreement through the Date of Termination. Pursuant to the
Management Agreement, the ATI Management Members have been granted options to
purchase, in the aggregate, 126,500 shares of Common Stock. Such of the
foregoing options as have been allocated to Dr. Capetola shall be fully vested
upon the closing of the 1998 Merger and the remaining options shall vest in
three equal installments on the first, second and third anniversaries of the
1998 Merger, provided that in the event the 1998 Merger is not consummated on or
prior to July 15, 1998 due to the breach by Discovery or its stockholders of any
of their obligations under the 1998 Merger Agreement, all of the options granted
pursuant to the Management Agreement shall be immediately vested in full.

                                                                              16

IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS

The following important factors, among others, could cause the Company's actual
results, performance, achievements, or industry results to differ materially
from those expressed in the Company's forward-looking statements contained
herein and presented elsewhere by management from time to time.

Development Stage of the Company; No Developed or Approved Products; Uncertainty
of Future Profitability

The Company is a development stage company. The potential products upon which
the Company intends to focus its development efforts are in the research and
development stage and, accordingly, the Company has not begun to market or
generate revenues from the commercialization of any of these products under
development. The Company's products under development will require significant
time-consuming and costly research, development, preclinical studies, clinical
testing, regulatory approval and significant additional investment prior to
their commercialization, which may never occur. Such clinical testing
activities, together with resultant increases in general and administrative
expenses, are expected to result in significant additional operating losses for
the foreseeable future. The Company is not currently profitable and it is
expected that the Company will not generate significant product revenues for the
foreseeable future, if at all. It is expected that the Company will incur
significant increasing operating losses over the next several years. To achieve
profitable operations, the Company, alone or with others, must successfully
develop and obtain regulatory approval for marketing its products.

The Company's operations will be subject to numerous risks associated with the
establishment and development of products based upon innovative or novel
technologies. As a result, the Company will be subject to the problems, delays,
uncertainties and complications encountered in connection with newly founded
development stage life science businesses. Some of these unanticipated problems
may include development, regulatory, manufacturing, distribution and marketing
difficulties that may be beyond the Company's financial or technical abilities
to satisfactorily resolve. In particular, there can be no assurance that the
Company's proposed drug products will not cause adverse effects that may prevent
them from being marketed, regardless of their efficacy. Certain of the Company's
initial drug candidates have not been the subject of Phase 1 clinical trials,
the purpose of which include identifying adverse effects, or have not been the
subject of such clinical trials at the dosage levels at which the Company
anticipates they will be administered in treating the indications for which the
Company is exploring their use. Moreover, those that have been the subject of
previous clinical trials may be shown to have previously undetected adverse
effects during the more extensive clinical trials that will be required prior to
their becoming candidates for marketing approval by the FDA. There can be no
assurance that the research and development activities funded by the Company
will be successful, that products under development will prove to be safe and
effective, that any of the preclinical or clinical development work will be
completed, that the Company will ever achieve any of its NDA filing objectives
with the FDA, that FDA approval will be attained for such products, that the
anticipated products will be commercially viable or successfully marketed, that
third parties do not hold proprietary rights that will preclude the Company from
marketing its products, if any, or that, if the products under development are
approved by the FDA, the Company will ever achieve significant revenues or
profitable operations.

Need for Additional Financing; Issuance of Securities; Future Dilution

In the future, the Company will require substantial additional funding to
conduct its research and product development activities and to manufacture and
market, if approved by the FDA or corresponding foreign regulatory authorities,
the products currently under development by the

                                                                              17

Company and any other products that the Company may develop in the future. The
Company may seek to raise further funds through collaborative ventures entered
into with potential corporate partners and/or additional debt or equity
financings. While the Company may seek to enter into collaborative ventures with
corporate partners to fund some or all of its research and development
activities, as well as to manufacture or market any products which may be
successfully developed, the Company currently does not have any such
arrangements with corporate partners. The Company has not made arrangements to
obtain any additional financing and there can be no assurance that the Company
will be able to obtain adequate additional financing on acceptable terms, if at
all, or that any such additional financing would not result in significant
dilution of stockholders' interests. Failure by the Company to enter into
collaborative ventures or to receive additional funding to complete its proposed
product development programs would have a material adverse effect on the
Company. If additional financing is not otherwise available, the Company will be
required to modify its business development plans or reduce or cease certain or
all of its operations.

There are currently 2,200,256 shares of Series B Preferred Stock outstanding.
Based on the current conversion price, each share of Series B Preferred Stock is
convertible at the option of the holder thereof into approximately 1.56 shares
of Common Stock of the Company. The conversion price in effect immediately prior
to the first anniversary of the effective time of the Merger (the "Reset Date")
will be adjusted effective as of the Reset Date if the average closing bid price
of the Common Stock for the 30 consecutive trading days immediately preceding
the Reset Date is less than 135% of such conversion price. Any such reset of the
conversion price applicable to the Series B Preferred Stock could increase the
number of shares of Common Stock into which each share of Series B Preferred
Stock is convertible to a maximum of 3.12 shares and would have a dilutive
effect on the holders of the Company's capital stock.

Extensive Government Regulation; Uncertainty of FDA and Other Governmental
Approval of Products Under Development

The testing, manufacture, distribution, advertising and marketing of drug
products are subject to extensive regulation by governmental authorities in the
United States and other countries. Prior to marketing, any pharmaceutical
products developed or licensed by the Company must undergo an extensive
regulatory approval process required by the FDA and by comparable agencies in
other countries. This process, which includes preclinical studies and clinical
trials of each pharmaceutical compound to establish its safety and effectiveness
and confirmation by the FDA that good laboratory, clinical and manufacturing
practices were maintained during testing and manufacturing, can take many years,
requires the expenditure of substantial resources and will give larger companies
with greater financial resources a competitive advantage over the Company. The
FDA review process can be lengthy, and the Company may encounter delays or
rejections of its applications when submitted. If questions arise during the FDA
review process, approval may take a significantly longer period of time.
Generally, in order to gain FDA approval, a company must conduct preclinical
studies in a laboratory and in animal models to obtain preliminary information
on a compound's efficacy and to identify any safety problems. The results of
these studies are submitted as part of an IND that the FDA must review before
human clinical trials of an investigational drug can start. Clinical trials are
normally done in three phases and generally take two to five years or longer to
complete.

Upon completion of clinical trials of a new drug product, FDA and foreign
regulatory authority marketing approval must be obtained before the new drug
product can be sold. NDAs submitted to the FDA generally take one to three years
to be approved. If questions arise during the FDA review process, approval may
take a significantly longer period of time. The testing and approval processes
require substantial time and effort and there can be no assurance that any
approval will be granted on a timely basis, if at all. Even if regulatory
clearances are obtained, a marketed product is subject

                                                                              18

to continual review, and later discovery of previously unknown problems or
failure to comply with the applicable regulatory requirements may result in
restrictions on the marketing of a product or withdrawal of the product from the
market as well as possible civil or criminal sanctions. For marketing outside
the United States, the Company also will be subject to foreign regulatory
requirements governing human clinical trials and marketing approval for
pharmaceutical products. The requirements governing the conduct of clinical
trials, product licensing, pricing and reimbursement vary widely from country to
country. None of the Company's products under development have been approved for
marketing in the United States or elsewhere (nor has testing been completed). No
assurance can be given that the Company will be able to obtain regulatory
approval for any such products under development. Failure to obtain requisite
governmental approvals or failure to obtain approvals of the scope requested
will delay or preclude the Company or its licensees or marketing partners from
marketing the Company's products under development, or limit the commercial use
of such products, and thereby could have a material adverse effect on the
Company's business, financial condition and results of operations.

Dependence on Others for Clinical Development of, Regulatory Approvals for, and
Manufacturing and Marketing of Pharmaceutical Products

The Company's strategy has been, and will be, to seek to enter into
collaborative agreements with pharmaceutical companies for the research and
development, clinical testing, manufacturing, marketing and commercialization of
certain of its products. The Company will therefore be dependent upon obtaining
such partners and the expertise and dedication of sufficient resources by third
parties to develop and commercialize certain of its proposed products. The
Company may in the future grant to its collaborative partners, if any, rights to
license and commercialize any pharmaceutical products developed under these
collaborative agreements and such rights would limit the Company's flexibility
in considering alternatives for the commercialization of such products. Under
such agreements, the Company expects to rely on its collaborative partners to
conduct research and clinical trials, manufacture, market and commercialize
certain of its products. Although the Company believes that its collaborative
partners may have an economic motivation to commercialize the pharmaceutical
products which they may license from the Company, the amount and timing of
resources devoted to these activities generally will be controlled by each such
individual partner. There can be no assurance that the Company will be
successful in establishing any collaborative arrangements, or that, if
established, such future partners will be successful in developing and
commercializing products or that the Company will derive any revenues from such
arrangements.

The Company has entered into clinical research agreements with University of
Utah Health Sciences Center ("UHSC") for clinical trials of SuperVent(TM) in the
treatment of CF; with for clinical trials of Surfaxin(TM) to treat ARDS; and
with Covance Clinical Research Unit for clinical trials of ST-630 to treat
postmenopausal osteoporosis. ATI and Scripps have entered into a sponsored
research agreement whereby ATI is supporting continuing research regarding
Surfaxin(TM) for a two-year period ending in October 1998. The Company has not
entered into any collaborative arrangements with respect to its other products
under development.

Technological Uncertainty and Obsolescence

The market for biotechnology is characterized by rapidly changing technology and
evolving industry standards. The Company's future success will depend upon its
ability to develop and commercialize its existing products and to develop new
products and applications. There can be no assurance that the Company will
successfully complete the development of the Company's current or future
products or that such products will achieve market acceptance. Any delay or
failure of such products under development or any future product which may
develop in achieving market

                                                                              19

acceptance would adversely affect the Company's business.

The Company's products under development are intended to treat diseases for
which other technologies and proposed treatments are rapidly developing. There
can be no assurance that any results of the Company's research and product
development efforts will not be rendered obsolete by research efforts and
technological activities of others, including the efforts and activities of
governments, major research facilities and large multinational corporations.

Dependence on Patents, Licenses and Protection of Proprietary Rights; Risk of
Loss of Technology

In order to justify the substantial investment of time and expense required to
develop and commercialize its products, the Company will seek proprietary
protection for its drug candidates so as to prevent others from commercializing
equivalent products in substantially less time and at substantially lower
expense. The pharmaceutical industry places considerable importance on obtaining
patent and trade secret protection for new technologies, products and processes.
The Company's success will depend in part on the ability of the Company and its
licensors to obtain effective patent protection for the Company's proprietary
technologies and products, defend such patents, preserve its trade secrets and
operate without infringing upon the proprietary rights of others, both in the
United States and in other countries. The patent position of firms relying upon
biotechnology is highly uncertain and involves complex legal and factual
questions. To date, there has emerged no consistent policy at the United States
Patent and Trademark Office ("PTO") regarding the breadth of claims allowed in
biotechnology patents or the degree of protection afforded under such patents.

There are various United States and foreign patents and patent applications
(including international applications filed under the Patent Cooperation Treaty)
that have been issued or filed with respect to the products and technologies
under development by the Company. These patents and patent applications have
been licensed to the Company. Although the licensors under such licenses have
retained control of the patent prosecution process, the Company is responsible
for the expenses of prosecuting the patents and patent applications (i.e., the
fees of patent counsel and any domestic or foreign filing fees that are
applicable). Patent applications may be expected to remain pending for several
years before the issuance of a patent, if any, and the prosecution of patent
applications with respect to the Company's products may entail considerable
expense to the Company.

There can be no assurance that patents will issue as a result of any of the
pending patent applications relating to the Company's products and technologies
or that the issued patents and any patents resulting from the pending patent
applications will be sufficiently broad to afford protection to the Company
against competitors with similar products and technologies. In addition, there
can be no assurance that such patents will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company. The commercial success of the Company will also
depend upon its avoidance of infringement of patents issued to competitors. A
United States patent application is maintained under conditions of
confidentiality while the application is pending, so the Company will not be
able to determine the inventions being claimed in pending patent applications
filed by third parties. Litigation may be necessary to defend or enforce the
Company's patent and license rights or to determine the scope and validity of
the proprietary rights of others. Defense and enforcement of patent claims can
be expensive and time-consuming, even in those instances in which the outcome is
favorable to the Company, and can result in the diversion of substantial
resources from the Company's other activities. An adverse outcome could subject
the Company to significant liabilities to third parties, require the Company to
obtain licenses from third parties, or require the Company to alter its products
or processes or cease

                                                                              20

altogether any related research and development activities or product sales, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company requires all employees to enter into confidentiality agreements that
prohibit the disclosure of confidential information to third parties and require
disclosure and assignment to the Company of rights to such employees' ideas,
developments, discoveries and inventions while so employed. In addition, the
Company seeks to obtain such agreements from its consultants, advisors and
research collaborators. To the extent that consultants, key employees or other
third parties apply technological information independently developed by them or
by others to any of the proposed projects of the Company, disputes may arise as
to the proprietary rights to such information which may not be resolved in favor
of the Company. In addition, the Company will rely on trade secrets and
proprietary know-how that it will seek to protect in part by confidentiality
agreements with its employees, consultants, advisors or others. There can be no
assurance that these agreements will not be breached, that the Company would
obtain adequate remedies for any breach, or that the Company's trade secrets or
proprietary know-how and will not otherwise become known or be independently
developed by competitors in such a manner that the Company has no legal
recourse.

The Company is dependent on licensing arrangements for access to its products
under development, and the Company will be required to make certain payments and
satisfy certain performance obligations in order to maintain the effectiveness
of such licensing arrangements. The Company is responsible pursuant to its
licensing agreements for the cost of filing and prosecuting patent applications
and maintaining issued patents. If the Company does not meet its due diligence
and/or financial obligations under its license agreements in a timely manner,
the Company could lose the rights to its proprietary technology, which would
have a material adverse effect on the Company.

See also "License Agreements; Patents and Proprietary Rights" in this Item 1.

Dependence on Third Party Suppliers; Lack of Manufacturing Capability

The Company does not have any manufacturing capacity of its own and the Company
will be required to rely on outside manufacturers to produce appropriate
clinical grade material for its use in clinical studies for certain of its
products. Failure of the foreign or domestic suppliers of the Company's products
or failure of the manufacturers of the Company's products to comply with GMP
regulations or other FDA regulatory requirements would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Third Party Suppliers; Marketing and Manufacturing" in this Item 1.

Lack of Marketing Capability and Experience

The Company currently has no marketing and sales experience and no marketing or
sales personnel. Unless a sales force is established, the Company will be
dependent on corporate partners or other entities for the marketing and selling
of its products. There can be no assurance that the Company will be able to
enter into any satisfactory arrangements for the marketing and sale of its
products. The inability of the Company to successfully establish a sales force
or enter into third party distribution, marketing and selling arrangements for
its anticipated products would have a material adverse effect on the Company's
business, financial condition and results of operations.

Dependence Upon Key Personnel and Consultants

The Company will be highly dependent upon its officers and directors, as well as
its scientific advisory board members, consultants and collaborating scientists.
Since competent management personnel and personnel capable of performing the
foregoing functions are in great demand, there

                                                                              21

can be no assurance that the Company will be able to attract and retain such
personnel on a timely basis and on terms acceptable to the Company. It is
anticipated that the Company's success will depend in large part upon attracting
and retaining highly-skilled managerial and other employees.

No Assurance of Additional Products

Although the Company intends to devote substantial resources to the development
and commercialization of some or all of the products under development, the
Company intends to explore the acquisition and subsequent development and
commercialization of additional pharmaceutical products and technologies. There
can be no assurance that the Company will be able to identify any additional
products or technologies, that it will be able to license any such technologies
on acceptable terms or that, even if suitable products or technologies are
identified, the Company will have sufficient resources to pursue any such
products or technologies to commercialization.

Competition

The Company will be engaged in a highly competitive field. Competition from
numerous existing companies and potential new entrants is intense and expected
to increase. Many of these companies have substantially greater research and
development, manufacturing, marketing, financial, technological, personnel and
managerial resources than the Company. There can be no assurance that any
products developed by the Company will be more effective than those developed
and marketed by its competitors. Colleges, universities, governmental agencies
and other public and private research organizations are becoming more active in
seeking patent protection and licensing arrangements to collect royalties for
use of technology that they have developed, some of which may be directly
competitive with the technologies to be developed by the Company. These
institutions will also compete with the Company in recruiting highly qualified
scientific personnel. It is expected that therapeutic developments in the areas
in which the Company will be active may occur at a rapid rate and that
competition will intensify as advances in this field are made. Accordingly, the
Company will be required to continue to devote substantial resources and efforts
to research and development activities. See "Competition" in this Item 1.

Risk of Product Liability; No Insurance Coverage

Should the Company successfully develop any products, the marketing of such
products, through third party arrangements or otherwise, may expose the Company
to product liability claims in the event that the use or misuse of
pharmaceutical products manufactured by, or under license from, the Company
results in adverse effects. The Company presently carries product liability
insurance relating to its Phase 1/2 clinical trial of SuperVent(TM) and its
Phase 2 Clinical trials of Surfaxin(TM) in treating ARDS and MAS. The Company
may be required to obtain additional product liability insurance coverage prior
to initiation of clinical trials of its other proposed products. It is expected
that the Company will obtain product liability insurance coverage before
commercialization of its proposed products. There can be no assurance that
adequate insurance coverage will be available at an acceptable cost, if at all.
In addition, there can be no assurance that a product liability claim, even if
the Company has insurance coverage, would not materially adversely affect the
Company's business, financial condition and results of operations.

Uncertainty of Product Pricing and Reimbursement; Health Care Reform and Related
Measures

The levels of revenues and profitability of pharmaceutical and/or biotechnology
products and companies may be affected by efforts of governmental and third
party payers to contain or reduce

                                                                              22

the costs of health care through various means. For example, in certain foreign
markets, pricing or profitability of prescription pharmaceuticals is subject to
government control. In the United States, there have been a number of federal
and state proposals to implement similar government control. Presently, the
United States Congress is considering a number of legislative and regulatory
reforms that may affect companies engaged in the health care industry in the
United States. Pricing constraints on the Company's products, if approved, could
have a material adverse effect on the Company. While it cannot be predicted
whether these proposals will be adopted or what effects such proposals may have
on its business, the existence and pendency of such proposals could in general
have a material adverse effect on the Company. In addition, the Company's
ability to commercialize potential pharmaceutical and/or biotechnology products
may be adversely affected to the extent that such proposals have a material
adverse effect on other companies that are prospective collaborators with
respect to any of the Company's product candidates.

In the United States and elsewhere, successful commercialization of the
Company's products will depend in part on the availability of reimbursement to
the consumer from third party health care payers, such as government and private
insurance plans. There can be no assurance that such reimbursement will be
available or will permit price levels sufficient to realize an appropriate
return on the Company's investment in product development. Third party health
care payers are becoming increasingly cost conscious in determining which
pharmaceutical products they will and will not reimburse. If the Company
succeeds in bringing one or more products to the market, there can be no
assurance that these products will be considered cost effective and that
reimbursement to the consumer will be available or will be sufficient to allow
the Company to sell its products on a competitive basis.

Control by Current Officers, Directors and Principal Stockholders

The directors, executive officers and principal stockholders of the Company
beneficially own approximately 28% of the outstanding voting securities of the
Company on an as converted basis. Accordingly, the Company's executive officers,
directors, principal stockholders and certain of their affiliates have the
ability to exert substantial influence over the election of the Company's Board
of Directors and the outcome of issues submitted to the Company's stockholders.
Such a concentration of ownership may have the effect of delaying or preventing
a change in control of the Company, including transactions in which stockholders
might otherwise recover a premium for their shares over their current market
prices.

Uncertainty of Listing on Nasdaq Small Cap Market; Possible Delisting from
Nasdaq SmallCap Market; Market Illiquidity

To meet the current Nasdaq listing requirements for the Company's securities to
continue to be listed on the Nasdaq SmallCap Market, the Company will have to
maintain (a) (1) at least $2 million in net tangible assets, (2) $35 million in
market capitalization, or (3) $500,000 in net income (over two of the last three
years), (b) a public float of at least 500,000 shares valued at $1 million or
more and (c) a minimum bid price of $1.003. In addition, the Company's Common
Stock will have to be held by at least 300 holders and will have to have at
least two active market makers. For purposes of determining compliance with the
public float requirement, shares of stock held by officers, directors and
10%-or- greater stockholders are excluded.

If the Company is unable to satisfy the NASD's listing maintenance requirements,
the Company's securities may be delisted from the Nasdaq SmallCap Market. In
such event, trading, if any, in the Company's securities would thereafter be
conducted in the over-the-counter market in the so-called "pink sheets" or on
the NASD's "OTC Electronic Bulletin Board." Consequently, the liquidity of the
Company's securities could be impaired, not only in the number of securities
which could be bought

                                                                              23

and sold, but also through delays in the timing of the transactions, reduction
in securities analysts' and the news media's coverage of the Company, and lower
prices for the Company's securities than might otherwise be attained.

Risks of Low-Priced Stock; Possible Effect of "Penny Stock" Rules on Liquidity
for the Common Stock

If the Company's securities were to be delisted from the Nasdaq SmallCap Market,
they could become subject to Rule 15g-9 under the Exchange Act, which imposes
additional sales practice requirements on broker-dealers which sell such
securities to persons other than established customers and "accredited
investors" (generally, individuals with net worth in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses). For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, the rule may
adversely affect the ability of broker-dealers to sell the Company's securities
and may adversely affect the ability of purchasers in this offering to sell any
of the securities acquired hereby in the secondary market.

The Commission has adopted regulations which define a "penny stock" to be an
equity security that has a market price (as therein defined) less than $5.00 per
share or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks.

The foregoing required penny stock restrictions will not apply to the Company's
securities if such securities continue to be listed on the Nasdaq SmallCap
Market and have certain price and volume information provided on a current and
continuing basis or meet certain minimum net tangible assets or average revenue
criteria. There can be no assurance that the Company's securities will qualify
for exemption from these restrictions. In any event, even if the Company's
securities were exempt from such restrictions, it would remain subject to
Section 15(b)(6) of the Exchange Act, which gives the Commission the authority
to prohibit any person that is engaged in unlawful conduct while participating
in a distribution of a penny stock from associating with a broker-dealer or
participating in a distribution of a penny stock, if the Commission finds that
such a restriction would be in the public interest. If the Company's securities
were subject to the existing or proposed rules on penny stocks, the market
liquidity for the Company's securities could be severely adversely affected.

Certain Interlocking Relationships; Potential Conflicts of Interest

Steve H. Kanzer, the Chairman of the Board of Directors, is a full-time officer
of Paramount Capital, Incorporated ("Paramount Capital") and of Paramount
Capital Investments, LLC ("Paramount Investments"), an affiliate of Paramount
Capital. In addition, Kenneth Johnson, the Director of Business Development of
the Company, is a Technology Associate of Paramount Investments. Each of these
individuals devotes only a portion of his time to the business of the Company.
Paramount Capital acted as placement agent for Old Discovery in a private equity
offering conducted during June through November 1996 (the "Unit Offering").
Paramount Investments is a merchant banking firm specializing in biotechnology
companies. In the regular course of its business, Paramount Investments
identifies, evaluates and pursues investment opportunities in biomedical and
pharmaceutical products, technologies and companies. The DGCL

                                                                              24

requires that any transactions between the Company and any of its affiliates be
on terms that, when taken as a whole, are substantially as favorable to the
Company as those then reasonably obtained from a person who is not an affiliate
in an arm's-length transaction. Nevertheless, Paramount Investments is not
obligated pursuant to any agreement or understanding with the Company to make
any additional products or technologies available to the Company, and there can
be no assurance that any biomedical or pharmaceutical product or technology
identified by Paramount Investments or any other affiliates of Paramount Capital
or Paramount Investments in the future will be made available to the Company.

Certain of the officers, directors, consultants, and advisors to the Company may
from time to time serve as officers, directors, consultants or advisors to other
biopharmaceutical or biotechnology companies. There can be no assurance that
such other companies will not in the future have interests in conflict with
those of the Company.

Potential Adverse Effect of Shares Eligible for Future Sale

The Company has outstanding approximately (i) 3,175,955 shares of Common Stock;
(ii) 2,200,256 shares of Series B Preferred Stock convertible into 3,424,980
shares of Common Stock; (iii) 735,833 Class A Warrants to purchase an aggregate
of 735,833 shares of Common Stock and 735,833 Class B Warrants to purchase an
additional 735,833 shares of Common Stock; (iv) 498,333 Class B Warrants to
purchase 498,333 shares of Common Stock; (v) a unit purchase option to purchase
an aggregate of 173,333 shares of Common Stock, assuming exercise of the
underlying warrants; (vi) outstanding options to purchase 630,993 shares of
Common Stock; (vii) warrants to purchase 220,026 shares of Series B Preferred
Stock; and (viii) warrants to purchase 85,625 shares of Common Stock. The
Company also has 18,341 shares of Common Stock reserved for issuance upon
exercise of options issuable under stock option plans. Holders of the Company's
warrants and options are likely to exercise them when, in all likelihood, the
Company could obtain additional capital on terms more favorable than those
provided by warrants and options. Further, while these warrants and options are
outstanding, the Company's ability to obtain additional financing on favorable
terms may be adversely affected. The holders of the unit purchase options and
certain stockholders have certain demand and "piggy-back" registration rights
with respect to their securities. Exercise of such rights could involved
substantial expense to the Company.

No prediction can be made as to the effect, if any, that the availability of
such shares for sale will have on the market prices that may be quoted from time
to time on the Nasdaq SmallCap Market. Nevertheless, the possibility that
substantial amounts of the Company's Common Stock may be sold in the public
market may adversely effect the prevailing market prices for the Company's
Common Stock and could impair the Company's ability to raise capital in the
future through the sale of equity securities. Actual sales or the prospect of
future sales of shares of the Company's Common Stock under Rule 144 or otherwise
may have a depressive effect upon the price of the Company's Common Stock and
the market therefor.

Antitakeover Effects of Provisions of the Certificate of Incorporation and
Delaware Law

The Company's Certificate of Incorporation, as amended, authorizes the issuance
of up to 5,000,000 shares of preferred stock, of which 2,200,256 shares will be
outstanding and of which 220,026 shares will be reserved for issuance upon the
exercise of warrants. The Board of Directors of the Company will have the
authority to fix and determine the relative rights and preferences of preferred
shares, as well as the authority to issue such shares, without further
stockholder approval. As a result, the Board of Directors of the Company could
authorize the issuance of a series of preferred stock which would grant to
holders the preferred right to the assets of the Company upon liquidation, the
right to receive dividend coupons before dividends would be declared to Common

                                                                              25

stockholders, and the right to the redemption of such shares, together with a
premium, prior to the redemption of the Company's Common Stock. Common
stockholders have no redemption rights. In addition, the Board could issue large
blocks of preferred stock to fend against unwanted tender offers or hostile
takeovers without further stockholder approval.

The Company is subject to Section 203 of the DGCL which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person. The foregoing provisions could have the
effect of discouraging others from making tender offers for the Company's shares
and, as a consequence, they also may inhibit fluctuations in the market price of
the Company's shares that could result from actual or rumored takeover attempts.
Such provisions also may have the effect of preventing changes in the management
of the Company.

Dividends Unlikely

The Company has never paid cash dividends on its capital stock and does not
anticipate paying any cash dividends for the foreseeable future.

ITEM 2. DESCRIPTION OF PROPERTY.

The Company currently has its executive offices at 509 Madison Avenue, 14th
Floor, New York, New York 10022. The Company's telephone number is (212)
223-9504 and its facsimile number is (212) 688-7978.

ATI currently has its executive offices at 3359 Durham Road, Doylestown, PA
18901. ATI's telephone number is (215) 794-3064 and its facsimile number is
(215) 794-3239.

ITEM 3. LEGAL PROCEEDINGS.

The Company is not aware of any pending or threatened legal actions other than
disputes arising in the ordinary course of its business that would not, if
determined adversely to the Company, have a material adverse effect on the
Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.

On November 24, 1997, the Company held a special meeting of shareholders at
which three proposals were submitted to a vote of the stockholders.

Proposal No. 1

Submitted as Proposal No. 1 at the special meeting was the approval of the 1997
Merger. The number of affirmative votes, negative votes, withheld votes,
abstentions and broker non-votes with respect to Proposal No. 1 (without giving
effect to the Reverse Split) were as follows:

                   Affirmative  Negative                  Broker
                         Votes     Votes  Abstentions  Non-Votes
                   -----------  --------  -----------  ---------
                     1,521,823    19,600       34,000    937,876

                                                                              26

Proposal No. 2

Submitted as Proposal No. 2 at the special meeting was the approval of an
amendment to the Company's certificate of incorporation to effect the Reverse
Split. The number of affirmative votes, negative votes, abstentions and broker
non-votes with respect to Proposal No. 2 (without giving effect to the Reverse
Split) were as follows:

                   Affirmative  Negative                  Broker
                         Votes     Votes  Abstentions  Non-Votes
                   -----------  --------  -----------  ---------
                     2,511,294     2,000            0          0

Proposal No. 3

Submitted as Proposal No. 3 at the special meeting was an amendment to the
Company's 1995 Stock Option Plan increasing the number of shares of Common Stock
available for issuance thereunder. The number of affirmative votes, negative
votes, abstentions and broker non-votes with respect to Proposal No. 3 (without
giving effect to the Reverse Split) were as follows:

                   Affirmative  Negative                  Broker
                         Votes     Votes  Abstentions  Non-Votes
                   -----------  --------  -----------  ---------
                     1,510,623    29,800        3,500    969,376

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Common Stock is traded on the Nasdaq SmallCap Market under the symbol
"DSCO." In addition, the Company's units (consisting of Common Stock, Class A
Warrants and Class B Warrants), Class A Warrants and Class B Warrants are
approved for listing on the Nasdaq SmallCap Market. As of March 24, 1998, the
number of stockholders of record of the Common Stock was approximately 105, and
the number of beneficial owners of shares of the Common Stock held in street
name was approximately 465. As of March 24, 1998, there were approximately
3,175,955 shares of Common Stock outstanding.

The following table sets forth the quarterly price ranges of the Discovery
Common Stock for the periods indicated, as reported by Nasdaq. The following
price ranges are adjusted for the Reverse Split.

                                                                   Low      High
                                                                   ---      ----

First Quarter 1996.............................................  $10.88    15.75
Second Quarter 1996............................................   12.00    15.38
Third Quarter 1996.............................................    7.50    14.25
Fourth Quarter 1996............................................    6.00     9.38

                                                                              27

First Quarter 1997.............................................    6.38   $ 9.75
Second Quarter 1997 ...........................................    3.75     6.00
Third Quarter 1997.............................................    3.56     6.00
Fourth Quarter 1997............................................    3.75    10.31

First Quarter 1998 (through March 24)..........................    3.94     9.00

The Company has not paid dividends on the Discovery Common Stock. It is
anticipated that the Company will not pay dividends on the Discovery Common
Stock in the foreseeable future.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
        OPERATIONS

The following discussion reflects the historical results of Old Discovery as the
1997 Merger was accounted for as a reverse acquisition with Old Discovery as the
acquiror for financial reporting purposes.

Plan of Operations

Since its inception, the Company has concentrated its efforts and resources in
the development and commercialization of pharmaceutical products and
technologies. The Company has been unprofitable since its founding and has
incurred a cumulative net loss of approximately $12,418,000 as of December 31,
1997. The Company expects to incur significantly increasing operating losses
over the next several years, primarily due to the expansion of its research and
development programs, including clinical trials for some or all of its existing
products and technologies and other products and technologies that it may
acquire or develop. The Company's ability to achieve profitability depends upon,
among other things, its ability to discover and develop products, obtain
regulatory approval for its proposed products, and enter into agreements for
product development, manufacturing and commercialization. None of the Company's
products currently generates revenues and the Company does not expect to achieve
revenues for the foreseeable future. Moreover, there can be no assurance that
the Company will ever achieve significant revenues or profitable operations from
the sale of any of its products or technologies.

The Company is currently engaged in the development and commercialization of
investigational drugs that have previously been tested in humans or animals. The
Company anticipates that during the next 12 months it will conduct substantial
research and development of its products under development, including, without
limitation, a Phase 1/2 clinical trial of SuperVent(TM) for the treatment of CF
that was commenced by Discovery on March 17, 1997 (and, if such clinical trial
is successfully completed, a Phase 2 clinical trial of SuperVent(TM) for the
treatment of chronic bronchitis), a Phase 2 clinical trial of Surfaxin(TM) for
the treatment of MAS that was commenced by ATI on May 27, 1997 and a Phase 2
clinical trial of Surfaxin((TM)) for the treatment of ARDS that was commenced by
ATI on August 15, 1997. Discovery initiated on December 5, 1997 a Phase 1
clinical study of ST-630 as a once-daily, orally administered drug for the
treatment of postmenopausal osteoporosis in the United States. Any clinical
trials of the Company's products in development that have not yet commenced will
require the receipt of the FDA approvals, and there can be no assurance as to
the receipt or the timing of such approvals.

On March 5, 1998, Discovery and ATI executed the 1998 Merger Agreement. Upon
consummation of the 1998 Merger, the current holders of outstanding shares of
ATI Common Stock will be issued approximately 1,004,870 shares of Common Stock,
and outstanding options exercisable for ATI Common Stock that are assumed by
Discovery will become exercisable, in the aggregate, for approximately 424,235
shares of Common Stock. In addition, upon consummation of the 1998

                                                                              28

Merger, options to purchase an additional 338,500 shares of Common Stock will be
granted pursuant to employment agreements with the Company's new management team
and options for the purchase of an additional 335,000 shares of Common Stock
upon the achievement of corporate milestones will also be granted to such
persons. The Common Stock to be issued in the 1998 Merger, the shares of Common
Stock purchasable upon exercise of the options to be issued and assumed in
connection with the 1998 Merger and the shares of Common Stock purchasable upon
exercise of the options issued pursuant to the Management Agreement will
represent approximately 23% of the Common Stock on a fully-diluted basis
(exclusive of the Company's Class A and Class B Warrants) immediately following
the 1998 Merger.

Upon consummation of the 1998 Merger, Robert Capetola, Ph.D., the Chief
Executive Officer of ATI, will become the Chief Executive Officer of Discovery
and the other members of ATI's management team will assume executive positions
with Discovery. Discovery's principal executive offices will be consolidated
with ATI's Doylestown, Pennsylvania facilities following the 1998 Merger. On
March 5, 1998, Discovery and ATI entered into the Management Agreement, which
provides for the management of Discovery on an interim basis by the ATI
management team pending the consummation of the 1998 Merger. Upon execution of
the Management Agreement, members of the ATI management team were granted
options exercisable, in the aggregate, for the purchase of 126,500 shares of
Common Stock.

LIQUIDITY

The Company anticipates that its current resources will permit it to meet its
business objectives until approximately June 1999. The Company's working capital
requirements will depend upon numerous factors, including, without limitation,
progress of the Company's research and development programs, preclinical and
clinical testing, timing and cost of obtaining regulatory approvals, levels of
resources that the Company devotes to the development of manufacturing and
marketing capabilities, technological advances, status of competitors and
abilities of the Company to establish collaborative arrangements with other
organizations, and as such there can be no assurance that the Company will not
be required to raise additional capital prior to June 1999 or, in general, that
the Company will be able to achieve its business objectives.

ITEM 7. FINANCIAL STATEMENTS.

See Index to Consolidated Financial Statements on Page F-1.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

On January 9, 1998, the Audit Committee of the Board of Directors of the Company
reached a determination to retain Richard A. Eisner & Company, LLP ("RAE"), as
the independent auditors to audit the Company's financial statements for fiscal
year 1997. Prior to the 1997 Merger, RAE served as the independent auditors for
Old Discovery. In addition, prior to the 1997 Merger, the Company's executive
offices and principal accounting functions were located at the Company's prior
executive offices in South San Francisco, California. The Company's annual
audits for the years ended December 31, 1995 and 1996, conducted by its
independent accountants, Ernst & Young, LLP ("Ernst & Young") were primarily
staffed and performed out of Ernst & Young's Palo Alto, California office. As a
consequence of the 1997 Merger, the executive offices and principal accounting
functions of the Company have been relocated to New York City.

                                                                              29

The Company believes that, with respect to the years ended December 31, 1995 and
1996 and the subsequent interim period through January 16, 1998, the Company did
not have any disagreement on any matter of accounting principals or practices,
financial statement disclosure or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Ernst & Young would have
caused it to make reference in connection with its report on the Company's
financial statements to the subject matter of the disagreement.

The 1995 and 1996 audit reports issued by Ernst & Young for the Company did not
contain an adverse opinion or a disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope or accounting principles. However, in
reissuing its audit report on the Company's 1996 financial statements in
connection with the filing by the Company of its registration statement on Form
S-4 filed with the Securities and Exchange Commission on August 25, 1997 (and
the amendments thereto), Ernst & Young added an explanatory paragraph to such
report with respect to the ability of the Company to continue as a going
concern. During those years there were no events described in Item 304(a)(1)(iv)
(B) of Regulation S-B promulgated under the Act.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT.

MANAGEMENT

The following table sets forth the names and positions of all the executive
officers and directors of Discovery and ATI as of March 24, 1998. Since March 5,
1998, Discovery has been managed by the executive officers of ATI pursuant to
the Management Agreement. See Items 1 and 6 of this Report for a description of
certain transactions relating to the Management Agreement.

Discovery

Name                           Age  Positions with the Company
- ----                           ---  --------------------------

James S. Kuo, M.D.             33   President, Chief Executive Officer and
                                    Director
Steve H. Kanzer, C.P.A., Esq.  34   Chairman of the Board of Directors
Evan Myrianthopoulos           33   Chief Financial Officer, Secretary and
                                    Director
David Crockford                52   Vice President of Regulatory Affairs
Juerg F. Geigy, Esq.           62   Director
Max Link, Ph.D                 54   Director
Herbert H. McDade, Jr.         70   Director
Mark C. Rogers, M.D.           54   Director
Richard Sperber                55   Director
David Naveh, Ph.D.             44   Director

ATI

Name                           Age     Positions with ATI
- ----                           ---     ------------------

Robert J. Capetola, Ph.D.      48      President, Chief Executive Officer and
                                       Chairman of the Board of Directors
Harry Brittain                 48      Vice President of Pharmaceutical and
                                       Chemical Development
Laurence B. Katz, Ph.D.        42      Vice President of Project Management and

                                                                              30

                                       Clinical Administration
Chris Schaber                  31      Vice President of Regulatory Affairs and
                                       Quality Control
Huei Tsai                      58      Vice President of Biometrics
Thomas E. Wiswell, M.D.        45      Vice President of Clinical Research
Lisa Mastroianni               36      Director of Clinical Research
Steve H. Kanzer, C.P.A., Esq.  33      Director
James S. Kuo, M.D.             33      Director
Max Link, Ph. D.               57      Director
Milton Packer, M.D.            46      Director
Richard G. Power               68      Director
Mark G. Rogers, M.D.           54      Director
Marvin E. Rosenthale, Ph.D.    63      Director

James S. Kuo, M.D. has served as President, Chief Executive Officer and a
Director of Discovery since the effective time of the 1997 Merger. From March
1996 until such time he held such positions with Old Discovery. He has been a
Director of ATI since November 1996. Prior to joining Old Discovery, Dr. Kuo was
employed from May 1995 to March 1996 by Pfizer, Inc., a multinational
pharmaceutical company, as Associate Director of the Corporate Licensing and
Development Division. At Pfizer, Dr. Kuo, was directly responsible for
cardiovascular licensing and development, a business segment with approximately
$2.9 billion in sales in 1995. Prior to his employment with Pfizer, Dr. Kuo,
from September 1992 to May 1995, was Managing Director of Venture Analysis at
HealthCare Investment Corporation, a venture capital fund which managed over
$375 million in venture funds predominantly devoted to start up
biopharmaceutical companies. Prior to his employment at HealthCare Investment
Corporation, Dr. Kuo was Vice President of The Castle Group Ltd., a medical
venture capital group. Dr. Kuo received his M.D. from The University of
Pennsylvania School of Medicine and obtained his M.B.A. from The Wharton School
of Business where he concentrated in health care management and finance. He
received his B.A. in molecular biology from Haverford College and has conducted
and published research at The Wistar Institute in Philadelphia.

Steve H. Kanzer, C.P.A., Esq. has served as Chairman of the Board of Directors
of Discovery Laboratories, Inc. since the effective time of the 1997 Merger.
From June 1996 until such time he was the Chairman of the Board of Old
Discovery. He has been a Director of ATI since November 1996. Mr. Kanzer is also
a Senior Managing Director of Paramount Capital, Inc. ("Paramount Capital"), a
biotechnology investment bank, and Paramount Investments, LLC ("Paramount
Investments"), a medical venture capital group that is an affiliate of Paramount
Capital. Mr. Kanzer is a founder and currently a director of Boston Life
Sciences, Inc. and Atlantic Pharmaceuticals, Inc. and is currently a director of
Endorex, Inc. He has been a founder and director of several other public and
private biotechnology companies including Avigen, Inc., Titan Pharmaceuticals,
Inc. and Xenometrix, Inc. From October 1991 until January 1995, Mr. Kanzer was
General Counsel of The Castle Group Ltd, an affiliate of Paramount Capital. From
1988 to 1991, Mr. Kanzer was an attorney at the law firm of Skadden, Arps,
Meagher, Slate, & Flom. Mr. Kanzer received his J.D. from New York University
School of Law and a B.B.A. in Accounting from Baruch College. He devotes only a
portion of his time to the business of the Company.

Evan Myrianthopoulos has served as Chief Financial Officer of Discovery since
December 1997 and as Chief Operating Officer, Secretary and a Director of
Discovery since the effective time of the 1997 Merger. From June 1996 until such
time he held such positions (other than Chief Financial Officer) with Old
Discovery. Prior to joining Old Discovery, he was a Technology Associate of
Paramount Capital Investments, L.L.C. from December 1995 until January 1987.
Before joining Paramount Capital Investments, LLC, Mr. Myrianthopoulos managed a
hedge fund for S + M

                                                                              31

Capital Management in Englewood Cliffs, New Jersey. The fund specialized in
syndicate and secondary stock issues and also engaged in arbitrage of municipal
and mortgage bonds. Prior to his employment with S + M Capital Management, Mr.
Myrianthopoulos was employed at the New York Branch of National Australia Bank
where he was Assistant Vice President of Foreign Exchange trading. Mr.
Myrianthopoulos received a B.S. in Economics and Psychology from Emory
University in 1986.

David R. Crockford has served as Vice President of Regulatory Affairs of
Discovery since the effective time of the 1997 Merger and held such position
with Old Discovery from November 1996 until such time. From December 1991 to
November 1996, Mr. Crockford served as Vice President of Regulatory Affairs at
Oncologix, Inc. and at Alpha I Biomedicals, Inc., where he was responsible for
product development planning activities, from preclinical testing through
clinical development and regulatory strategies and submissions of pulmonary and
cancer therapeutics.

Robert J. Capetola, Ph.D. has served as Chairman and Chief Executive Officer of
ATI since its inception in October 1996. From February 1994 to May 1996, Dr.
Capetola was Managing Director of Delta Biotechnology, a subsidiary of Ohmeda
Pharmaceutical Products Division, a division of The BOC Group, plc ("Ohmeda"),
in the U.K. He also served on the Board of Directors of Delta Biotechnology.
From December 1992 to September 1996, Dr. Capetola served as Vice President of
Research and Development at Ohmeda. He served on Ohmeda's operating board and
was responsible for all aspects of Ohmeda's research and development, including
preclinical research and development, clinical development, biometrics and
regulatory affairs. From 1977 to 1992, Dr. Capetola held a variety of positions
as a drug discovery scientist at Johnson & Johnson Pharmaceutical Research
Institute, including Senior Worldwide Director of Experimental Therapeutics. Dr.
Capetola received his B.S. from the Philadelphia College of Pharmacy & Science
and his Ph.D. in pharmacology from Hahnemann Medical College.

Harry G. Brittain, Ph.D., has served as the Vice President for Pharmaceutical
and Chemical Development of ATI since November 1996. He is a graduate of Queens
College (B.S., 1970; M.S., 1972), and of the City University of New York (Ph.D.
in physical chemistry, 1975). He was a postdoctoral fellow at the University of
Virginia, and has held faculty positions at Ferrum College and Seton Hall
University. Prior to joining ATI, Dr,. Brittain served as Director of
Pharmaceutical Development for the Pharmaceutical Products Division of Ohmeda,
Inc. Before that, he worked at Bristol-Myers Squibb, where he led a variety of
groups within the Analytical R&D department. His research interests include
studies of molecular optical activity and chirality, development of
pharmaceutical dosage forms, and the physical characterization of pharmaceutical
materials. He has authored approximately 195 research publications, and is a
member of the editorial boards of numerous journals.

Laurence B. Katz, Ph.D., has served as Vice President of Project Management and
Clinical Administration of ATI since November 1996. Prior to joining the
Company, Dr. Katz was employed from April 1993 to November 1996 by Ohmeda
Pharmaceutical Products Division, a division of The BOC Group, as Senior
Director of Project Management and Clinical Administration. At Ohmeda, Dr. Katz
was project team leader for the inhaled nitric oxide project and was responsible
for the administration of all clinical trials within the company. Previously,
Dr. Katz was employed by Ortho Pharmaceutical Corporation and the R.W. Johnson
Pharmaceutical Research Institute, divisions of Johnson & Johnson, Inc. ("J&J").
While there he served as Senior Project Manager in the Project Planning &
Management department from January 1990 to April 1993, and as a Principal
Scientist in the Drug Discovery department from February 1983 to January 1990.
Dr. Katz received a B.S. degree in biology from the University of Pennsylvania,
his M.S. and Ph.D. degrees in pharmacology form the Philadelphia College of
Pharmacy & Science, and was a post-doctoral research fellow at the University of
Wisconsin-Madison.

                                                                              32

Christopher J. Schaber has served as Vice President of Regulatory Affairs and
Quality Assurance of ATI since November 1996. Prior to joining ATI, Mr. Schaber
was employed from October 1994 to November 1996 by Ohmeda Pharmaceutical
Products Division, a division of The BOC Group, as Director of Regulatory
Affairs. At Ohmeda, Mr. Schaber was directly responsible for all regulatory
strategies with the Food and Drug Administration and other Health Authority
bodies. From 1989 to 1994, Mr. Schaber held a variety of regulatory positions of
increasing importance with The Liposome Company, Inc. and Elkins-Sinn Inc., a
division of Wyeth-Ayerst Laboratories. Mr. Schaber received his B.A. from
Western Maryland College and his M.S. from Temple University. Mr. Schaber is
currently pursuing his Ph.D. in Pharmaceutical Sciences-Regulatory Affairs with
the Union Graduate School and is estimated to complete his doctoral program in
May 1998. In 1994, Mr. Schaber also received his Regulatory Affairs
Certification (RAC) from the Regulatory Affairs Professional Society.

Huei Tsai, Ph.D., has served as Vice President of Biometrics of ATI since
February, 1997. Prior to joining ATI, Dr. Tsai was a statistical consultant
after retiring from the position of Director of Biometrics and Clinical
Information at Ohmeda Pharmaceutical Products Division, a division of The BOC
Group. At Ohmeda, Dr. Tsai was responsible for all statistical, computer
operations, database and data coordination. From 1994 to 1995, Dr. Tsai was a
statistical consultant to a variety of companies, including Janssen
Pharmaceutical Company. For seventeen years prior to that, Dr. Tsai held a
variety of biostatistical positions at the Robert Wood Johnson Pharmaceutical
Research Institute and Ortho Pharmaceutical Corporation (both wholly-owned
subsidiaries of J&J), including Director of Biostatistics for Clinical
Pharmacology. Dr. Tsai received a B.A. degree in economics from Tunghai
University in 1962 and a Ph.D. in mathematical statistics from Oklahoma State
University in 1976.

Max Link, Ph.D., has served as a Director of Discovery since the effective time
of the 1997 Merger and was a Director of Old Discovery from 1996 until such
time. He has been a Director of ATI since October 1996. Dr. Link has held a
number of executive positions with pharmaceutical and health care companies. He
currently serves on the Boards of Directors of three publicly-traded life
science companies: Alexion Pharmaceuticals, Inc., Protein Design Labs, Inc.,
Human Genome Sciences, Inc., Cell Therapeutics, Inc., Procept, Inc. and Access
Pharmaceuticals, Inc. From May 1993 until June 1994, Dr. Link was Chief
Executive Officer of Corange Limited, the parent company of Boehringer Mannheim
and DePuy, an orthopedic company. Prior to joining Corange, he served in a
number of positions within Sandoz Pharma, Ltd., including Chief Executive
Officer from 1987 until April 1992, and Chairman from April 1992 until May 1993.

Lisa Mastroianni, R.N., has served as Director of Clinical Research of ATI since
January of 1997. Prior to joining the Company, Ms. Mastroianni was employed from
November of 1994 to November of 1996 by Ohmeda Pharmaceutical Products Division,
a division of The BOC Group as Senior Clinical Research Associate. At Ohmeda,
Ms. Mastroianni was responsible for the management and completion of the Phase
2/3 clinical study in acute respiratory distress syndrome, supervision of
internal personnel as well as management of a Contract Research Organization,
and assisting in the development and management of a Phase 1 clinical study in
congestive heart failure. Previously Ms. Mastroianni was employed by Sandoz
Pharmaceuticals from March 1992 to November 1994 in their cardiovascular
clinical research department and was responsible for monitoring Phase 3 lipid
studies and managing and monitoring Phase 1 CHF studies. Ms. Mastroianni has her
Bachelors degree in Nursing from Bloomfield College and has worked as a critical
care nurse in a number of hospitals in the United States from 1985 to 1992.

Juerg F. Geigy, Esq. has served as a Director of Discovery since the effective
time of the 1997 Merger and was a Director of Old Discovery from June 1996 until
such time. Dr. Geigy is an

                                                                              33

attorney at law in Basel, Switzerland specializing in corporate and tax law,
portfolio management and venture capital consulting. Dr. Geigy is a director of
the following companies: Pitney Bowes (Switzerland) AG, U.S. Ventures S.A.,
Strategic Healthcare Investment Fund and Rothschild Bank AG. Dr. Geigy has been
a director of J. Henry Schroder Bank AG, Biogen S. A., Bank Julius Baer
International Limited, Baer Holding AG, Great Pacific Capital S.A. and Petroferm
N.V. Dr. Geigy has also been a member of the Advisory Board of Massey Burch
Investment Group, a Vice-Chairman and CEO of Rothschild Corporate Finance Ltd.,
Chief Executive Officer of Julius Baer Atlantic Limited and a member of the
Management Committee of Bank Julius Baer & Co. AG. Dr. Geigy has held the
position of Treasurer of the parent company of Ciba Geigy Ltd. and Group
Treasurer of J.R. Geigy Limited.

Herbert H. McDade, Jr. has served as a Director of Discovery since the effective
time of the 1997 Merger and was a Director of Old Discovery from June 1996 until
such time. Mr. McDade is the Chairman of Access Pharmaceutical and a member of
the Boards of Directors of two other publicly-held companies, Cytrx Corporation
and Shaman Pharmaceuticals, and Clarion Pharmaceuticals, Inc., which is
privately held. Mr. McDade was employed with the Upjohn Company for 20 years and
for 14 years as President of Revlon Health Care International.

Mark C. Rogers, M.D. has served as a Director of Discovery since the effective
time of the 1997 Merger and was a Director of Old Discovery from June 1996 until
such time. Dr. Rogers has been Senior Vice President, Corporate Development and
Chief Technology Officer at Perkin-Elmer Corporation since 1996. Prior to
Perkin-Elmer, Dr. Rogers was the Vice Chancellor for Health Affairs, Executive
Director and Chief Executive Officer of Duke University Hospital and Health
Network from 1992 to 1996. Prior to his employment at Duke, Dr. Rogers was on
the faculty of Johns Hopkins University for 15 years where he served as
Distinguished Faculty Professor and Chairman of the Department of Anesthesiology
and Critical Care Medicine, Associate Dean for Clinical Practice, Director of
the Pediatric Intensive Care Unit and Professor of Pediatrics. Dr. Rogers
received his M.D. from Upstate Medical Center and his M.B.A. from The Wharton
School of Business. He received his B.A. from Columbia University and held a
Fulbright Scholarship

Richard Sperber has been a Director of Discovery since May 1994. Mr. Sperber has
been President and Chief Executive Officer of The Global Medicines Group Inc., a
consulting firm, since 1991. From 1988 to 1991 Mr. Sperber was a Director and
Head of Business Development and Strategic Planning for Glaxo Pharmaceuticals
U.K. Ltd., a subsidiary of Glaxo Holdings plc. Prior to his employment at Glaxo,
Mr. Sperber held a variety of positions including Area Director for Ayerst
International, responsible for Southeast Asia, and Director of Marketing for
Schering-Plough Corp. responsible for Canada, Japan, Australia and Southeast
Asia. Mr. Sperber received his B.S. from the University of Denver and attended
graduate school at Columbia University.

David Naveh, Ph.D. has been a Director of Discovery since May 1996. Dr. Naveh
has served as Director of Process Technology for Bayer Corporation since
September 1994 and was Director of Process Development from 1992 through 1994.
Dr. Naveh was Director of Biotechnology Operations for Centocor from 1990 to
1992 and was Director of Purification for Centocor from 1989 to 1990. From 1984
to 1988, Dr. Naveh was a manager at Schering-Plough Corp. Dr. Naveh was on the
faculty of the University of Wisconsin, Madison as Assistant Professor from 1982
to 1984. He received his B.Sc. and M.S. in 1990 from the Technion, Haifa, Israel
and his Ph.D. from the University of Minnesota.

Richard G. Power is a Principal and Executive Director of The Sage Group,
founded in 1994, which specializes in providing strategic and transactional
services to the managements and boards of, and investors in, health care
companies. He serves on the Board of Directors of The Quantum Group, and
Neuromedica, Inc. From 1980 to 1994, Mr. Power served as President of R.G. Power
&

                                                                              34

Associates, Inc., which specializes in worldwide business development and
financing strategy for the health care industry. From 1955 to 1980, Mr. Power
held senior management positions with several pharmaceutical industry firms,
including SmithKline, Searle and as a corporate officer at J&J Mr. Power
received his B.A. from Loras College in 1951, and attended graduate school at
the University of Wisconsin.

Marvin E. Rosenthale, Ph.D., has served as President and Chief Executive Officer
of Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT") from 1994 until 1997. He
joined the ALRT joint venture formed by Allergan and Ligand, the entity through
which they combined their resources to pursue the development of retinoid
research and development prior to ALRT, in August 1993 as Vice President. Prior
to joining ALRT, Dr. Rosenthale served as Vice President, Drug Discovery
Worldwide, at R. W. Johnson Pharmaceutical Research Institute from 1990 to 1993.
From 1977 to 1990, Dr. Rosenthale served in a variety of positions in drug
discovery research for Ortho Pharmaceutical Corporation, including director of
the divisions of pharmacology and biological research and executive director of
drug discovery research. From 1960 to 1977, he served in various positions with
Wyeth Laboratories. Dr. Rosenthale received a Ph.D. in pharmacology from
Hahnemann Medical College & Hospital, an M.Sc. in pharmacology from Philadelphia
College of Pharmacy and Science and a B.Sc. in pharmacy from Philadelphia
College of Pharmacy.

Milton Packer, M.D. has served in a variety of roles since 1992 and currently is
the Dickinson W. Richards, Jr. Professor of Medicine, Professor of Pharmacology,
Chief of the Division of Circulatory Physiology at the Columbia University
College of Physicians and Surgeons, and Director of the Heart Failure Center at
the Columbia Presbyterian Hospital. He is also a Clinical Research Scholar at
Columbia. Dr. Packer's major research is focused on the pathophysiology and
treatment of heart failure. He is on the Executive Committee of both the
American Heart Association and the American College of Cardiology. He is a
primary consultant to the National Institutes of Health and the Food and Drug
Administration on the management of heart failure and on matters related to
cardiovascular research and drug development and health care policy. From 1988
to 1992, Dr. Packer was Professor of Medicine at the Mt. Sinai School of
Medicine. Dr. Packer received his B.S. degree from the Pennsylvania State
University in 1971 and his M.D. degree from the Jefferson Medical College in
1973.

Thomas E. Wiswell, M.D., has served as Vice President of Clinical Research of
ATI since April 1997. Since 1993, he has been a Professor of Pediatrics at
Jefferson Medical College at Thomas Jefferson University in Philadelphia,
Pennsylvania. From 1988 to 1993, he was an Associate Professor of Pediatrics at
the F. Edward Herbert School of Medicine in Bethesda, Maryland. He retired as a
Lieutenant Colonel from the U.S. Army on June 30, 1993 after twenty years on
active duty. Dr. Wiswell is a graduate of the United States Military Academy at
West Point and the University of Pennsylvania Medical School.

All directors hold office until the next annual meeting of stockholders of
Discovery or ATI, as the case may be, or until their successors have been
elected and qualified. Officers serve at the discretion of the applicable Board
of Directors. The Bylaws of each of Discovery and ATI provide that directors and
officers shall be indemnified against liabilities arising from their service as
directors or officers to the fullest extent permitted by the laws of the State
of Delaware, which generally requires that the individual act in good faith and
in a manner he or she reasonably believes to be in or not opposed to the best
interests of Discovery or ATI, as the case may be.

                                                                              35

ITEM 10. EXECUTIVE COMPENSATION

Compensation Committee Interlocks and Insider Participation

The Compensation Committee of the Company's Board is comprised of Mr. McDade and
Dr. Rogers. Neither Mr. McDade nor Dr. Rogers was at any time during the fiscal
year ended December 31, 1997, or at any other time, an officer or employee of
the Company. Neither Mr. McDade nor Dr. Rogers serves as a member of the board
of directors or compensation committee of any entity that has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.

The remainder of the information required to be included in this Item is
incorporated by reference to the Company's Proxy Statement for its Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1997.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Incorporated by reference to the Company's Proxy Statement for its Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1997.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Incorporated by reference to the Company's Proxy Statement for its Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the fiscal year ended December 31, 1997.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

Exhibits are listed on the Index to Exhibits at the end of this Report. The
exhibits required by Item 601 of Regulation S-B, listed on such Index in
response to this Item, are incorporated herein by reference.

(b) Reports On Form 8-K

Two reports on Form 8-K were filed by the Company during the three months ended
December 31, 1997. One report was filed on November 28, 1997, relating to a
press release dated November 26, 1997, announcing the completion of the 1997
Merger. The second report was filed on December 11, 1997, relating to a press
release dated December 10, 1997, announcing the completion of the enrollment of
ATI's Phase 1B clinical trial in ARDS.

                                                                              36

                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                          DISCOVERY LABORATORIES, INC.

Date:  March 30, 1998      By: /s/ Robert J. Capetola, Ph.D.
                              --------------------------------------------------
                              Robert J. Capetola, Ph.D.
                              Acting Chief Executive Officer

In accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.

 Signature                           Name & Title                      Date
 ---------                           ------------                      ----

/s/ James S. Kuo           James S. Kuo, M.D.                     March 30, 1998
                           Director

/s/ Evan Myrianthopoulos   Evan Myrianthopoulos                   March 30, 1998
                           Chief Financial Officer
                           (Principal Accounting Officer)

/s/ Steve H. Kanzer        Steve H. Kanzer, C.P.A., Esq.          March 30, 1998
                           Chairman of the Board

                           Mark C. Rogers, M.D.                   March 30, 1998
                           Director

                           Herbert McDade, Jr.                    March __, 1998
                           Director

/s/ Max Link               Max Link, Ph.D.                        March 30, 1998
                           Director

                           David Naveh, Ph.D.                     March __, 1998
                           Director

/s/ Juerg Geigy            Juerg Geigy, Esq.                      March 30, 1998
                           Director

/s/ Richard Sperber        Richard Sperber                        March 30, 1998
                           Director

                                                                              37

                                  EXHIBIT INDEX

EXHIBIT NO.                 DESCRIPTION

    2.1*             Agreement and Plan of Merger dated as of March 5, 1998
                     among Discovery, ATI Acquisition Corp. and ATI.

                     Exhibit A: Form of Employment Agreement between Discovery
                     and Robert Capetola, Ph.D.

                     Exhibit B: Form of Employment Agreement.

                     Exhibits C, D and E: Notices of Grant of Stock Option

                     Exhibit F: Form of Registration Rights Agreement among
                     Discovery, Johnson & Johnson Development Corporation and
                     The Scripps Research Institute.

                     Exhibit G: Form of Investment Agreement.

                     Exhibit H: Form of Lock-up Agreement among Discovery, ATI
                     Acquisition Corp. and ATI.

                     Exhibit I: Form of Discovery 1998 Stock Option Plan.

    2.3**            Agreement and Plan of Reorganization and Merger, dated as
                     of July 16, 1997, by and between Discovery and Old
                     Discovery.

    2.4**            Form of Affiliate's Agreement

    2.5**            Form of Lock-Up Agreement executed by certain stockholders
                     of Old Discovery that did not participate in the Unit
                     Offering.

    2.6**            Voting Agreement, dated as of August 4, 1997, by and
                     between Old Discovery and Titan.

    2.7**            Form of Voting Agreement between Discovery and certain
                     stockholders of Old Discovery.

    2.8***           Form of Subscription Agreement by and between Discovery and
                     Certain Purchasers of Series A Convertible Preferred Stock
                     and Common Stock of Old Discovery.

    3.1*             Restated Certificate of Incorporation of Discovery, as
                     amended to date.

    3.2oo            By-laws of Discovery.

    10.1             Reference is made to Exhibit 2.1.

    10.2oo           Warrant Agreement, dated as of August 8, 1995 among
                     Discovery,

                                                                              38

                     Continental Stock Transfer & Trust Company and D.H. Blair
                     Investment Banking Corp.

    10.3***+         Inventory Transfer/Stock Purchase Agreement dated October
                     28, 1996, among ATI, Johnson & Johnson Development
                     Corporation ("JJDC"), The R.W. Johnson Pharmaceutical
                     Research Institute and Ortho.

                     Schedule A: Summary of significant available inventory

                     Schedule B: Radiolabelled materials inventory

                     Exhibit A: Form of Registration Rights Agreement

                     Exhibit B: Form of Co-Sale Agreement

                     Exhibit C: Certificate of Designations for Series A
                     Preferred Stock

                     Exhibit D: Certificate of Designations for Series B
                     Preferred Stock 

                     Schedule I: Capitalization

    10.4***          Investor Rights Agreement dated March 20, 1996, between Old
                     Discovery and RAQ, LLC.

    10.5***          Registration Rights Agreement dated October 28, 1996,
                     between ATI, JJDC, Ortho and Scripps.

    10.6*            Co-Sale and Registration Agreement between Discovery and
                     Thomas Kennedy M.D. dated March 20, 1996.

    10.7*            Co-Sale and Registration Agreement between Discovery and
                     John Hoidal M.D. dated March 20, 1996.

    10.8***          Co-Sale Agreement dated October 28, 1996, between ATI and
                     certain shareholders.

    10.9*            Employee Stock Purchase Agreement between Discovery and
                     Steve Kanzer dated March 20, 1996.

    10.10*           Employee Stock Purchase Agreement between Discovery and
                     Steve Kanzer dated August 15, 1995.

    10.11*           Employee Stock Purchase Agreement between Discovery and
                     Evan Myrianthopoulos dated March 20, 1996.

    10.12*           Employee Stock Purchase Agreement between Discovery and
                     Evan Myrianthopoulos dated August 15, 1995.

    10.13***         Stock Purchase Agreement dated October 28, 1996, between
                     ATI and Scripps.

    10.14***         Founder/Employee Stock Purchase Agreement dated October 10,

                                                                              39

                     1996, between ATI and Robert Capetola, Ph.D.

    10.15***         Founder/Employee Stock Purchase Agreement dated October 10,
                     1996, between ATI and Charles Cochrane, M.D.

    10.16***         Founder/Employee Stock Purchase Agreement dated October 10,
                     1996, between ATI and Susan Revak.

    10.17***         Founder/Employee Stock Purchase Agreement dated October 10,
                     1996, between ATI and Sage Partners.

    10.18*+          License Agreement between Discovery and Bar-Ilan dated
                     November 25, 1997.

    10.19**          License Agreement dated May 31, 1996, between Boehringer
                     Ingelheim and Discovery.

    10.20***+        License Agreement dated September 6, 1996, between
                     Discovery and WARF, as amended on October 31, 1996.

    10.21***+        Sublicense Agreement dated October 28, 1996 between ATI,
                     Johnson & Johnson, Inc. and Ortho.

    10.22***+        License Agreement between Discovery and The
                     Charlotte-Mecklenburg Hospital Authority dated March 20,
                     1996.

    10.23oo          Restated 1993 Stock Option Plan of Discovery.

    10.24oo          1995 Stock Option Plan of Discovery.

    10.25oo          Form of Escrow Agreement by and between Discovery,
                     Continental Stock Transfer & Trust Company and certain
                     securityholders of Discovery.

    10.26oo          Form of Indemnification Agreement.

    10.27*           Lease Agreement between Discovery and Newmark and Company
                     Real Estate, Inc., dated May 29, 1997, for professional
                     offices at 509 Madison Avenue, New York, New York.

    10.28*           Lease Agreement between ATI and Kevin MacDonald and Marilyn
                     MacDonald, dated November 8, 1996, for professional offices
                     at 3359 Durham Road, Buckingham township, Pennsylvania,
                     from November 11, 1996 to November 10, 2001.

    10.29***         Scientific Advisory & Consulting Agreement dated March 20,
                     1996, between Discovery and Dr. Thomas Kennedy.

    10.30***         Scientific Advisory & Consulting Agreement dated May 1,
                     1996, between Discovery and Dr. John Hoidal.

    10.31***+        Letter of Intent dated October 17, 1996, between Discovery
                     and

                                                                              40

                     Robert Capetola, Ph.D.

    10.32***         Employment Agreement by and between Discovery and James S.
                     Kuo, M.D. dated April 4, 1996

    10.33***         Employment Agreement dated November 25, 1996, between
                     Discovery and David Crockford.

    10.34***         Management Agreement dated June 1, 1996 by and between
                     Discovery and Steve Kanzer.

    10.35*           Consulting Agreement dated October 1, 1996 between
                     Discovery and Hector deLuca

    10.36***         Employment Agreement dated October 1, 1996 between ATI and
                     Robert J. Capetola, Ph.D.

    10.37***+        Consulting Agreement dated December 9, 1996 between ATI and
                     Dr. Charles Cochrane.

    10.38***+        Consulting Agreement dated December 9, 1996 between ATI and
                     Susan Revak.

    10.39***         Consulting Agreement dated December 9, 1996 between ATI and
                     Zenaida Oades.

    10.40***         Consulting Agreement dated December 9, 1996 between ATI and
                     Monica Cochrane.

    10.41***         Consulting Agreement dated October 28, 1996 between ATI and
                     The Sage Group.

    10.42*           Letter Agreement between ATI and the Sage Group signed
                     November 4, 1996.

    10.43***         Financial Advisory Agreement dated November 8, 1996 between
                     Discovery and Paramount Capital Incorporated.

    10.44***+        Clinical Product Development Agreement dated January 29,
                     1997, between Discovery and Cook Imaging Corporation.

    10.45***+        Clinical Product Development Agreement dated January 3,
                     1997, between ATI and Cook Imaging Corporation.

    10.46*+          First Amendment to the Clinical Product Development
                     Agreement, effective January 3, 1997, between ATI and Cook
                     Imaging Corporation, dated January 16, 1998.

    10.47***+        Research Funding and Option Agreement dated October 28,
                     1996, between Scripps and ATI, as amended by letter
                     agreement dated February 26, 1997.

                                                                              41

    10.48***         Employment Agreement dated as of February 16, 1997 between
                     ATI and Huei Tsai, PH.D.

    10.49***         Employment Agreement dated as of June 1, 1997 between ATI
                     and Thomas E. Wiswell, M.D.

    10.50***+        Clinical Testing Agreement dated as of February 24, 1997
                     between Discovery and the University of Utah.

    10.51*+          Clinical Development Services Agreement dated as of
                     December 1, 1997 between Discovery and Covance Clinical
                     Research Unit.

    10.52*+          Supply Agreement between ATI and Polypeptides Laboratories,
                     Inc., dated December 10, 1997, for the processing of
                     peptides.

    10.53*           Employment Agreement between ATI and Harry G. Brittain,
                     Ph.D., dated November 1, 1996

    10.54*           Employment Agreement between ATI and Laurence B. Katz,
                     Ph.D., dated November 18, 1996

    10.55*           Employment Agreement between ATI and Lisa Mastroianni,
                     R.N., dated January 2, 1997

    10.56*           Employment Agreement between ATI and Christopher J.
                     Schaber, R.A.C., dated November 4, 1996

    10.57*           Management Agreement between Discovery Laboratories, Inc.
                     and Acute Therapeutics, Inc. dated as of March 5, 1998.

    10.58*           Letter Agreement between ATI and Lehman Brothers dated
                     November 10, 1997.

    21.1*            Subsidiaries of Discovery.

    27.1*            Financial Data Schedule.

- ----------

*     Filed herewith.

**    Incorporated by reference to Discovery's Registration Statement on Form
      S-4 (File No. 333- 34337).

***   Incorporated by reference to Discovery's Registration Statement on Form
      SB-2 (File No. 333-19375).

o     Incorporated by reference to Discovery's Annual Report on Form 10-K-SB for
      the year ending December 31, 1995.

oo    Incorporated by reference to Discovery's Registration Statement on Form
      SB-2 (File No. 33-92-886).

                                                                              42

+     Confidential treatment requested as to certain portions of these exhibits.
      Such portions have been redacted.

                                                                              43

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)

Contents

                                                                            Page
                                                                            ----

Consolidated Financial Statements

   Independent auditors' report                                             F-2

   Balance sheet as of December 31, 1997                                    F-3

   Statements of operations for the years ended December
      31, 1997 and 1996 and the period May 18, 1993
      (inception) through December 31, 1997                                 F-4

   Statements of changes in stockholders' equity for the
      period May 18, 1993 (inception) through December 31, 1997             F-5

   Statements of cash flows for the years ended December 31,
      1997 and 1996 and the period May 18, 1993 (inception)
      through December 31, 1997                                             F-6

   Notes to financial statements                                            F-7

                                                                             F-1

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Discovery Laboratories, Inc.
New York, New York

We have audited the accompanying consolidated balance sheet of Discovery
Laboratories, Inc. and subsidiary (a development stage company) as of December
31, 1997, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the two years ended December 31, 1997,
and the period from May 18, 1993 (inception) through December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Discovery
Laboratories, Inc. and subsidiary as of December 31, 1997 and the consolidated
results of their operations and their consolidated cash flows for each of the
years in the two-year period ended December 31, 1997, and the period from May
18, 1993 (inception) through December 31, 1997, in conformity with generally
accepted accounting principles.

Richard A. Eisner & Company, LLP

New York, New York
January 26, 1998

With respect to Note L
March 5, 1998

                                                                             F-2

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)

Consolidated Balance Sheet
December 31, 1997

ASSETS

Current assets:
   Cash and cash equivalents                                   $  6,297,000
   Investments                                                    4,957,000
   Prepaid expenses                                                 190,000
                                                               ------------

        Total current assets                                     11,444,000

Furniture and equipment, net of deprecation                         181,000
Security deposits                                                    30,000
                                                               ------------

                                                               $ 11,655,000
                                                               ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable and accrued expenses                       $    565,000
                                                               ------------

Dividends payable on preferred stock                                238,000
                                                               ------------
Minority interest in preferred stock of
 subsidiary (Note H)                                              2,039,000
                                                               ------------

Commitments (Notes D, F, H[2] and K)

Stockholders' Equity (Notes A, G and J):
   Preferred stock, $.001 par value; 5,000,000
      shares authorized; 2,200,256 shares issued
      and outstanding (liquidation preference $29,703,000)            2,000
   Common stock, $.001 par value; 20,000,000
      authorized; 3,175,955 shares issued and outstanding             3,000
   Additional paid-in capital                                    21,464,000
   Deficit accumulated during the development stage             (12,656,000)
                                                               ------------
        Total stockholders' equity                                8,813,000
                                                               ------------
                                                               $ 11,655,000
                                                               ============

See notes to financial statements

                                                                             F-3

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)

Consolidated Statements of Operations

                                                                                    May 18, 1993
                                                              Year Ended             (Inception)
                                                              December 31,             Through  
                                                      =========================     December 31,
                                                          1997          1996            1997
                                                      ===========   ===========     ============
                                                                                    
Interest income                                       $   713,000   $   205,000     $    918,000
                                                      -----------   -----------     ------------
Expenses:
   Write-off of acquired in-process research
      and development and supplies                      3,663,000     2,200,000(1)     5,863,000
   Research and development                             4,378,000       540,000(1)     4,918,000
   General and administrative                           1,836,000       692,000        2,546,000
   Interest                                                              11,000           11,000
                                                      -----------   -----------     ------------

        Total expenses                                  9,877,000     3,443,000       13,338,000
                                                      -----------   -----------     ------------

                                                       (9,164,000)   (3,238,000)     (12,420,000)

Minority interest in net loss of subsidiary                               2,000            2,000
                                                      -----------   -----------     ------------

Net loss                                              $(9,164,000)  $(3,236,000)    $(12,418,000)
                                                      ===========   ===========     ============

Net loss per share - basic and diluted (Note B[9])    $     (3.42)  $     (1.96)
                                                      ===========   ===========

Weighted average number of common shares outstanding    2,678,803     1,647,923
                                                      ===========   ===========

(1)   Reclassified to be comparative to current year presentation.

See notes to financial statements

                                                                             F-4

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)

Consolidated Statements of Changes in Stockholders' Equity

                                                                                                                         Deficit  
                                                                                                                       Accumulated
                                        Common Stock     Preferred Stock                   Stock         Additional    During the 
                                     -----------------  -----------------              Subscriptions      Paid-in      Development
                                       Shares   Amount   Shares    Amount  Receivable     Capital          Stage         Total
                                     ---------  ------  ---------  ------  ----------  -------------    ------------   -----------
                                                                                                       
Issuance of common shares,
   May 1993                            440,720  $1,000                      $(2,000)    $     1,000                    $         0
Net loss                                                                                                $     (1,000)       (1,000)
Expenses paid on behalf of the
   Company                                                                    1,000                                          1,000
                                     ---------  ------                      -------     -----------     ------------   -----------
Balance - December 31, 1993            440,720   1,000                       (1,000)          1,000           (1,000)            0
                                     ---------  ------                      -------     -----------     ------------   -----------
Net loss                                                                                                                         0
Balance - December 31, 1994            440,720   1,000                       (1,000)          1,000           (1,000)            0
Issuance of common shares,                                                              
   February 1995                       143,016                               (1,000)          1,000                              0
Net loss                                                                                                     (17,000)      (17,000)
Payment on stock subscriptions                                                2,000                                          2,000
Expenses paid on behalf of the
   Company                                                                                   18,000                         18,000
                                     ---------  ------                      -------     -----------     ------------   -----------
Balance - December 31, 1995            583,736   1,000                            0          20,000          (18,000)        3,000
Issuance of common shares,                                                              
   March 1996                        1,070,175   1,000                                        5,000                          6,000
Issuance of private placement units                                                     
   August, October and November                                                         
   1996                                856,138   1,000  2,200,256  $2,000                18,933,000                     18,936,000
Issuance of common shares for                                                           
   cash and compensation,                                                               
   September 1996                       82,502                                               42,000                         42,000
Exercise of stock options, July and                                                     
   October 1996                         19,458                                                7,000                          7,000
Net loss                                                                                                  (3,236,000)   (3,236,000)
                                     ---------  ------  ---------  ------   -------     -----------     ------------   -----------
Balance - December 31, 1996          2,612,009   3,000  2,200,256   2,000         0      19,007,000       (3,254,000)   15,758,000
Private placement expenses                                                                  (11,000)                       (11,000)
Issuance of common shares                                                               
   pursuant to merger                  546,433                                            2,459,000                      2,459,000
Exercise of stock options, July,                                                        
   August and October 1997              17,513                                                9,000                          9,000
Accumulated dividends on preferred                                                      
   stock                                                                                                    (238,000)     (238,000)
Net loss                                                                                                  (9,164,000)   (9,164,000)
                                     ---------  ------  ---------  ------   -------     -----------     ------------   -----------
Balance - December 31, 1997          3,175,955  $3,000  2,200,256  $2,000   $     0     $21,464,000     $(12,656,000)  $ 8,813,000
                                     =========  ======  =========  ======   =======     ===========     ============   ===========

See notes to financial statements

                                                                             F-5

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)

Consolidated Statements of Cash Flows

                                                                                            
                                                                                               May 18, 1993
                                                                         Year Ended             (Inception)
                                                                        December 31,             Through   
                                                                 --------------------------    December 31,
                                                                     1997           1996           1997
                                                                 -----------   ------------   ------------
                                                                                               
Cash flows from operating activities:
   Net loss                                                      $(9,164,000)  $ (3,236,000)  $(12,418,000)
   Adjustments to reconcile net loss to net cash used in
      operating activities:
        Write-off of acquired in-process research and
           development and supplies                                3,663,000      2,200,000      5,863,000
        Write-off of licenses                                        683,000                       683,000
        Depreciation and amortization                                 40,000         24,000         64,000
        Changes in:
           Prepaid expenses                                         (141,000)       (18,000)      (159,000)
           Accounts payable and accrued expenses                     129,000        230,000        359,000
           Other assets                                              (30,000)                      (30,000)
        Expenses paid on behalf of company                                                          18,000
        Employee stock compensation                                                  42,000         42,000
        Reduction of research and development supplies              (161,000)                     (161,000)
                                                                 -----------   ------------   ------------
           Net cash used in operating activities                  (4,981,000)      (758,000)    (5,739,000)
                                                                 -----------   ------------   ------------
Cash flows from investing activities:
   Acquisition of furniture and equipment                           (114,000)       (83,000)      (197,000)
   Acquisition of licenses                                                         (711,000)      (711,000)
   Purchase of investments                                        (7,539,000)   (13,064,000)   (20,603,000)
   Proceeds from sale or maturity of investments                  16,051,000                    16,051,000
   Net cash payments on merger                                    (1,454,000)                   (1,454,000)
                                                                 -----------   ------------   -------------
           Net cash provided by (used in) investing activities     6,944,000    (13,858,000)    (6,914,000)
                                                                 -----------   ------------   ------------
Cash flows from financing activities:
   Proceeds on private placements of units, net of expenses          (11,000)    18,936,000     18,925,000
   Collections on stock subscriptions and proceeds
      on exercise of stock options                                     9,000         13,000         25,000
                                                                 -----------   ------------   ------------
           Net cash (used in) provided by financing activities        (2,000)    18,949,000     18,950,000
                                                                 -----------   ------------   ------------
Net (decrease) increase in cash and cash equivalents              (1,961,000)     4,333,000      6,297,000
Cash and cash equivalents - beginning of period                    4,336,000          3,000              0
                                                                 -----------   ------------   ------------
Cash and cash equivalents - end of period                        $ 6,297,000   $  4,336,000   $  6,297,000
                                                                 ===========   ============   ============
Noncash transactions:
   Accrued dividends on ATI preferred stock                      $   238,000                  $    238,000
                                                                 ===========                  ============

                                                                             F-6

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)

Notes to Financial Statements
December 31, 1997

NOTE A - THE COMPANY AND BASIS OF PRESENTATION

Discovery Laboratories, Inc. (the "Company"), formerly known as Ansan
Pharmaceuticals, Inc. ("Ansan"), was incorporated in Delaware on November 6,
1992 and was a wholly owned subsidiary of Titan Pharmaceuticals, Inc. ("Titan").
The Company was formed to license and develop pharmaceutical products to treat a
variety of human diseases. In August 1995, Ansan issued its securities in an
initial public offering and ceased to be a subsidiary of Titan. In November
1997, Ansan merged (the "Merger") with Discovery Laboratories, Inc., a former
Delaware corporation ("Old Discovery"), and was the surviving corporate entity.
Subsequent to the Merger, Ansan changed its name to Discovery Laboratories, Inc.
Pursuant to the Merger, each outstanding share of Old Discovery's common stock
was converted into 1.167471 shares of the Company's common stock and each share
of Old Discovery's Series A convertible preferred stock was converted into one
share of the Company's Series B preferred stock (the "Exchange Ratios"). The
Company also assumed all outstanding options and warrants to purchase Old
Discovery's common stock and Series A preferred stock which became exercisable
for the Company's common stock and Series B preferred stock, respectively, based
on the Exchange Ratios. In connection with the Merger, the Company and Titan
entered into arrangements providing for the relinquishment by the Company of
rights to certain drug compounds and the transfer of such rights to Titan in
exchange for (i) a 2% net royalty payable by Titan to the Company from net sales
of such drug compounds (see Note F[3]), and (ii) the cancellation of all Ansan
common stock owned by Titan. On consummation of the merger, 13,000 shares of
Ansan Series A preferred stock held by Old Discovery were cancelled.

The Merger was accounted for as a reverse acquisition with Old Discovery as the
acquirer for financial reporting purposes since Old Discovery's stockholders
owned approximately 92% of the merged entity on a diluted basis. The
consolidated financial statements include the historical accounts of Old
Discovery and its majority owned subsidiary Acute Therapeutics, Inc. ("ATI") and
the accounts of Ansan from November 25, 1997 (the date of acquisition). The
assets and liabilities of Ansan acquired are recorded at fair value on the date
of the merger. The difference between the fair value of the net assets acquired
and value of the common stock issued plus merger related costs has been
attributed to in-process research and development and has been recorded as an
expense upon acquisition.

The following assets were acquired and the costs of the acquisition were as
follows:

          Assets acquired:
             Cash                                                   $  281,000
             Investments                                               400,000
             Prepaid expenses                                           31,000
             Furniture and equipment                                    25,000
             In-process research and development                     3,663,000
                                                                    ----------

                                                                    $4,400,000
                                                                    ==========
          Acquisition costs:
             Assumption of accounts payable and
                accrued expenses                                    $  206,000

             Ansan Series A Preferred Stock (purchased
                by Old Discovery in July 1997 and
                cancelled upon completion of the Merger)             1,300,000

             Common stock issued to Ansan
                stockholders, 546,433 shares, at fair value          2,459,000

             Transaction costs                                         435,000
                                                                    ----------

                                                                    $4,400,000
                                                                    ==========

                                                                             F-7

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)

Notes to Financial Statements
December 31, 1997

NOTE A - THE COMPANY AND BASIS OF PRESENTATION (CONTINUED)

The following pro forma unaudited financial information gives effect to the
Merger as if it had occurred at the beginning of the respective periods. A
nonrecurring charge of $3,663,000 for in-process research and development which
was recorded by the Company upon consummation of the merger has not been
considered in the pro forma results.

                                                              Year Ended
                                                              December 31,
                                                      -------------------------
                                                          1997          1996
                                                      -----------   -----------
                                                                      
Interest income                                       $   811,000   $   363,000
                                                      -----------   -----------

Expenses:
   Research and development                             5,400,000     3,921,000
   General and administrative                           2,556,000     1,949,000
   Interest                                                              11,000
                                                      -----------   -----------

           Total expenses                               7,956,000     5,881,000

Minority interest in net loss of subsidiary                               2,000
                                                      -----------   -----------

Net loss                                              $(7,145,000)  $(5,516,000)
                                                      ===========   ===========

Net loss per common share - basic and diluted         $     (2.26)  $     (2.51)
                                                      ===========   ===========

Weighted average number of common
   shares outstanding                                  3,164,383      2,194,356
                                                      ===========   ===========

The accompanying financial statements include the accounts of the Company and
its majority owned subsidiary, Acute Therapeutics, Inc. ("ATI"). All
intercompany balances and transactions have been eliminated. No allocation of
ATI's net loss for the year ended December 31, 1997, has been attributed to the
minority interest since the accumulated losses exceed the minority's common
equity interest.

Concurrently with the Merger, the Company's Board of Directors and stockholders
approved a 1 for 3 reverse stock split of its common stock, Class A and Class B
warrants and options to purchase shares of the Company's common stock (the
"Reverse Split").

All references to shares and per share amounts have been adjusted to reflect the
Exchange Ratios and the Reverse Split.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

[1]   Cash and cash equivalents:

      The Company considers all highly liquid investments purchased with a
      maturity of three months or less to be cash equivalents.

                                                                             F-8

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)

Notes to Financial Statements
December 31, 1997

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (CONTINUED)

[2]   Investments:

      The investments are classified as available for sale, and are comprised of
      United States government obligations and shares in a mutual fund which
      invests in income producing securities. Investments are recorded at fair
      value which approximates cost. Any appreciation/depreciation on these
      investments is recordable as a separate component of stockholders equity
      until realized.

[3]   Furniture and equipment:

      Furniture and equipment is recorded at cost. Depreciation is computed
      using the straight-line method over the estimated useful lives of the
      assets (five to seven years).

[4]   Licenses:

      Through March 1997 licenses were capitalized and were being amortized on a
      straight-line basis over their respective terms of 15 to 17 years. During
      the quarter ended June 30, 1997, the Company determined that since they
      will not pursue any alternative uses for the licenses, that all license
      costs would be written off as research and development costs.

[5]   Research and development:

      Research and development costs are charged to operations as incurred.

[6]   Use of estimates:

      The preparation of financial statements in conformity with generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities at
      the date of the financial statements and the reported amounts of revenues
      and expenses during the reporting period. Actual results could differ from
      those estimates.

[7]   Long-lived assets:

      In accordance with Statement of Financial Accounting Standards No. 121,
      "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
      Assets to be Disposed of," the Company records impairment losses on
      long-lived assets used in operations, including intangible assets, when
      events and circumstances indicate that the assets might be impaired and
      the undiscounted cash flows estimated to be generated by those assets are
      less than the carrying amounts of those assets. No such losses have been
      recorded.

[8]   Stock-based compensation:

      During 1996, the Company adopted Statement of Financial Accounting
      Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
      123"). The provisions of SFAS No. 123 allow companies to either expense
      the estimated fair value of employee stock options or to continue to
      follow the intrinsic value method set forth in Accounting Principles Board
      Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25") but
      disclose the pro forma effects on net income (loss) had the fair value of
      the options been expensed. The Company has elected to continue to apply
      APB 25 in accounting for its employee stock option incentive plans. See
      Note I to the financial statements for further information.

                                                                             F-9

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)

Notes to Financial Statements
December 31, 1997

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

[9]   Net loss per share:

      During the year ended December 31, 1997, the Company adopted Statement of
      Financial Accounting Standards No. 128 "Earnings per Share" which had no
      effect on the previously reported net loss per share. Net loss per share
      is computed based on the weighted average number of common shares
      outstanding for the periods and common shares issuable for little or no
      cash consideration, adjusted to reflect the Exchange Ratios and the
      reverse stock split. Potential common shares not included in the
      calculation of net loss per share for the year ended December 31, 1997 as
      the effect would be anti-dilutive, are as follows (Notes G and I):

                                                                     Number of
                                                                     Potential
                                                                   Common Shares
                                                                   -------------

      Series B convertible preferred stock                           3,424,980
      Placement agent's warrants to acquire Series
       B convertible preferred stock                                   342,498
      Stock options                                                    371,993

[10]  Recent accounting pronouncements:

      Recently issued accounting pronouncements concerning disclosure of
      information about capital structure, reporting comprehensive income and
      disclosure about segments of an enterprise are not expected to have a
      material effect on the presentation of the Company's financial statements.

NOTE C - FURNITURE AND EQUIPMENT

At December 31, 1997 furniture and equipment comprised of the following:

           Furniture                                                   $ 59,000
           Equipment                                                    163,000
                                                                       --------

                                                                        222,000
           Less accumulated depreciation                                 41,000
                                                                       --------
                                                                       $181,000
                                                                       ========

NOTE D - EMPLOYMENT AGREEMENTS

An employment agreement with the Company's President and CEO provides for an
annual salary of $175,000 through April 1999. An employment agreement with an
executive officer provides for an annual salary of approximately $141,000
through November 1999. The agreements include the issuance of options, bonuses
and salary increases, and contain renewal options.

The Company has also entered into two three year consulting agreements which
provide for aggregate annual fees of approximately $48,000 through March 1999.

                                                                            F-10

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)

Notes to Financial Statements
December 31, 1997

NOTE E - INCOME TAXES

At December 31, 1997, the Company has available for federal income tax purposes
net operating loss carryforwards of approximately $14,600,000 expiring through
2011, that may be used to offset future taxable income. As a result of the
ownership change pursuant to the Merger, Ansan's portion of the net operating
loss carryforward of approximately $9,500,000 through November 1997, is limited
in accordance with Section 382 of the Internal Revenue Code. Pursuant to Section
382 of the Internal Revenue Code, the utilization of these carryforwards may
become further limited if certain ownership changes occur. The Company has
research and development credit carryforwards of approximately $373,000 which
expire in 2011. Ansan's portion of these credits of approximately $179,000 are
also subject to a Section 382 limitation. There will be an annual amount
available to offset future taxable income.

The principal difference between the deficit accumulated during the development
stage for financial reporting purposes and the net operating loss carryforward
for tax purposes is primarily due to the write-off of the acquired in-process
research and development and supplies and certain research and development
expenses which are not currently deductible for tax purposes. The Company has
provided a valuation reserve against the full amount of the deferred tax asset
of $7,354,000. The components of the deferred tax assets are net operating loss
benefits of approximately $5,410,000, acquired in-process research and
development and supplies write-off of approximately $765,000 and research and
development costs not currently deducted and research credits of approximately
$1,179,000. The valuation reserve is required since the likelihood of
realization cannot be determined. The valuation reserve increased by
approximately $6,124,000 and $1,223,000 for the years ended December 31, 1997
and 1996, respectively. The difference between the statutory federal income tax
rate of 34% and the Company's effective tax rate of 0% is due to the increase in
the valuation reserve.

NOTE F - LICENSE AGREEMENTS

[1]   In 1996, the Company entered into a license agreement with the
      Charlotte-Mecklenburg Hospital Authority for the use of the active
      compound in SuperVent, a therapy which the Company is clinically testing.
      The Company paid a license issue fee of $86,400 and has agreed to pay
      royalties on future sales and to pay future patent-related costs. The
      license expires upon expiration of the underlying patents.

[2]   In 1996, the Company entered into a license agreement with the Wisconsin
      Alumni Research Foundation ("WARF") for the use of the patented compound
      ST-630 in the treatment of post-menopausal osteoporosis. The Company paid
      WARF an option fee of $25,000 in June 1996 and a license issue fee of
      $400,000 in October 1996 and is obligated to make future milestones
      payments aggregating $3,095,000 and pay royalties on future sales. The
      license expires upon expiration of the underlying patents.

[3]   In 1992, the Company entered into research (which expired in 1994) and
      license agreements with Bar-Ilan Research and Development Company, Ltd.
      ("Bar-Ilan"), an entity located in Israel. Pursuant to the license
      agreement, the Company received certain exclusive worldwide licenses to
      inventions and confidential information related to the research program in
      exchange for the research funding and specified royalties on future sales
      and/or sublicensing arrangements. In November 1997, in connection with the
      Merger, the Company and Bar-Ilan agreed to enter into a new license
      agreement in order to permit certain of the Company's rights under the
      original Bar-Ilan license agreement to be licensed to Titan (see Note A).
      Pursuant to the new license agreement, the Company is obligated to pay
      royalties to Bar-Ilan on any of its sales of licensed products. To
      maintain license exclusivity, the Company is obligated to make minimum
      royalty payments of $25,000 in 1998 and $60,000 in each calendar year
      thereafter.

                                                                            F-11

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)

Notes to Financial Statements
December 31, 1997

      NOTE F - LICENSE AGREEMENTS (CONTINUED)

[3]   (continued)

      Bar-Ilan's agreement with Titan includes the obligation for making the
      minimum royalty payments in 1998 and thereafter to maintain license
      exclusively. In addition, the agreement includes future milestone payments
      aggregating $200,000 (to be shared equally by the Company and Titan,
      pursuant to a separate agreement between the Company and Titan, in the
      event both companies achieve the milestone) and royalties on future sales.
      In the event the agreement between Bar-Ilan and Titan is terminated,
      Bar-Ilan has the right to require the Company to assume all rights and
      obligations under the Titan agreement. The Company does not intend to
      pursue development of the compounds under the license agreement and is
      seeking to sublicense that technology.

[4]   In May 1996, the Company signed a licensing agreement with Boehringer
      Ingelheim GmbH ("Boehringer") to acquire the rights in the United States
      and the European Union to develop a new intravenous formulation of the
      drug Apafant(TM) for all clinical indications. Pursuant to the agreement,
      the Company may be obligated to make future milestone and royalty payments
      to Boehringer. However, under certain circumstances, Boehringer may
      participate in further development and commercialization of Apafant(TM)
      and, in such circumstances, would be obligated to make milestone and
      royalty payments to the Company.

[5]   See Note H[1] with respect to a sublicense agreement between ATI and
      Johnson & Johnson, Inc.

NOTE G - STOCKHOLDERS' EQUITY

Private placement:

In 1996, pursuant to a private placement offering, Old Discovery sold
approximately 44 units (each unit consisting of securities converted in the
Merger into 50,000 shares of Series B convertible preferred stock and 19,458
shares of common stock of the Company). Preferred stockholders have voting
rights based upon the number of shares of common stock issuable upon conversion
of the preferred shares. Each share of preferred stock is convertible at the
option of the holders thereof into 1.556628 shares of common stock of the
Company. The conversion rate will be adjusted under certain circumstances based
on the future market price of the common stock. Net proceeds from the private
placement approximated $19,000,000.

The placement agent for the offering received approximately $2,860,000 in cash
plus warrants which, pursuant to the merger give the holders thereof the right
to acquire 220,026 shares of Series B preferred stock at a price of $11 per
share, through November 8, 2006 and to acquire 85,625 shares of common stock at
a price of $0.64 per share, through November 8, 2006. The warrants contain
certain anti-dilution provisions and may be exercised on a "net exercise" basis
pursuant to a provision that does not require the payment of any cash to the
Company.

Unit offering:

In August 1995, the Company issued an aggregate of 498,333 units (including
65,000 units pursuant to the underwriter's overallotment option) at $15.00 per
unit in an initial public offering (the "Offering"). Each unit consisted of one
share of common stock, one redeemable Class A warrant, and one Class B warrant.
Each Class A warrant entitles the holder to purchase one share of common stock
and one Class B warrant at an exercise price of $19.50 per share. Each Class B
warrant entitles the holder to purchase one share of common stock an exercise
price of $26.25 per share.

                                                                            F-12

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)

Notes to Financial Statements
December 31, 1997

NOTE G - STOCKHOLDERS' EQUITY (CONTINUED)

Unit offering: (continued)

In connection with the Offering, the holders of the Company's common stock and
options to purchase common stock placed, on a pro rata basis, 121,246 shares
(including 115,491 shares held by the Company pending cancellation pursuant to
the Merger (Note A)) and options to purchase 12,086 shares of common stock into
escrow (the "Escrow Shares" and "Escrow Options", respectively). The Escrow
Shares and Escrow Options are not transferable or assignable; however, the
Escrow Shares may be voted. Holders of Escrow Options may exercise their options
prior to their release from escrow; however, the shares issuable upon any such
exercise will continue to be held in escrow. The Escrow Shares and Escrow
Options will be released from escrow if, and only if, certain earnings or market
price criteria have been met. If the conditions are not met by March 31, 2000,
the Escrow Shares and Escrow Options will be cancelled and contributed to the
Company's capital.

The release of Escrow Shares and Escrow Options held by employees, officers,
directors, consultants and their relatives will be deemed compensatory.
Accordingly, the Company will recognize as compensation expense, during the
period in which the earnings or market price targets are met, a one-time charge
to reflect the then fair market value of the shares released from escrow. Such
charges could substantially reduce the Company's net income or increase the net
loss. The amount of compensation expense recognized by the Company will not
affect the total stockholders equity.

NOTE H - INVESTMENT IN ACUTE THERAPEUTICS, INC.

[1]   Formation of Acute Therapeutics, Inc.:

      On October 28, 1996, the Company invested $7.5 million in a newly formed
      subsidiary, ATI, in exchange for 600,000 shares of Series A convertible
      preferred stock of ATI, then representing 75% of the outstanding voting
      securities of ATI following such transaction.

      Concurrent with the Company's investment in ATI, Johnson & Johnson, Inc.
      ("J&J"), Ortho Pharmaceuticals, Inc. (a wholly owned subsidiary of J&J),
      and ATI entered into an agreement (the "J&J License Agreement") granting
      an exclusive license of Surfaxin(TM) technology to ATI in exchange for
      certain license fees ($200,000 of which was paid in November 1996),
      milestone payments aggregating $2,750,000, royalties and 40,000 shares of
      ATI common stock. J&J contributed its Surfaxin(TM) raw material inventory
      and manufacturing equipment to ATI in exchange for 2,200 shares of
      nonvoting Series B preferred stock of ATI having a $2.2 million
      liquidation preference and a $100 per share cumulative annual dividend.
      Dividends of $238,000 have accrued to the benefit of J&J through December
      31, 1997. However, such dividends are only required to be paid upon
      liquidation of ATI or redemption of the preferred stock. The inventory and
      equipment were valued at $2,200,000 (the value of the preferred shares
      issued to J&J) and were charged to expense as their intended use is for
      research and development activities. The Scripps Research Institute
      ("Scripps") received 40,000 shares of common stock of ATI in exchange for
      its consent to the J&J License Agreement.

      In 1997, ATI and J&J determined that certain of the raw material inventory
      to be received pursuant to the J&J License Agreement was not available.
      ATI negotiated with J&J a price adjustment and proportionate reduction of
      the liquidation preference of the Series B preferred stock issued of
      approximately $161,000 and a corresponding reduction of 161 Series B
      preferred shares held by J&J. The price adjustment has been accounted as a
      credit to research and development expense in 1997.

      The co-founders (some of who are also consultants to ATI) of ATI purchased
      an aggregate of 120,000 shares of ATI common stock for $.01 per share and
      were granted options to purchase an aggregate of 44,800 shares of common
      stock of ATI at an exercise price of $.01 per share vesting after a
      five-year term, subject to acceleration and 40,000 shares of common stock
      of ATI at an exercise price of $.32 per share vesting in April 1997.

                                                                            F-13

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)

Notes to Financial Statements
December 31, 1997

NOTE H - INVESTMENT IN ACUTE THERAPEUTICS, INC. (CONTINUED)

[2]   Commitments:

      (a)   In 1996, ATI entered into a four-year employment agreement with its
            President, Chief Executive Officer and Chairman of the Board of
            Directors providing for a base salary of $225,000 per year. The
            agreement includes additional payments in the aggregate amount of
            $150,000 on the completion of specified events and the issuance of
            bonuses in each year of employment. In 1996 and 1997, ATI also
            entered into three-year employment agreements with six employees
            providing for aggregate annual salaries of $829,000. Certain of
            these agreements provide for the issuance of bonuses at the
            discretion of ATI's Chief Executive Officer and the issuance of
            options to purchase ATI's common stock. The agreements expire on
            various dates through May 2000.

            ATI entered into various two-year consulting agreements providing
            for aggregate annual fees of $300,000 plus royalties on net
            commercial sales of licensed products sold by ATI or its
            sublicensees and an 18-month consulting agreement providing for
            monthly fees of $7,500.

      (b)   ATI entered into a research funding and option agreement with
            Scripps to provide certain funding of research activities. The
            agreement is for an initial term of two years with renewal
            provisions for additional one year periods. The agreement provides
            for Scripps to grant an option to ATI to acquire an exclusive
            license for the application of technology developed from the
            research program. Pursuant to the agreement, in 1997 ATI paid
            Scripps $460,000, of which approximately $383,000 has been charged
            to research and development expense in 1997 and the balance of which
            will be charged to research and development expense in 1997.

      (c)   In November 1997, ATI entered into a one year exclusive agreement
            with Lehman Brothers, Inc. ("Lehman") for financial advisory
            services. The agreement provides for ATI to pay Lehman a retainer of
            $100,000 of which $25,000 was paid through December 31, 1997.

      (d)   ATI leases its office and laboratory space pursuant to an operating
            lease requiring aggregate annual payments of approximately $67,000
            through November 2001.

[3]   ATI stock option plan:

      ATI adopted the 1996 Stock Option/Stock Issuance Plan (the "ATI Plan")
      consisting of a Discretionary Option Grant program for employees and an
      Automatic Option Grant Program under which option grants will
      automatically be made at periodic intervals to eligible nonemployee
      directors to purchase shares of common stock, in either case at an
      exercise price equal to at least 85% of the fair market value of the
      common stock on the grant date. Under the Discretionary Option Grant
      program, options will be granted to employees either as incentive stock
      options or nonstatutory options and will vest over a specified period of
      time (generally three to five years) as determined by the ATI Board of
      Directors. ATI has reserved 234,800 shares of common stock for issuance
      under these plans.

      In January 1998, ATI granted additional options to purchase 7,500 shares
      of common stock to eligible employees and nonemployees at $0.75 per share
      for a ten year term. ATI also granted a consultant an option to purchase
      5,000 shares of common stock at $1.25 per share, which will vest on the
      occurance of certain events.

                                                                            F-14

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)

Notes to Financial Statements
December 31, 1997

NOTE I - STOCK OPTIONS

The Company's 1993 Stock Option Plan which was amended and restated (the "1993
Plan"), provided that incentive stock options may be granted to employees, and
nonstatutory stock options may be granted to employees, directors, consultants
and affiliates. No further options will be granted under the Company's 1993
Plan. In May 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Option Plan"). A total of 395,800 shares of common stock were reserved and
authorized for issuance under the 1995 Option Plan.

Options granted under the 1993 and 1995 Plans expire no later than ten years
from the date of grant, except when the grantee is a 10% shareholder of the
Company or an affiliate company, in which case the maximum term is five years
form the date of grant. The exercise price shall be at least 100%, 85% and 110%
of the fair value of the stock subject to the option on the grant date, as
determined by the board of directors, for incentive stock options, nonstatutory
stock options and options granted to 10% shareholders of the Company or
affiliate company, respectively. Options granted under the 1993 Option Plan are
exercisable immediately upon grant, however, the shares issuable upon exercise
of the options are subject to repurchase by the Company. Such repurchase rights
will lapse as the shares vest over a period of five years from the date of
grant.

On consummation of the Merger the Company assumed Old Discovery's outstanding
options which were exchanged at the Exchange Ratio for options to purchase the
Company's common stock (Note A). The pro forma effects of applying SFAS No. 123
and the stock options activity shown below are those of Old Discovery's 1996
Stock Option /Stock Issuance Plan (the "Discovery Plan") through the date of the
Merger and the Plans described above after the Merger as the Merger was
accounted for as a reverse acquisition.

The Company applies APB 25 in accounting for the Discovery Plan and the ATI Plan
and, accordingly, recognizes compensation expense for the difference between the
fair value of the underlying common stock and the exercise price of the option
at the date of grant. The effect of applying SFAS No. 123 on pro forma net loss
is not necessarily representative of the effects on reported net income or loss
for future years due to, among other things, (i) the vesting period of the stock
options and (ii) the fair value of additional stock options in future years. Had
compensation cost for the Company's stock option plans been determined based
upon the fair value of the options at the grant date of awards under the plans
consistent with the methodology prescribed under SFAS No. 123, the Company's net
loss for each of the years ended December 31, 1997 and 1996 would have been
approximately $9,219,000 or $3.44 per share and $3,246,000 or $1.97 per share,
respectively. The fair value of the options granted are estimated at $0.24 and
$0.28 per share for the Discovery Plan and the ATI Plan, respectively, for the
year ended December 31, 1997, and $0.16 and $0.11 per share for the Discovery
Plan and the ATI Plan, respectively, for the year ended December 31, 1996, on
the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions: dividend yield 0%, volatility of 0%,
risk-free interest rate of 6.53% for 1997 and 6.51% for 1996, and expected life
of ten years.

                                                                            F-15

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)

Notes to Financial Statements
December 31, 1997

NOTE I - STOCK OPTIONS (CONTINUED)

Additional information with respect to Old Discovery stock option activity is
summarized as follows:

                                                                              Weighted-
                                                                  Weighted-    Average
                                                                   Average    Remaining
                                             Price                Exercise   Contractual
                                           Per Share    Shares     Price        Life
                                          -----------   -------   --------   -----------
                                                                        
Outstanding at January 1, 1996:
    Options granted                       $0.26-$0.51    38,916    $0.32
    Options exercised                      0.26-0.51    (19,458)    0.39
                                                        -------

Outstanding December 31, 1996:             0.26-0.51     19,458     0.26     8.42 years
                                                        -------
    Options granted                          0.51       257,589     0.51
    Options exercised                        0.51       (17,514)    0.51
    Options forfeited                        0.51        (5,999)    0.51
    Ansan options outstanding              0.18-4.50    118,459     4.19
                                                        -------

Options outstanding at December 31, 1997   0.18-4.50    371,993     1.67     6.61 years
                                                        =======

Options exercisable at December 31, 1997   0.18-4.50    252,912     1.80        6.49
                                                        =======

Additional information with respect to the ATI Plan stock option activity is
summarized as follows:

                                                                              Weighted-
                                                                  Weighted-    Average
                                                                   Average    Remaining
                                             Price                Exercise   Contractual
                                           Per Share    Shares     Price        Life
                                          -----------   -------   --------   -----------
                                                                        
Outstanding at January 1, 1996:
    Options granted                       0.01-$0.32    144,800     $.22
                                                        -------

Outstanding at December 31, 1996:         0.01-0.32     144,800      .22      8.8 years
    Options granted                       0.32-0.75      52,000      .58
    Options exercised                       0.32         (2,000)     .32
                                                        -------

Outstanding at December 31, 1997          0.01-0.75     194,800      .32      8.9 years
                                                        =======

Options exercisable at December 31, 1997  0.32-0.75      89,500      .50      9.0 years
                                                        =======

                                                                            F-16

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)

Notes to Financial Statements
December 31, 1997

NOTE J - STOCKHOLDERS' EQUITY

Common shares reserved for issuance:

The Company has reserved shares of common stock for issuance upon conversion of
preferred stock and exercise of options as follows:

             (i)   Preferred stock (Note G)                         3,424,980
             (ii)  Stock option plan                                  395,800
             (iii) Old Discovery stock options                        253,534
             (iv)  Placement agent warrants (Note G):
                     Conversion of preferred stock                    342,498
                     Common stock                                      85,625
             (v)   Class A warrants                                   735,833
             (vi)  Class B warrants                                 1,234,167
             (vii) Underwriter's option                               173,333

NOTE K - COMMITMENTS

[1]   In December 1997, the Company entered into an agreement with a clinical
      research institute for clinical studies to be performed on behalf of the
      Company. The agreement specifies payments to be made by the Company on the
      successful completion of certain phases of the study that aggregate to
      approximately $394,000, $50,000 of which was paid and charged to expense
      in 1997.

[2]   In May 1997, the Company entered into an agreement to lease office space
      for a period of three years. Future minimum lease payments (excluding
      ATI's operating lease commitment (Note H[2])) are as follows:

                                                                Amount
                                                             -----------
             1998                                            $    91,000
             1999                                                 93,000
             2000                                                 47,000
                                                             -----------
                                                             $   231,000
                                                             ===========

Total rent expense for the years ended December 31, 1997 and 1996 was
approximately $164,000 and $31,000, respectively.

NOTE L - SUBSEQUENT EVENTS

On March 5, 1998, the Company entered into an agreement and plan of
reorganization and merger with ATI and ATI Acquisition Corp. ("Acquisition
Sub"), a wholly owned subsidiary of the Company (the "ATI Merger Agreement").
Pursuant to the ATI Merger Agreement, subject to receipt of approval of the
stockholders of the Company and ATI and the fulfillment of other conditions,
Acquisition Sub will merge (the "ATI Merger") with and into ATI in a transaction
in which (i) ATI will be the surviving corporation, (ii) the existing holders of
ATI common stock will receive 3.91 shares of common stock for each share of ATI
common stock held by such holders and (iii) certain outstanding ATI options will
be assumed by Discovery and will become exercisable for 3.91 shares of common
stock per share of ATI common stock for which such options are presently
exercisable (the "ATI Transaction"). Pending the closing of the merger, the
Company will be managed by ATI's management team pursuant to a management
agreement entered into simultaneously with the execution of the ATI Merger
Agreement (the "Management Agreement"). The Company has agreed to pay to ATI 50%
of the salary expense attributable to the ATI management team during the period
from the execution of the ATI Merger Agreement

                                                                            F-17

DISCOVERY LABORATORIES, INC. AND SUBSIDIARY
(a development stage company)

Notes to Financial Statements
December 31, 1997

NOTE L - SUBSEQUENT EVENTS (CONTINUED)

through the date of any termination or abandonment of the transactions
contemplated by the ATI Merger Agreement if the ATI Merger is not consummated
due to a breach of the ATI Merger Agreement by Discovery or its stockholders.
Members of ATI's management team (the "ATI Management Members") will be issued
options to purchase an aggregate of 338,500 shares of the Company's common stock
in connection with the ATI Merger and additional options to purchase an
aggregate of 335,000 shares subject to the achievement of certain corporate
milestones. Upon execution of the ATI Management Agreement, ATI Management
Members were granted options to purchase an aggregate of 126,500 shares of the
Company's common stock, which will vest on the earlier of the consummation of
the ATI Merger or on the termination of the ATI Management Agreement by the
Company in the absence of a material breach thereof by ATI, provided that in the
case of the ATI Management Members other than its President, such options shall
vest over a three-year period in the event the ATI Merger is completed. If the
ATI Merger has not occurred by July 15, 1998 due to action or inaction by the
Company, its management or its stockholders, all such options shall be
immediately vested in full.

Pro forma results of operations of the Company, giving effect to the ATI Merger
as if it had occurred at the beginning of 1997 and 1996 would not differ from
the historical consolidated results of the Company as the operations of ATI have
been included in the consolidated results of the Company. A nonrecurring charge
of $5,199,000 for in-process research and development which will be recorded by
the Company upon consummation of the ATI Merger, has not been considered in the
pro forma results.

                                                                            F-18

                                                                         Annex A

                          AGREEMENT AND PLAN OF MERGER

                                      among

                          DISCOVERY LABORATORIES, INC.

                              ATI ACQUISITION CORP.

                                       AND

                            ACUTE THERAPEUTICS, INC.

                                  March 5, 1998

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

ARTICLE 1 THE MERGER.........................................................  2
      Section 1.1   The Merger...............................................  2
      Section 1.2   Closing and Effective Time...............................  2
      Section 1.3   Directors and Officers of the Surviving Corporation......  2
      Section 1.4   Certificate of Incorporation.............................  2
      Section 1.5   Bylaws...................................................  2
      Section 1.6   Effect of the Merger.....................................  2

ARTICLE 2 CONVERSION OR EXCHANGE OF SECURITIES...............................  3
      Section 2.1   Conversion of Capital Stock..............................  3
      Section 2.3   Payment for Common Shares; Surrender of Certificates.....  4
      Section 2.4   Appraisal Rights.........................................  5
      Section 2.5   Seller Option Plan.......................................  5

ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF SELLER...........................  6
      Section 3.1   Organization.............................................  6
      Section 3.2   Capitalization...........................................  6
      Section 3.3   Authorization; Validity of Agreement; Necessary Action...  7
      Section 3.4   Consents and Approvals; No Violations....................  7
      Section 3.5   [RESERVED]...............................................  8
      Section 3.6   Absence of Certain Changes...............................  8
      Section 3.7   No Undisclosed Liabilities...............................  9
      Section 3.8   Litigation...............................................  9
      Section 3.9   No Default; Compliance with Applicable Laws..............  9
      Section 3.10  Intellectual Property ...................................  9
      Section 3.11  Tax Returns and Payments ................................ 10
      Section 3.12  Certificate of Incorporation and Bylaws ................. 10
      Section 3.13  Title to Property ....................................... 10
      Section 3.14  Employee Benefits and Contracts ......................... 11
      Section 3.15  Employment; Labor Matters ............................... 12
      Section 3.16  Brokers ................................................. 12
      Section 3.17  Environmental Laws ...................................... 12
      Section 3.18  Insurance ............................................... 13
      Section 3.19  Contracts and Commitments ............................... 13
      Section 3.20  Interests of Officers and Directors ..................... 14
      Section 3.21  Questionable Payments ................................... 14
      Section 3.22  Certain Tax Matters ..................................... 14

ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER AND 
          ACQUISITION SUBSIDIARY............................................. 15

                                        i

      Section 4.1   Organization............................................. 15
      Section 4.2   Capitalization........................................... 15
      Section 4.3   Authorization; Validity of Agreement; Necessary Action... 16
      Section 4.4   Consents and Approvals; No Violations.................... 17
      Section 4.5   SEC Reports and Financial Statements..................... 17
      Section 4.6   Absence of Certain Changes............................... 18
      Section 4.7   No Undisclosed Liabilities............................... 19
      Section 4.8   Litigation............................................... 19
      Section 4.9   No Default; Compliance with Applicable Laws.............. 19
      Section 4.10  Intellectual Property ................................... 20
      Section 4.11  Tax Returns and Payments ................................ 20
      Section 4.12  Certificate of Incorporation and Bylaws ................. 21
      Section 4.13  Title to Property ....................................... 21
      Section 4.14  Employee Benefits and Contracts ......................... 21
      Section 4.15  Employment; Labor Matters ............................... 22
      Section 4.16  Brokers ................................................. 23
      Section 4.17  Environmental Laws ...................................... 23
      Section 4.18  Insurance ............................................... 23
      Section 4.19  Contracts and Commitments ............................... 23
      Section 4.20  Interests of Officers and Directors ..................... 24
      Section 4.21  Questionable Payments ................................... 24
      Section 4.22  Certain Tax Matters ..................................... 25
      Section 4.23  No Prior Activities ..................................... 25

ARTICLE 5  COVENANTS......................................................... 25
      Section 5.1   Interim Operations of Seller and Buyer................... 25
      Section 5.2   Access; Confidentiality.................................. 27
      Section 5.3   Additional Agreements.................................... 27
      Section 5.4   Consents and Approvals; HSR Act.......................... 28
      Section 5.5   Exclusivity.............................................. 28
      Section 5.6   Publicity................................................ 28
      Section 5.7   Notification of Certain Matters.......................... 28
      Section 5.8   Indemnification.......................................... 29
      Section 5.9   Approval of Stockholders................................. 29
      Section 5.10  Buyer Proxy Statement ................................... 30
      Section 5.11  Seller Information Statement ............................ 30
      Section 5.12  Tax Treatment............................................ 31
      Section 5.13  Form S-8 ................................................ 31
      Section 5.14  Reservation of Buyer Common Stock ....................... 31
      Section 5.15  Consolidation of Operations ............................. 31
      Section 5.16  Consolidation of Board of Directors ..................... 32
      Section 5.17  Incentive Bonus Payments ................................ 32

ARTICLE 6 CONDITIONS......................................................... 32
      Section 6.1   Conditions to Each Party's Obligation to Effect the
                    Merger................................................... 32

                                       ii

      Section 6.2   Additional Conditions to Obligations of Seller........... 33
      Section 6.3   Additional Conditions to Obligations of Buyer and
                    Acquisition Subsidiary................................... 34

ARTICLE 7 TERMINATION........................................................ 35
      Section 7.1   Termination.............................................. 35
      Section 7.2   Effect of Termination.................................... 36

ARTICLE 8  MISCELLANEOUS..................................................... 36
      Section 8.1   Fees and Expenses........................................ 36
      Section 8.2   Amendment and Modification............................... 36
      Section 8.3   Nonsurvival of Representations and Warranties............ 36
      Section 8.4   Notices.................................................. 37
      Section 8.5   Interpretation........................................... 38
      Section 8.6   Counterparts............................................. 38
      Section 8.7   Entire Agreement; No Third Party Beneficiaries;
                    Rights of Ownership...................................... 38
      Section 8.8   Severability............................................. 38
      Section 8.9   Governing Law............................................ 38
      Section 8.10  Assignment .............................................. 39

Exhibit A  -  Form of Capetola Employment Agreement
Exhibit B  -  Form of Key Executive Employment Agreement
Exhibit C  -  Form of Option Agreement for 338,500 Shares
Exhibit D  -  Form of Option Agreement for 175,000 Shares
Exhibit E  -  Form of Option Agreement for 160,000 Shares
Exhibit F  -  Form of Registration Rights Agreement
Exhibit G  -  Form of Investment Agreement
Exhibit H  -  Form of Lock-up Agreement
Exhibit I  -  Form of Buyer 1998 Stock Option Plan

                                      iii

                          AGREEMENT AND PLAN OF MERGER

      AGREEMENT AND PLAN OF MERGER, dated March 5, 1998, by and among Discovery
Laboratories, Inc., a Delaware corporation ("Buyer" or "Discovery"), ATI
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Buyer
("Acquisition Subsidiary"), and Acute Therapeutics, Inc., a Delaware corporation
("Seller" or "Acute").

                                    RECITALS:

      WHEREAS, upon and subject to the terms and conditions of this Agreement,
Acquisition Subsidiary will merge with and into Seller (the "Merger") and Seller
will become a wholly-owned subsidiary of Buyer;

      WHEREAS, the Boards of Directors of Seller and Buyer have each determined
that it is in the best interests of their respective stockholders for Buyer to
acquire Seller upon the terms and subject to the conditions set forth herein;
and

      WHEREAS, also in furtherance of such acquisition, the Boards of Directors
of Seller and Buyer have each approved this Agreement and the Merger of
Acquisition Subsidiary with and into Seller in accordance with the Delaware
General Corporation Law ("DGCL"), and upon the terms and subject to the
conditions set forth herein; and

      WHEREAS, the Board of Directors of Seller has resolved to recommend
approval of this Agreement and the Merger to the holders of shares of Seller's
Common Stock, $0.001 par value per share (the "Common Shares") and the holder of
shares of Seller's Series A Preferred Stock, $0.001 par value per share (the
"Series A Acute Preferred Shares");

      WHEREAS, for federal income tax purposes it is intended that the Merger
qualify as a reorganization under the provisions of Section 368(a) of the United
States Internal Revenue Code of 1986, as amended (the "Code"); and

      NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby,
Seller, Buyer and Acquisition Subsidiary hereby agree as follows:

                                    ARTICLE 1

                                   THE MERGER

      Section 1.1 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.2 hereof), Seller and
Acquisition Subsidiary shall consummate the Merger pursuant to which Acquisition
Subsidiary shall be merged with and into Seller in accordance with Section 251
of the DGCL, the separate corporate existence of Acquisition Subsidiary shall
cease, and Seller shall continue as the surviving corporation in the Merger
(Seller is sometimes referred to as the "Surviving Corporation").

      Section 1.2 Closing and Effective Time . The closing of the Merger (the
"Closing") shall take place (i) at 10:00 a.m., New York time, on a date to be
specified by the parties, which shall be no later than the fifth business day
after satisfaction or waiver of all of the conditions set forth in Article 6
hereof, at the offices of Brobeck, Phleger & Harrison LLP, 1633 Broadway, 47th
Floor, New York, NY 10019 or (ii) at such other time and place as Buyer and
Seller shall agree (the "Closing Date"). Immediately after completion of the
Closing, the parties shall cause the Merger to be consummated by filing a
certificate of merger (the "Certificate of Merger") executed in accordance with
the relevant provisions of the DGCL and shall make all other filings or
recordings required under the DGCL. The Merger shall become effective at the
time when the Certificate of Merger has been duly filed with the Delaware
Secretary of State, or such time as is agreed upon by the parties and specified
in the Certificate of Merger, and such time is hereinafter referred to as the
"Effective Time." The date of the Effective Time is hereinafter referred to as
the "Effective Date."

      Section 1.3 Directors and Officers of the Surviving Corporation. The
directors and officers of Seller at the Effective Time shall be the initial
directors and officers, respectively, of the Surviving Corporation.

      Section 1.4 Certificate of Incorporation. The certificate of incorporation
of Acquisition Subsidiary in effect at the Effective Time shall be the
certificate of incorporation of the Surviving Corporation until amended in
accordance with applicable law.

      Section 1.5 Bylaws. The bylaws of Acquisition Subsidiary in effect at the
Effective Time shall be the bylaws of the Surviving Corporation until amended in
accordance with applicable law.

      Section 1.6 Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of the DGCL. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time all the property, rights, privileges, powers and franchises of Seller and
Acquisition Subsidiary shall vest in the Surviving Corporation, and all debts,
liabilities and duties of Seller and Acquisition Subsidiary shall become the
debts, liabilities and duties of the Surviving Corporation. 

                                   ARTICLE 2

                      CONVERSION OR EXCHANGE OF SECURITIES

      Section 2.1 Conversion of Capital Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of Buyer, Acquisition
Subsidiary, Seller, or the holders of any Common Shares or Series A Acute
Preferred Shares or Series B Acute Preferred Shares (as herein defined) or any
shares of capital stock of Acquisition Subsidiary:

                                       2

      (a) Acquisition Subsidiary Capital Stock. Each issued and outstanding
share of capital stock of Acquisition Subsidiary shall be converted into and
become one fully paid and nonassessable share of common stock of the Surviving
Corporation.

      (b) Cancellation of Treasury Stock and Series A Acute Preferred Shares.
All Common Shares that are owned by Seller and all Series A Acute Preferred
Shares that are owned by Buyer shall be cancelled and extinguished without any
conversion thereof and no consideration shall be delivered in exchange therefor.

      (c) Conversion of Common Shares. Each issued and outstanding Common Share
(other than Common Shares to be canceled in accordance with Section 2.1(b) and
any dissenting Common Shares which are held by stockholders exercising appraisal
rights pursuant to the DGCL ("Dissenting Stockholders")) shall by virtue of the
Merger and without any action on the part of the holder thereof, be
automatically converted into the right to receive, upon surrender of the
certificate formerly representing such Common Share (the "Common Share
Certificate") in the manner provided in Section 2.3 below, 3.91 shares of Common
Stock, $.001 par value of Buyer ("Buyer Common Stock"). The number of shares of
Buyer Common Stock into which each Common Share will be automatically converted
is referred to as the "Conversion Ratio." All such Common Shares, when so
converted, shall no longer be outstanding and shall automatically be canceled
and retired and shall cease to exist, and each holder of a certificate
representing any such Common Shares shall cease to have any rights with respect
thereto, except the right to receive the merger consideration therefor upon the
surrender of such certificate in accordance with Section 2.3, or, in the case of
Dissenting Stockholders, the right, if any, to receive payment from the
Surviving Corporation of the fair value of such Common Shares as determined in
accordance with the DGCL. No fractional shares of Buyer Common Stock shall be
issued and, in lieu thereof, a cash payment shall be made pursuant to Section
2.3(c).

      Section 2.2 Exchange of Series B Acute Preferred Shares. Each issued and
outstanding Share of Seller's Series B Preferred Stock, $0.001 par value per
share (the "Series B Acute Preferred Shares") shall, at the Closing, be
exchanged for one share of Series A Preferred Stock, $0.001 par value per share
of Buyer (the "Discovery Preferred Shares"), pursuant to an exchange agreement
between Buyer and Johnson & Johnson Development Corporation ("JJDC")(the
"Exchange Agreement") in form and substance reasonably acceptable to Buyer and
Seller.

      Section 2.3 Payment for Common Shares; Surrender of Certificates

      (a) Letter of Transmittal. As soon as practicable after the Effective
Time, Buyer will send to each record holder of Common Shares at the Effective
Time a letter of transmittal and other appropriate materials for use in
surrendering Common Share Certificates to Buyer's transfer agent, who shall be
appointed exchange agent with respect to the Merger (the "Exchange Agent").

      (b) Payment Procedures. Promptly after the Effective Time, Buyer shall
request that the Exchange Agent distribute to each former holder of Common
Shares, upon surrender to the Exchange Agent of one or more Common Share
Certificates for cancellation together with a duly executed and properly
completed letter of transmittal, the shares of Buyer Common Stock receivable by
such holder in accordance with the provisions of Section 2.1(c). If Buyer Common
Stock is to be delivered to a person other than the person in whose name a
Common Share Certificate is so registered, the Common Share Certificate is so
surrendered shall be properly endorsed, with signatures guaranteed, or otherwise
in proper form for transfer, and the person requesting such payment shall pay
any transfer or other taxes required by reason of the delivery to a person other
than the registered holder of such Common Share Certificate surrendered, or such
person shall establish to the satisfaction of Buyer that such tax has been paid
or is not 

                                       3

applicable. No interest shall be paid on any consideration payable in the Merger
to former holders of Common Shares.

      (c) No Fractional Shares.

            (i)   No fractional shares of Buyer Common Stock shall be issued as
                  a result of the Merger. In lieu of the issuance of fractional
                  shares, cash adjustments will be paid to the former holder of
                  Common Shares in respect of any fraction of a share of Buyer
                  Common Stock which would otherwise be issuable under this
                  Agreement. Such cash adjustment shall be equal to an amount
                  determined by multiplying (A) the fractional share of Buyer
                  Common Stock to which the holder of Seller Common Stock would
                  be otherwise entitled under Section 2.1(c) (after aggregating
                  all shares of Buyer Common Stock to which such holder is
                  entitled), by (B) the average closing price of shares of Buyer
                  Common Stock on The Nasdaq Small Cap Market for the twenty
                  trading days immediately preceding the Effective Date.

            (ii)  As soon as practicable after the determination of the amount
                  of cash, if any, to be paid to former holders of Common Shares
                  with respect to any fractional share interests of Buyer Common
                  Stock, the Exchange Agent shall promptly pay such amounts to
                  such former holders of Common Shares subject to and in
                  accordance with the terms of this Section 2.3. Buyer will make
                  available to the Exchange Agent the cash necessary for this
                  purpose.

      Section 2.4 Appraisal Rights. Notwithstanding any other provision of this
Agreement to the contrary, including but without limitation Section 6.3(f),
Common Shares held by a holder who has not voted such Common Shares in favor of
the approval of this Agreement and the Merger or consented thereto in writing
and with respect to which appraisal rights shall have been demanded and
perfected in accordance with Section 262 of the DGCL (the "Dissenting Common
Shares") and as of the Effective Time not withdrawn shall not be converted into
the right to receive the consideration payable pursuant to Section 2.1(c) at or
after the Effective Time, but such Common Shares shall become the right to
receive such consideration as may be determined to be due to holders of
Dissenting Common Shares pursuant to the laws of the State of Delaware unless
and until the holder of such Dissenting Common Shares withdraws his or her
demand for such appraisal or becomes ineligible for such appraisal. If a holder
of Dissenting Common Shares shall withdraw his or her demand for such appraisal
or shall become ineligible for such appraisal (through failure to perfect or
otherwise), then, as of the Effective Time or the occurrence of such event,
whichever last occurs, such holder's Dissenting Common Shares shall
automatically be converted into and represent the right to receive the merger
consideration as provided in Section 2.1(c). Seller shall give Buyer (i) prompt
written notice of any demands for appraisal of Common Shares received by Seller
and (ii) the opportunity to participate in and direct all negotiations and
proceedings with respect to any such demands. Seller shall not, without prior
written consent of Buyer, make any payment with respect to, or settle, offer to
settle or otherwise negotiate, any such demands.

                                       4

      Section 2.5 Seller Option Plan.

      (a) Assumption of Options. Each outstanding option to purchase Common
Shares issued to employees, non-employee directors and consultants of Seller
pursuant to Seller's 1996 Stock Option/Stock Issuance Plan, as amended (the
"Seller Option Plan"), except for options to purchase 44,800 Common Shares
granted on October 10, 1996, as listed on Schedule 2.5 hereto which shall
terminate on the Closing, whether vested or unvested (each a "Stock Option"),
shall remain outstanding after the Effective Time and shall be assumed by Buyer.
The parties intend that Buyer's assumption of the Stock Options shall be treated
as "assuming a stock option in a transaction to which Section 424(a) applies"
within the meaning of Section 424 of the Code and this subsection (a) shall be
interpreted and applied consistent with such intent. Each Stock Option assumed
by Buyer shall be exercisable upon the same terms and conditions as under the
Seller Option Plan and applicable option agreement issued thereunder, except
that (i) such option shall be exercisable for that number of shares of Buyer
Common Stock equal to the number of Common Shares for which such option was
exercisable times the Conversion Ratio, and (ii) the exercise price of such
option shall be equal to the exercise price of such option divided by the
Conversion Ratio. The number of shares of Buyer Common Stock subject to an
option assumed by Buyer shall be rounded to the nearest whole number (with .5
rounded up) and the exercise price thereof shall be rounded up to the nearest
whole cent.

      (b) Notice. As soon as practicable after the Effective Time, Buyer shall
deliver to the holders of Stock Options appropriate notices setting forth such
holders' rights pursuant to the Buyer Option Plan (as defined in Section 4.2
hereof). The agreements evidencing the grants of such Stock Options shall
continue in effect on the same terms and conditions (subject to the adjustments
required by this Section 2.5 after giving effect to the Merger).

                                    ARTICLE 3

                         REPRESENTATIONS AND WARRANTIES
                                    OF SELLER

      Seller represents and warrants to Buyer and Acquisition Subsidiary as
follows:

      Section 3.1 Organization.

      (a) Except as set forth in Section 3.1 of the disclosure schedule
delivered to Buyer on or before the date hereof (the "Seller Disclosure
Schedule"), Seller is a corporation duly organized, validly existing and in good
standing under the laws of Delaware and has the requisite corporate power and
authority and any necessary governmental authority to own, operate or lease the
properties that it purports to own, operate or lease and to carry on its
business as it is now being conducted, and, except as set forth in Section 3.1
of the Seller Disclosure Schedule, is duly qualified as a foreign corporation to
do business, and is in good standing, in each jurisdiction where the character
of its properties owned, operated or leased or the nature of its activities
makes such qualification necessary, except for such failure which, when taken
together with all other such failures, would not have a Seller Material Adverse
Effect (as defined below in Section 3.1(b)). Seller does not own or control any
subsidiary.

      (b) The term "Seller Material Adverse Effect" means any individual
material adverse effect, or adverse effects which in the aggregate (whether or
not related and whether or not any individual effect is material) have a
material adverse effect, on the business, operations, properties (including
intangible properties), condition (financial or otherwise), assets or
liabilities of Seller or could reasonably be expected to prevent or materially
delay the consummation of the Merger.

                                       5

      Section 3.2 Capitalization.

      (a) Capitalization. The authorized capital stock of Seller consists of
2,000,000 Common Shares, par value $0.001 per share and 1,000,000 shares of
Preferred Stock, $0.001 par value per share, of which 600,000 shares are
designated Series A Acute Preferred Shares and 2,200 shares are designated
Series B Acute Preferred Shares. The outstanding Series A Acute Preferred Shares
are convertible into 600,000 shares of Common Shares at the conversion price in
effect with respect thereto. The Series B Acute Preferred Shares are not
convertible. As of December 31, 1997, (i) 202,000 Common Shares were issued and
outstanding, (ii) 600,000 Series A Acute Preferred Shares were issued and
outstanding and were convertible into 600,000 Common Shares, (iii) 2,039 Series
B Acute Preferred Shares were issued and outstanding and held by JJDC, (iv) no
shares of Common Stock were held in the treasury of Seller, and (v) 202,300
Common Shares were reserved for issuance upon exercise of outstanding options
under the Seller Option Plan. Section 3.2 of the Seller Disclosure Schedule sets
forth a true and correct list as of December 31, 1997 of all holders of options
to purchase Common Shares, the number of such options outstanding as of such
date and the exercise price per option. All of the outstanding shares of Common
Shares have been duly authorized and validly issued and are fully paid and
nonassessable and free of preemptive rights. Except as set forth in this Section
3.2 and in Section 3.2 of the Seller Disclosure Schedule, there are no other
options, warrants or other rights, convertible debt, agreements, arrangements or
commitments of any character obligating Seller to issue or sell any shares of
capital stock of or other equity interests in Seller. Seller is not obligated to
redeem, repurchase or otherwise reacquire any of its capital stock or other
securities.

      (b) Seller does not directly or indirectly own or have a right to acquire
an equity interest in any corporation, partnership, joint venture or other
business association or entity.

      Section 3.3 Authorization; Validity of Agreement; Necessary Action. Seller
has full corporate power and authority to execute and deliver this Agreement,
all agreements to which Seller is or will be a party that are exhibits to this
Agreement and the Management Agreement of even date herewith between Buyer and
Seller (the "Management Agreement") and to consummate the transactions
contemplated hereby and thereby. The execution, delivery and performance by
Seller of this Agreement and such other agreements and the consummation of the
Merger and of the other transactions contemplated hereby and thereby, have been
duly authorized by the Board of Directors of Seller and no other corporate or
stockholder action on the part of Seller is necessary to authorize the execution
and delivery by Seller of this Agreement and such other agreements and the
consummation of the transactions contemplated hereby and thereby (other than the
approval of this Agreement and the Merger by the holders of a majority of the
outstanding shares of Seller capital stock entitled to vote with respect
thereto). This Agreement and such other agreements have been duly executed and
delivered by Seller and, assuming due and valid authorization, execution and
delivery hereof by the other parties thereto are valid and binding obligations
of Seller, enforceable against Seller in accordance with its terms.

      Section 3.4 Consents and Approvals; No Violations. Except for the filings
or the consents, authorizations or approvals under the agreements set forth in
Section 3.4 of the Seller Disclosure Schedule and the filings, permits,
authorizations, consents and approvals as may be required under, and other
applicable requirements of, the Securities Exchange Act of 1934 (the "Exchange
Act"), the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), state securities or blue sky laws, the DGCL and the filing and
recordation of a Certificate of Merger under the DGCL, neither the execution,
delivery or performance of this Agreement by Seller nor the consummation by
Seller of the transactions contemplated hereby nor compliance by Seller with any
of the provisions hereof will (i) conflict with or result in any breach of any
provision of the certificate of incorporation or the bylaws of Seller, (ii)
require 

                                       6

any filing with, or permit, authorization, consent or approval of any court,
arbitration tribunal, administrative agency or commission or other governmental
or other regulatory authority or agency, domestic or foreign (a "Governmental
Entity") on the part of Seller, (iii) require the consent of any person under,
result in a violation or breach of, or constitute (with or without due notice or
lapse of time or both) a default (or give rise to any right of termination,
amendment, cancellation or acceleration) under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, lease, license, contract,
agreement or other instrument or obligation to which Seller is a party or by
which Seller or any of its properties or assets may be bound (the "Seller
Specified Agreements"), the lack of which consent, or which violation, breach or
default, individually or in the aggregate, could reasonably be expected to have
a Seller Material Adverse Effect or (iv) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to Seller, any of its
subsidiaries or any of their properties or assets.

      Section 3.5 [RESERVED]

      Section 3.6 Absence of Certain Changes. Since December 31, 1997, except as
contemplated by this Agreement, there has not been:

      (a) any Seller Material Adverse Effect;

      (b) any material damage, destruction or loss (whether or not covered by
insurance) with respect to any of the material assets of Seller;

      (c) any issuance, redemption or acquisition of capital stock by Seller or
any declaration or payment of any dividend or other distribution in cash, stock
or property with respect to capital stock;

      (d) any stock split, reverse stock split, combination, reclassification or
other similar action with respect to capital stock;

      (e) any entry into any material commitment or transaction (including,
without limitation, any borrowing or capital expenditure) other than in the
ordinary course of business or as contemplated by this Agreement;

      (f) any acquisition or disposition of rights (pursuant to license,
sublicense or otherwise) under or with respect to any patent, copyright,
trademark, tradename or other intellectual property right or registration
thereof or application therefor;

      (g) any mortgage, pledge, security interest or imposition of lien or other
encumbrance on any material asset of Seller; or

      (h) any change by Seller in accounting principles or methods except
insofar as may have been required by a change in generally accepted accounting
principles and disclosed in the Buyer Financial Statements (as defined in
Section 4.5 below).

      Except as set forth in Section 3.6 of the Seller Disclosure Schedule,
since December 31, 1997 Seller has conducted its business only in the ordinary
course and in a manner consistent with past practice and has not made any
material change in the conduct of its business or operations. Except as set
forth in Section 3.6 of the Seller Disclosure Schedule, no person has or will
have the right to receive any severance, bonus, other payment, increase or
change in benefits or vesting of stock options, shares or other benefits as a
result of any of the transactions contemplated by this Agreement.

                                       7

      Section 3.7 No Undisclosed Liabilities. Except as set forth in Section 3.7
of the Seller Disclosure Schedule, and except as reflected in the Buyer
Financial Statements, Seller has no liabilities of any nature (whether accrued,
absolute, contingent or otherwise), except those liabilities incurred in the
ordinary course of business which could not, individually or in the aggregate,
reasonably be expected to have a Seller Material Adverse Effect.

      Section 3.8 Litigation. Except as disclosed in Section 3.8 of the Seller
Disclosure Schedule, there is no suit, claim, action, proceeding or
investigation pending or, to the knowledge of Seller, threatened against Seller.
Except as disclosed in Section 3.8 of the Seller Disclosure Schedule, Seller is
not subject to any outstanding order, writ, injunction or decree.

      Section 3.9 No Default; Compliance with Applicable Laws. The business of
Seller is not being conducted in default or violation of any term, condition or
provision of (i) its certificate of incorporation or bylaws, (ii) any Seller
Specified Agreement or (iii) any federal, state, local or foreign statute, law,
ordinance, rule, regulation, judgment, decree, order, concession, grant,
franchise, permit or license or other governmental authorization or approval
applicable to Seller, excluding from the foregoing clauses (ii) and (iii),
defaults or violations which could not, individually or in the aggregate,
reasonably be expected to have a Seller Material Adverse Effect. As of the date
of this Agreement, no investigation or review by any Governmental Entity or
other entity with respect to Seller is pending or, to the knowledge of Seller,
threatened, nor has any Governmental Entity or other entity indicated an
intention to conduct the same. Seller has in effect all Federal, state, local
and foreign governmental approvals, authorizations, certificates, filings,
franchises, licenses, notices, permits and rights ("Seller Permits") necessary
for it to own, lease or operate its properties and assets and to carry on its
business as now conducted, and there has occurred no default under any such
Seller Permit.

      Section 3.10 Intellectual Property. Except as set forth in Section 3.10 of
the Seller Disclosure Schedule, or as could not reasonably be expected to have,
individually or in the aggregate, a Seller Material Adverse Effect, Seller owns
or possesses adequate licenses or other valid rights to use all patents,
trademarks, trade names, copyrights, service marks, trade secrets, know-how and
other proprietary rights and information used or held for use in connection with
the business of Seller as currently conducted, and Seller is unaware of any
assertion or claim challenging the validity of any of the foregoing. Section
3.10 of the Seller Disclosure Schedule lists all material licenses, sublicenses
and other agreements to which Seller is a party and pursuant to which (i) any
third party is authorized to use any intellectual property right of Seller and
(ii) Seller is authorized to use any intellectual property rights (other than
pursuant to shrink-wrap licenses and other software licenses) of a third party,
true and correct copies of which have been provided to Buyer and Acquisition
Subsidiary. The conduct of the business of Seller as currently conducted does
not conflict in any way with any patent, license, trademark, or copyright of any
third party. To the knowledge of Seller, there are no infringements of any
proprietary rights owned by or licensed by or to Seller that could reasonably be
expected to have, individually or in the aggregate, a Seller Material Adverse
Effect. Seller has taken reasonable security measures to protect the
confidentiality of its trade secrets. Except as set forth in Section 3.10 of the
Seller Disclosure Schedule, all current and past employees or consultants of
Seller, who, either alone or in concert with others, developed, invented,
discovered, derived, programmed or designed such trade secrets, or who have or
had access to information disclosing such trade secrets, have entered into
confidentiality and non-disclosure agreements with Seller (the "Seller Trade
Secret Agreements"). Any exception which has been taken to the Trade Secrets
Agreements (for example an employee or consultant excluding a prior invention)
is described in Section 3.10 of the Seller Disclosure Schedule, including the
exception taken and the employee taking such exception. To the knowledge of
Seller, neither Seller, nor its employees or its consultants have caused any of
Seller's trade secrets to become part of the public knowledge or literature, nor
has Seller, its employees or consultants permitted 

                                       8

any such trade secrets to be used, divulged or appropriated for the benefit of
persons to the material detriment of Seller.

      Section 3.11 Tax Returns and Payments. Except as set forth in Section 3.11
of the Seller Disclosure Schedule, all tax returns and reports with respect to
Seller required by law to be filed under the laws of any jurisdiction, domestic
or foreign, have been duly and timely filed and all taxes, fees or other
governmental charges of any nature which were required to have been paid have
been paid or provided for. Seller has no knowledge of any unpaid taxes or any
actual or threatened assessment of deficiency or additional tax or other
governmental charge or a basis for such a claim against Seller. Seller has no
knowledge of any tax audit of Seller by any taxing or other authority in
connection with any of its fiscal years; Seller has no knowledge of any such
audit currently pending or threatened, and Seller has no knowledge of any tax
liens on any of the properties of Seller.

      Section 3.12 Certificate of Incorporation and Bylaws. Seller has
heretofore furnished to Buyer and Acquisition Subsidiary a complete and correct
copy of the certificate of incorporation and the bylaws, each as amended to the
date hereof, of Seller. Such certificate of incorporation and bylaws are in full
force and effect. Seller is not in violation of any of the provisions of its
certificate of incorporation or bylaws.

      Section 3.13 Title to Property.

      (a) Seller has good and marketable title, or valid leasehold rights in the
case of leased property, to all real property and all personal property
purported to be owned or leased by it, free and clear of all material liens,
security interests, claims, encumbrances and charges, excluding (i) immaterial
liens for fees, taxes, levies, imposts, duties or governmental tax of any kind
which are not yet delinquent or are being contested in good faith by appropriate
proceedings which suspend the collection thereof, (ii) immaterial liens for
mechanics, materialmen, laborers, employees, suppliers or other liens arising by
operation of law for sums which are not yet delinquent or are being contested in
good faith by appropriate proceedings, (iii) purchase money liens on office,
computer and related equipment and supplies incurred in the ordinary course of
business, and (iv) liens or defects in title or leasehold rights that,
individually or in the aggregate, could not reasonably be expected to have a
Seller Material Adverse Effect.

      (b) Consummation of the Merger will not result in any breach of or
constitute a default (or an event with which notice or lapse of time or both
would constitute a default) under, or give to others any rights of termination
or cancellation of, or require the consent of others under, any lease in which
Seller is a lessee, except for breaches or defaults which, individually, or in
the aggregate, could not reasonably be expected to have a Seller Material
Adverse Effect.

      Section 3.14 Employee Benefits and Contracts.

            (a) Section 3.14 of the Seller Disclosure Schedule lists all
employee benefit plans (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) maintained by Seller. Each of
such employee benefit plans complies in all material respects with applicable
requirements of ERISA or the Code of 1986 and no "reportable event" or
"prohibited transaction" (as such terms are defined in ERISA) has occurred with
respect to any such plan, and no termination, if it has occurred or were to
occur before the Effective Date, would present a risk of liability to any
Governmental Entity or other persons that would have a Seller Material Adverse
Effect.

            (b) Seller has never maintained an employee benefit plan subject to
Section 412 of the Code or Title IV of ERISA. Each employee benefit plan of
Seller intended to be qualified under Section 401(a) of the Code has received a
favorable determination letter from the Internal Revenue Service 

                                       9

confirming such qualification. Seller has never had an obligation to contribute
to a "multi-employer plan" as defined in Section 4001(a)(3) of ERISA. There are
no unfunded obligations under any employee benefit plan of Seller providing
benefits after termination of employment to any employee or former employee,
including but not limited to retiree health coverage and deferred compensation,
but excluding continuation of health coverage required to be continued under
Section 4980(B) of the Code. Each employee benefit plan of Seller may be amended
or terminated by Seller without the consent or approval of any other person.
There is no employee benefit plan, stock option plan, stock appreciation right
plan, restricted stock plan, stock purchase plan, or severance benefit plan of
Seller, any of the benefits of which will be increased or the vesting of the
benefits under which will be accelerated by the occurrence of any of the
transactions contemplated by this Agreement or the benefits under which will be
calculated on the basis of the transactions contemplated by this Agreement.

            (c) Seller is not obligated to make any parachute payment, as
defined in Section 280G(b)(2) of the Code, nor will any parachute payment be
deemed to have occurred as a result of or arising out of any of the transactions
contemplated by this Agreement. Seller has no contract, agreement, obligation or
arrangement with any employee or other person, any of the benefits of which will
be increased or the vesting of the benefits under which will be accelerated by
any change of control of Seller or the occurrence of any of the transactions
contemplated by this Agreement or the benefits under which will be calculated on
the basis of the transactions contemplated by this Agreement.

      Section 3.15 Employment; Labor Matters.

      (a) Seller has delivered to Buyer true, complete and correct copies of all
employment agreements and all consulting agreements to which Seller is a party.

      (b) Except as set forth in Section 3.15 of the Seller Disclosure Schedule
(i) Seller is not a party to any outstanding employment agreements or contracts
with directors, officers, employees or consultants; (ii) Seller is not a party
to any agreement, policy or practice that requires it to pay termination or
severance pay to employees (other than as required by law); and (iii) Seller is
not a party to any collective bargaining agreement or other labor union contract
applicable to persons employed by Seller, nor does Seller know of any activities
or proceedings of any labor union to organize any such employees.

      Section 3.16 Brokers. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Seller.

      Section 3.17 Environmental Laws. Except as could not reasonably be
expected to have, individually or in the aggregate, a Seller Material Adverse
Effect: (i) Seller is in compliance with all applicable Environmental Laws (as
defined below); (ii) all past noncompliance, if any, of Seller with
Environmental Laws or Environmental Permits (as defined below) has been resolved
without any pending, ongoing or future obligation, cost or liability; and (iii)
Seller has not released or transported a Hazardous Material (as defined below),
in violation of any Environmental Law.

            For purposes of this Agreement:

            (a) "Environmental Law" shall mean any law and any enforceable
judicial or administrative interpretation thereof, including any judicial or
administrative order, consent decree or judgment, relating to pollution or
protection of the environment or natural resources, including, without
limitation, those relating to the use, handling, transportation, treatment,
storage, disposal, release or discharge of Hazardous Material, as in effect as
of the date hereof.

                                       10

            (b) "Environmental Permit" shall mean any permit, approval,
identification number, license or other authorization required under or issued
pursuant to any applicable Environmental Law.

            (c) "Hazardous Material" shall mean any hazardous or toxic
substance, material or waste which is or becomes regulated by any local
government authority, any state or the United State Government.

            Section 3.18 Insurance. Section 3.18 of the Seller Disclosure
Schedule sets forth a true and complete list of all insurance policies in force
at the date hereof, with respect to the assets, properties or operations of
Seller. True and complete copies of all such insurance policies have been made
available to Buyer and Acquisition Subsidiary by Seller. Such policies are in
full force and effect.

      Section 3.19 Contracts and Commitments.

      (a) Except as disclosed in Section 3.10, 3.15 or 3.19 of the Seller
Disclosure Schedule, Seller is not a party or subject to:

            (i) any plan, contract or arrangement, written or oral, which
      requires aggregate payments by Seller in excess of $50,000 per year or
      which provides for bonuses, pensions, deferred compensation, severance pay
      or benefits, retirement payments, profit-sharing, or the like;

            (ii) any joint marketing, joint development or joint venture
      contract or arrangement or any other agreement which has involved or is
      expected to involve a sharing of profits with other persons;

            (iii) any lease for real or personal property in which the amount of
      payments which Seller is required to make on an annual basis exceeds
      $50,000;

            (iv) any agreement, contract, mortgage, indenture, lease,
      instrument, license, franchise, permit, concession, arrangement,
      commitment or authorization which may be, by its terms, terminated or
      breached by reason of the execution of this Agreement, the Merger, or the
      consummation of the transactions contemplated hereby or thereby;

            (v) except for trade indebtedness incurred in the ordinary course of
      business, any instrument evidencing or related in any way to indebtedness
      in excess of $50,000 incurred in the acquisition of companies or other
      entities or indebtedness in excess of $50,000 for borrowed money by way of
      direct loan, sale of debt securities, purchase money obligation,
      conditional sale, guarantee, indemnification or otherwise;

            (vi) any contract containing covenants purporting to limit Seller's
      freedom to compete in any line of business or in any geographic area or
      with any third party,

            (vii) any agreement, contract or commitment relating to capital
      expenditures and involving future obligations in excess of $50,000; or

            (viii) any other agreement, contract or commitment which is material
      to Seller taken as a whole.

                                       11

      (b) Except as disclosed in Section 3.19 of the Seller Disclosure Schedule,
each agreement, contract, mortgage, indenture, plan, lease, instrument, permit,
concession, franchise, arrangement, license and commitment listed in Section
3.19 of the Seller Disclosure Schedule is valid and binding on Seller and the
other party(ies) thereto, is in full force and effect, and neither Seller, nor
to the knowledge of Seller any other party thereto, has breached any material
provision of, or is in material default under the terms of, any such agreement,
contract, mortgage, indenture, plan, lease, instrument, permit, concession,
franchise, arrangement, license or commitment.

      (c) There is no agreement, judgment, injunction, order or decree binding
upon Seller which has or could reasonably be expected to have the effect of
prohibiting or materially impairing any current business practice of Seller, any
acquisition of property by Seller or the conduct of business by Seller as
currently conducted or as proposed to be conducted by Seller.

      Section 3.20 Interests of Officers and Directors. To Seller's knowledge,
except as set forth in Section 3.20 of the Seller Disclosure Schedule, no
officer or director of Seller has had, either directly or indirectly, a material
interest in: (i) any person or entity which purchases from or sells, licenses or
furnishes to Seller any goods, property rights or services; (ii) except for the
employment or consulting contracts listed in Section 3.15 of the Seller
Disclosure Schedule, any contract or agreement to which Seller is a party or by
which it may be bound or affected; or (iii) any property, real or personal,
tangible or intangible, used in or pertaining to its business.

      Section 3.21 Questionable Payments. Neither Seller nor to its knowledge
any director, officer, agent or other employee of Seller has: (i) made any
payments or provided services or other favors in the United States of America or
in any foreign country in order to obtain preferential treatment or
consideration by any Governmental Entity with respect to any aspect of the
business of Seller; or (ii) made any political contributions which would not be
lawful under the laws of the United States or the foreign country in which such
payments were made. Neither Seller nor to its knowledge any director, officer,
agent or other employee of Seller has been the subject of any inquiry or
investigation by any Governmental Entity in connection with payments or benefits
or other favors to or for the benefit of any governmental or armed services
official, agent, representative or employee with respect to any aspect of the
business of Seller or with respect to any political contribution.

      Section 3.22 Certain Tax Matters. Neither Seller nor, to the knowledge of
Seller, any of its affiliates has taken or agreed to take any action that could
be expected to prevent the Merger from constituting a transaction qualifying
under Section 368 of the Code. Seller is not aware of any agreement, plan or
other circumstances that could reasonably be expected to prevent the Merger from
so qualifying under Section 368 of the Code.

                                    ARTICLE 4

                         REPRESENTATIONS AND WARRANTIES
                       OF BUYER AND ACQUISITION SUBSIDIARY

      Buyer and Acquisition Subsidiary represent and warrant to Seller as
follows:

      Section 4.1 Organization.

      (a) Except as set forth in Section 4.1 of the disclosure schedule
delivered to Seller on or before the date hereof (the "Buyer Disclosure
Schedule"), each of Buyer and Acquisition Subsidiary (which is the only
subsidiary of Buyer other than Seller) is a corporation duly organized, validly
existing and in good 

                                       12

standing under the laws of the jurisdiction of its incorporation and has the
requisite corporate power and authority and any necessary governmental authority
to own, operate or lease the properties that it purports to own, operate or
lease and to carry on its business as it is now being conducted, and, except as
set forth in Section 4.1 of the Buyer Disclosure Schedule, is duly qualified as
a foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned, operated or leased or
the nature of its activities makes such qualification necessary, except for such
failure which, when taken together with all other such failures, would not have
a Buyer Material Adverse Effect (as defined below in Section 4.1(b)).

      (b) The term "Buyer Material Adverse Effect" means any individual material
adverse effect, or adverse effects which in the aggregate (whether or not
related and whether or not any individual effect is material) have a material
adverse effect, on the business, operations, properties (including intangible
properties), condition (financial or otherwise), assets or liabilities of Buyer
and its subsidiaries taken as a whole or that could reasonably be expected to
prevent or materially delay the consummation of the Merger.

      (c) For purposes of this Article 4 and Article 5, Acute shall not be
considered to be a subsidiary of Buyer.

      Section 4.2 Capitalization.

      (a) Capitalization. The authorized capital stock of Buyer consists of
20,000,000 shares of Buyer Common Stock, par value $0.001 per share, and
5,000,000 shares of Preferred Stock, par value $0.001 per share, of which
2,420,282 are designated Series B Convertible Preferred Stock (the "Series B
Preferred Stock"). As of December 31, 1997, (i) 3,176,065 shares of Buyer Common
Stock were issued and outstanding, (ii) 2,200,256 shares of Series B Preferred
Stock were issued and outstanding and were convertible into 3,424,980 shares of
Buyer Common Stock, (iii) 115,491 shares of Buyer Common Stock were held in the
treasury of the Buyer, (iv) 253,535 shares of Buyer Common Stock were reserved
for issuance upon exercise of outstanding options issued under the 1996 Stock
Option Plan of Discovery Laboratories, Inc., a former Delaware corporation ("Old
Discovery") and outside such plan and assumed by Buyer, (v) an aggregate of
116,162 shares of Buyer Common Stock were reserved for issuance under stock
options granted pursuant to Buyer's 1993 and 1995 Stock Option Plans (the "Buyer
Option Plans"), (vi) an aggregate of 2,297 shares of Buyer Common Stock were
reserved for issuance under stock options granted by Buyer outside the Buyer
Option Plans, (vii) an aggregate of 2,055,624 shares of Buyer Common Stock were
reserved for issuance under outstanding warrants as more fully described in
Section 4.2 of the Buyer Disclosure Schedule, (viii) 342,499 shares of Buyer
Common Stock were reserved for issuance upon conversion of the 220,026 shares of
Series B Preferred Stock issuable upon the exercise of outstanding warrants, and
(ix) 173,333 shares of Buyer Common Stock were reserved for issuance upon
exercise of Buyer's outstanding unit purchase option (including warrants
issuable upon the exercise of such unit purchase option). Section 4.2 of the
Buyer Disclosure Schedule sets forth a true and correct list as of December 31,
1997 of all holders of options to purchase shares of Buyer Common Stock, the
number of such options outstanding as of such date and the exercise price per
option. All of the outstanding shares of Buyer Common Stock have been duly
authorized and validly issued and are fully paid and nonassessable and free of
preemptive rights. Except as set forth in this Section 4.2 and Section 4.2 of
the Buyer Disclosure Schedule, there are no other options, warrants or other
rights, convertible debt, agreements, arrangements or commitments of any
character obligating Buyer or Acquisition Subsidiary to issue or sell any shares
of capital stock of or other equity interests in Buyer or Acquisition Subsidiary
other than Buyer's obligation to reset the conversion price applicable to the
Series B Preferred Stock under the circumstances described in Buyer's Restated
Certificate of Incorporation. Buyer is not obligated to redeem, repurchase or
otherwise reacquire any of its capital stock or other securities.

                                       13

      (b) Except as set forth in Section 4.2 of the Buyer Disclosure Schedule,
all of the outstanding shares of the capital stock of Acquisition Subsidiary are
beneficially owned by Buyer, directly or indirectly, and all such shares have
been duly authorized, validly issued and are fully paid and nonassessable and
are owned by either Buyer or one of its subsidiaries free and clear of all
liens, security interests, charges, claims or encumbrances of any nature
whatsoever. There are no existing options, calls or commitments of any character
relating to the issued or unissued capital stock or other securities of
Acquisition Subsidiary. Except as set forth in Section 4.2 of the Buyer
Disclosure Schedule, Buyer does not directly or indirectly own or have a right
to acquire an equity interest in any corporation, partnership, joint venture or
other business association or entity.

      Section 4.3 Authorization; Validity of Agreement; Necessary Action. Each
of Buyer and Acquisition Subsidiary has full corporate power and authority to
execute and deliver this Agreement and all agreements to which Buyer and
Acquisition Subsidiary is or will be a party that are exhibits to this
Agreement, including the Employment Agreements (as defined in Section 6.2
herein), and to consummate the transactions contemplated hereby and thereby. The
execution, delivery and performance by Buyer and Acquisition Subsidiary of this
Agreement, and the consummation of the Merger and of the other transactions
contemplated hereby and thereby, have been duly authorized by the Boards of
Directors of Buyer and Acquisition Subsidiary, as the case may be, and no other
corporate or stockholder action on the part of Buyer and Acquisition Subsidiary
is necessary to authorize the execution and delivery by Buyer or Acquisition
Subsidiary of this Agreement and the consummation of the transactions
contemplated hereby and thereby (other than the approval of this Agreement and
the Merger by the holders of a majority of the outstanding shares (on an
as-converted basis) of Buyer capital stock entitled to vote with respect
thereto). This Agreement has been duly executed and delivered by Buyer and
Acquisition Subsidiary and assuming due and valid authorization, execution and
delivery hereof by Seller, is a valid and binding obligation of Buyer and
Acquisition Subsidiary, as the case may be, enforceable against Buyer and
Acquisition Subsidiary in accordance with their respective terms.

      Section 4.4 Consents and Approvals; No Violations. Except for the filings
or the consents, authorizations or approvals under the agreements set forth in
Section 4.4 of the Buyer Disclosure Schedule and the filings, permits,
authorizations, consents and approvals as may be required under, and other
applicable requirements of, the Exchange Act, the HSR Act, state securities or
blue sky laws, the DGCL and the filing and recordation of a Certificate of
Merger under the DGCL, neither the execution, delivery or performance of this
Agreement by Buyer nor the consummation by Buyer of the transactions
contemplated hereby nor compliance by Buyer with any of the provisions hereof
will (i) conflict with or result in any breach of any provision of the
certificate of incorporation or the bylaws of Buyer or Acquisition Subsidiary,
(ii) require any filing with, or permit, authorization, consent or approval of,
a Governmental Entity, on the part of Buyer or Acquisition Subsidiary, (iii)
require the consent of any person under, result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, amendment, cancellation or acceleration)
under, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, license, contract, agreement or other instrument or obligation
to which Buyer or Acquisition Subsidiary is a party or by which any of them or
any of their properties or assets may be bound (the "Buyer Specified
Agreements"), the lack of which consent, or which violation, breach or default,
individually or in the aggregate, could reasonably be expected to have a Buyer
Material Adverse Effect, or (iv) violate any order, writ, injunction, decree,
statute, rule or regulation applicable to Buyer, Acquisition Subsidiary or any
of their properties or assets.

      Section 4.5 SEC Reports and Financial Statements.

      (a) Buyer has timely filed with the Securities and Exchange Commission
(the "SEC"), and has delivered to Seller, true and complete copies of, all
forms, reports, schedules, statements and other 

                                       14

documents required to be filed by it since January 1, 1996, under the Securities
Act of 1933, as amended, or the Exchange Act (collectively, the "SEC
Documents"). Except as set forth in Section 4.5 of the Buyer Disclosure
Schedule, the SEC Documents (i) were prepared in accordance with the
requirements of the Securities Act or the Exchange Act, as the case may be,
including without limitation the applicable accounting requirements thereunder
and the published rules and regulations of the SEC with respect thereto, (ii)
when filed, did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, and (iii) taken as a whole, do not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
Acquisition Subsidiary is not required to file any statements or reports with
the SEC pursuant to Sections 13(a) or 15(d) of the Exchange Act.

      (b) Except as set forth in Section 4.5 of the Buyer Disclosure Schedule,
the consolidated financial statements of Buyer contained in the SEC Documents
(the "Buyer Financial Statements"), have been prepared in accordance with United
States generally accepted accounting principles ("GAAP") applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and fairly present the financial position and the results of operations
and cash flows (and changes in financial position, if any) of Buyer and
Acquisition Subsidiary as of the respective dates and for the respective periods
thereof, except that the unaudited interim quarterly financial statements were
or are subject to normal and recurring year-end adjustments which were or are
not expected to be material in amount and did not or may not have included
footnote disclosure that would otherwise be required by GAAP. Except as set
forth in Section 4.5 of the Buyer Disclosure Schedule, Buyer is not aware of any
facts or circumstances which would require Buyer to amend or restate any of the
SEC Documents, including without limitation the financial information included
therein.

      Section 4.6 Absence of Certain Changes. Since December 31, 1997, except as
contemplated by this Agreement or set forth in Section 4.6 of the Buyer
Disclosure Schedule, there has not been:

      (a) any Buyer Material Adverse Effect;

      (b) any material damage, destruction or loss (whether or not covered by
insurance) with respect to any of the material assets of Buyer or Acquisition
Subsidiary;

      (c) any issuance, redemption or acquisition of capital stock by Buyer or
Acquisition Subsidiary or any declaration or payment of any dividend or other
distribution in cash, stock or property with respect to capital stock;

      (d) any stock split, reverse stock split, combination, reclassification or
other similar action with respect to capital stock;

      (e) any entry into any material commitment or transaction (including,
without limitation, any borrowing or capital expenditure) other than in the
ordinary course of business or as contemplated by this Agreement;

      (f) any acquisition or disposition of rights (pursuant to license,
sublicense or otherwise) under or with respect to any patent, copyright,
trademark, tradename or other intellectual property right or registration
thereof or application therefor;

                                       15

      (g) any mortgage, pledge, security interest or imposition of lien or other
encumbrance on any material asset of Buyer or Acquisition Subsidiary; or

      (h) any change by Buyer in accounting principles or methods except insofar
as may have been required by a change in generally accepted accounting
principles and disclosed in the SEC Documents.

      Except as set forth in Section 4.6 of the Buyer Disclosure Schedule, since
December 31, 1997, Buyer and its subsidiaries have conducted their business only
in the ordinary course and in a manner consistent with past practice and have
not made any material change in the conduct of the business or operations of
Buyer and Acquisition Subsidiary taken as a whole. Except as set forth in
Section 4.14(b) of the Buyer Disclosure Schedule, no person has or will have the
right to receive any severance, bonus, other payment, increase or change in
benefits or vesting of stock options, shares or other benefits as a result of
any of the transactions contemplated by this Agreement.

      Section 4.7 No Undisclosed Liabilities. Except as set forth in Section 4.7
of the Buyer Disclosure Schedule, and except as reflected in the Buyer Financial
Statements contained in the SEC Documents, Buyer and Acquisition Subsidiary have
no liabilities of any nature (whether accrued, absolute, contingent or
otherwise), except those liabilities incurred in the ordinary course of business
which could not, individually or in the aggregate, reasonably be expected to
have a Buyer Material Adverse Effect.

      Section 4.8 Litigation. Except as disclosed in the SEC Documents or in
Section 4.8 of the Buyer Disclosure Schedule, there is no suit, claim, action,
proceeding or investigation pending or, to the knowledge of Buyer, threatened
against Buyer. Except as disclosed in the SEC Documents or in Section 4.8 of the
Buyer Disclosure Schedule, neither Buyer nor Acquisition Subsidiary is subject
to any outstanding order, writ, injunction or decree.

      Section 4.9 No Default; Compliance with Applicable Laws. Except as
disclosed in Section 4.9 of the Buyer Disclosure Schedule, the business of each
of Buyer and Acquisition Subsidiary is not being conducted in default or
violation of any term, condition or provision of (i) its certificate of
incorporation or bylaws, (ii) any Buyer Specified Agreement or (iii) any
federal, state, local or foreign statute, law, ordinance, rule, regulation,
judgment, decree, order, concession, grant, franchise, permit or license or
other governmental authorization or approval applicable to Buyer or Acquisition
Subsidiary, excluding from the foregoing clauses (ii) and (iii), defaults or
violations which could not, individually or in the aggregate, reasonably be
expected to have a Buyer Material Adverse Effect. Except as disclosed in Section
4.9 of the Buyer Disclosure Schedule, as of the date of this Agreement, no
investigation or review by any Governmental Entity or other entity with respect
to Buyer or Acquisition Subsidiary is pending or, to the knowledge of Buyer,
threatened, nor has any Governmental Entity or other entity indicated an
intention to conduct the same. Each of Buyer and Acquisition Subsidiary has in
effect all Federal, state, local and foreign governmental approvals,
authorizations, certificates, filings, franchises, licenses, notices, permits
and rights ("Buyer Permits") necessary for it to own, lease or operate its
properties and assets and to carry on its business as now conducted, and there
has occurred no default under any such Buyer Permit.

      Section 4.10 Intellectual Property. Except as set forth in Section 4.10 of
the Buyer Disclosure Schedule, or as could not reasonably be expected to have,
individually or in the aggregate, a Buyer Material Adverse Effect, Buyer and its
subsidiaries own or possess adequate licenses or other valid rights to use all
patents, trademarks, trade names, copyrights, service marks, trade secrets,
know-how and other proprietary rights and information used or held for use in
connection with the business of Buyer and its subsidiaries as currently
conducted, and Buyer is unaware of any assertion or claim challenging the
validity of any of the foregoing. Section 4.10 of the Buyer Disclosure Schedule
lists all material licenses, sublicenses and other agreements to which the Buyer
or Acquisition Subsidiary is a party and pursuant to which (i) any third party

                                       16

is authorized to use any intellectual property right of the Buyer or Acquisition
Subsidiary and (ii) Buyer or its subsidiaries are authorized to use any
intellectual property rights (other than pursuant to shrink-wrap licenses and
other software licenses) of a third party, true and correct copies of which have
been provided to Seller. Except as set forth in Section 4.10 of the Buyer
Disclosure Schedule, the conduct of the business of Buyer and its subsidiaries
as currently conducted does not conflict in any way with any patent, license or
copyright of any third party. To the knowledge of Buyer, except as set forth in
Section 4.10 of the Buyer Disclosure Schedule, there are no infringements of any
proprietary rights owned by or licensed by or to Buyer or Acquisition Subsidiary
that could reasonably be expected to have, individually or in the aggregate, a
Buyer Material Adverse Effect. Buyer has taken reasonable security measures to
protect the confidentiality of its trade secrets. All current and past employees
or consultants of Buyer, who, either alone or in concert with others, developed,
invented, discovered, derived, programmed or designed such trade secrets, or who
have or had access to information disclosing such trade secrets, have entered
into confidentiality and non-disclosure agreements with Buyer (the "Buyer Trade
Secret Agreements"). Any exception which has been taken to the Buyer Trade
Secrets Agreements (for example an employee or consultant excluding a prior
invention) is described in Section 4.10 of the Buyer Disclosure Schedule,
including the exception taken and the employee taking such exception. To the
knowledge of Buyer, neither Buyer, nor its employees or its consultants have
caused any of Buyer's trade secrets to become part of the public knowledge or
literature, nor has Buyer, its employees or consultants permitted any such trade
secrets to be used, divulged or appropriated for the benefit of persons to the
material detriment of Buyer.

      Section 4.11 Tax Returns and Payments. All tax returns and reports with
respect to Buyer or Acquisition Subsidiary required by law to be filed under the
laws of any jurisdiction, domestic or foreign, have been duly and timely filed
and all taxes, fees or other governmental charges of any nature which were
required to have been paid have been paid or provided for. Buyer and Acquisition
Subsidiary have no knowledge of any unpaid taxes or any actual or threatened
assessment of deficiency or additional tax or other governmental charge or a
basis for such a claim against Buyer or Acquisition Subsidiary. Buyer and
Acquisition Subsidiary have no knowledge of any tax audit of Buyer or
Acquisition Subsidiary by any taxing or other authority in connection with any
of its fiscal years; Buyer and Acquisition Subsidiary have no knowledge of any
such audit currently pending or threatened, and Buyer and Acquisition Subsidiary
have no knowledge of any tax liens on any of the properties of Buyer or
Acquisition Subsidiary.

      Section 4.12 Certificate of Incorporation and Bylaws. Buyer and
Acquisition Subsidiary have heretofore furnished to Seller a complete and
correct copy of the certificate of incorporation and the bylaws, each as amended
to the date hereof, of Buyer and Acquisition Subsidiary. Such certificate of
incorporation and bylaws are in full force and effect. Neither Buyer nor
Acquisition Subsidiary is in violation of any of the provisions of its
certificate of incorporation.

      Section 4.13 Title to Property.

      (a) Except as disclosed in Section 4.13 to the Buyer Disclosure Schedule,
Buyer and Acquisition Subsidiary has good and marketable title, or valid
leasehold rights in the case of leased property, to all real property and all
personal property purported to be owned or leased by them, free and clear of all
material liens, security interests, claims, encumbrances and charges, excluding
(i) immaterial liens for fees, taxes, levies, imposts, duties or governmental
tax of any kind which are not yet delinquent or are being contested in good
faith by appropriate proceedings which suspend the collection thereof, (ii)
immaterial liens for mechanics, materialmen, laborers, employees, suppliers or
other liens arising by operation of law for sums which are not yet delinquent or
are being contested in good faith by appropriate proceedings, (iii) purchase
money liens on office, computer and related equipment and supplies incurred in
the ordinary course of business, and (iv) liens or defects in title or leasehold
rights that, individually or in the aggregate, could not reasonably be expected
to have a Buyer Material Adverse Effect.

                                       17

      (b) Except as set forth in Section 4.13(b) of the Buyer Disclosure
Schedule, consummation of the Merger will not result in any breach of or
constitute a default (or an event with which notice or lapse of time or both
would constitute a default) under, or give to others any rights of termination
or cancellation of, or require the consent of others under, any lease in which
Buyer or Acquisition Subsidiary is a lessee, except for breaches or defaults
which, individually or in the aggregate, could not reasonably be expected to
have a Buyer Material Adverse Effect.

      Section 4.14 Employee Benefits and Contracts.

            (a) Section 4.14 of the Buyer Disclosure Schedule lists all employee
benefit plans (as defined in Section 3(3) of the ERISA) maintained by Buyer and
Acquisition Subsidiary. Each of such employee benefit plans complies in all
material respects with applicable requirements of ERISA or the Internal Revenue
Code of 1986, as amended (the "Code") and no "reportable event" or "prohibited
transaction" (as such terms are defined in ERISA) has occurred with respect to
any such plan, and no termination, if it has occurred or were to occur before
the Effective Date, would present a risk of liability to any Governmental Entity
or other persons that would have a Buyer Material Adverse Effect.

            (b) Buyer and Acquisition Subsidiary has never maintained an
employee benefit plan subject to Section 412 of the Code or Title IV of ERISA.
Each employee benefit plan of Buyer or Acquisition Subsidiary intended to be
qualified under Section 401(a) of the Code has received a favorable
determination letter from the Internal Revenue Service confirming such
qualification. Neither Buyer nor Acquisition Subsidiary has ever had an
obligation to contribute to a "multi-employer plan" as defined in Section
4001(a)(3) of ERISA. There are no unfunded obligations under any employee
benefit plan of Buyer or Acquisition Subsidiary providing benefits after
termination of employment to any employee or former employee, including but not
limited to retiree health coverage and deferred compensation, but excluding
continuation of health coverage required to be continued under Section 4980(B)
of the Code. Each employee benefit plan of Buyer or Acquisition Subsidiary may
be amended or terminated by Buyer or Acquisition Subsidiary without the consent
or approval of any other person. There is no employee benefit plan, stock option
plan, stock appreciation right plan, restricted stock plan, stock purchase plan,
or severance benefit plan of Buyer or Acquisition Subsidiary, any of the
benefits of which will be increased or the vesting of the benefits under which
will be accelerated by the occurrence of any of the transactions contemplated by
this Agreement or the benefits under which will be calculated on the basis of
the transactions contemplated by this Agreement, except as set forth in Section
4.14(b) of the Buyer Disclosure Schedule.

            (c) Neither Buyer nor Acquisition Subsidiary is obligated to make
any parachute payment, as defined in Section 280G(b)(2) of the Code, nor will
any parachute payment be deemed to have occurred as a result of or arising out
of any of the transactions contemplated by this Agreement. Neither Buyer nor
Acquisition Subsidiary has any contract, agreement, obligation or arrangement
with any employee or other person, any of the benefits of which will be
increased or the vesting of the benefits under which will be accelerated by any
change of control of Buyer or Acquisition Subsidiary or the occurrence of any of
the transactions contemplated by this Agreement or the benefits under which will
be calculated on the basis of the transactions contemplated by this Agreement
except as set forth in Section 4.14(b) of the Buyer Disclosure Schedule.

      Section 4.15 Employment; Labor Matters.

      (a) Buyer has delivered to Seller true, complete and correct copies of all
employment agreements and all consulting agreements to which Buyer or
Acquisition Subsidiary is a party.

                                       18

      (b) Except as set forth in Section 4.15 of the Buyer Disclosure Schedule
(i) neither Buyer nor Acquisition Subsidiary is a party to any outstanding
employment agreements or contracts with directors, officers, employees or
consultants; (ii) neither Buyer nor Acquisition Subsidiary is a party to any
agreement, policy or practice that requires it to pay termination or severance
pay to employees (other than as required by law); and (iii) neither Buyer nor
Acquisition Subsidiary is a party to any collective bargaining agreement or
other labor union contract applicable to persons employed by Buyer or
Acquisition Subsidiary, nor does Buyer or Acquisition Subsidiary know of any
activities or proceedings of any labor union to organize any such employees.

      Section 4.16 Brokers. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by and
on behalf of Buyer or Acquisition Subsidiary.

      Section 4.17 Environmental Laws. Except as disclosed in Section 4.17 of
the Buyer Disclosure Schedule or as could not reasonably be expected to have,
individually or in the aggregate, a Buyer Material Adverse Effect: (i) Buyer and
Acquisition Subsidiary is in compliance with all applicable Environmental Laws;
(ii) all past noncompliance, if any, of Buyer or Acquisition Subsidiary with
Environmental Laws or Environmental Permits has been resolved without any
pending, ongoing or future obligation, cost or liability; and (iii) neither
Buyer nor Acquisition Subsidiary has released or transported a Hazardous
Material, in violation of any Environmental Law.

      Section 4.18 Insurance. Section 4.18 of the Buyer Disclosure Schedule sets
forth a true and complete list of all insurance policies in force at the date
hereof, with respect to the assets, properties or operations of each of Buyer
and Acquisition Subsidiary. True and complete copies of all such insurance
policies have been made available to Seller by Buyer. Such policies will not be
terminated as a result of the Merger, subject to payment of applicable premiums.
Such policies also are in full force and effect.

      Section 4.19 Contracts and Commitments.

      (a) Except as disclosed in Section 4.10, 4.15 or 4.19 of the Buyer
Disclosure Schedule, neither Buyer nor Acquisition Subsidiary is a party or
subject to:

            (i) any plan, contract or arrangement, written or oral, which
      requires aggregate payments by Buyer or Acquisition Subsidiary in excess
      of $50,000 per year or which provides for bonuses, pensions, deferred
      compensation, severance pay or benefits, retirement payments,
      profit-sharing, or the like;

            (ii) any joint marketing, joint development or joint venture
      contract or arrangement or any other agreement which has involved or is
      expected to involve a sharing of profits with other persons;

            (iii) any lease for real or personal property in which the amount of
      payments which Buyer or Acquisition Subsidiary is required to make on an
      annual basis exceeds $50,000;

            (iv) any agreement, contract, mortgage, indenture, lease,
      instrument, license, franchise, permit, concession, arrangement,
      commitment or authorization which may be, by its terms, terminated or
      breached by reason of the execution of this Agreement, the Merger, or the
      consummation of the transactions contemplated hereby or thereby;

                                       19

            (v) except for trade indebtedness incurred in the ordinary course of
      business, any instrument evidencing or related in any way to indebtedness
      in excess of $50,000 incurred in the acquisition of companies or other
      entities or indebtedness in excess of $50,000 for borrowed money by way of
      direct loan, sale of debt securities, purchase money obligation,
      conditional sale, guarantee, indemnification or otherwise;

            (vi) any contract containing covenants purporting to limit Buyer's
      or Acquisition Subsidiary's freedom to compete in any line of business or
      in any geographic area or with any third party,

            (vii) any agreement, contract or commitment relating to capital
      expenditures and involving future obligations in excess of $50,000; or

            (viii) any other agreement, contract or commitment which is material
      to Buyer and Acquisition Subsidiary taken as a whole.

      (b) Except as disclosed in Section 4.19 of the Buyer Disclosure Schedule,
each agreement, contract, mortgage, indenture, plan, lease, instrument, permit,
concession, franchise, arrangement, license and commitment listed in Section
4.19 of the Buyer Disclosure Schedule is valid and binding on Buyer or
Acquisition Subsidiary and the other party(ies) thereto, as applicable, and
assuming due and valid authorization, execution and delivery by all counter
parties, is in full force and effect, and neither Buyer, Acquisition Subsidiary,
nor to the knowledge of Buyer any other party thereto, has breached any material
provision of, or is in material default under the terms of, any such agreement,
contract, mortgage, indenture, plan, lease, instrument, permit, concession,
franchise, arrangement, license or commitment.

      (c) There is no agreement, judgment, injunction, order or decree binding
upon the Buyer or Acquisition Subsidiary which has or could reasonably be
expected to have the effect of prohibiting or materially impairing any current
business practice of Buyer or Acquisition Subsidiary, any acquisition of
property by Buyer or Acquisition Subsidiary or the conduct of business by Buyer
or Acquisition Subsidiary as currently conducted or as proposed to be conducted
by Buyer or Acquisition Subsidiary.

      Section 4.20 Interests of Officers and Directors. To Buyer's knowledge,
except as set forth in Section 4.20 of the Buyer Disclosure Schedule, no officer
or director of Buyer or Acquisition Subsidiary has had, either directly or
indirectly, a material interest in: (i) any person or entity which purchases
from or sells, licenses or furnishes to Buyer or Acquisition Subsidiary any
goods, property rights or services; (ii) except for the contracts listed in
Section 4.15 of the Buyer Disclosure Schedule, any contract or agreement to
which Buyer or Acquisition Subsidiary is a party or by which it may be bound or
affected; or (iii) any property, real or personal, tangible or intangible, used
in or pertaining to its business or that of Acquisition Subsidiary.

      Section 4.21 Questionable Payments. Neither Buyer nor Acquisition
Subsidiary nor to its knowledge any director, officer, agent or other employee
of Buyer or Acquisition Subsidiary has: (i) made any payments or provided
services or other favors in the United States of America or in any foreign
country in order to obtain preferential treatment or consideration by any
Governmental Entity with respect to any aspect of the business of Buyer or
Acquisition Subsidiary; or (ii) made any political contributions which would not
be lawful under the laws of the United States or the foreign country in which
such payments were made. Neither Buyer nor Acquisition Subsidiary nor to its
knowledge any director, officer, agent or other employee of Buyer or Acquisition
Subsidiary has been the subject of any inquiry or investigation by any
Governmental Entity in connection with payments or benefits or other favors to
or for the benefit of any 

                                       20

governmental or armed services official, agent, representative or employee with
respect to any aspect of the business of Buyer or Acquisition Subsidiary or with
respect to any political contribution.

      Section 4.22 Certain Tax Matters. Except as disclosed in Section 4.22 of
the Buyer Disclosure Schedule, neither Buyer nor, to the knowledge of Buyer, any
of its affiliates has taken or agreed to take any action that could be expected
to prevent the Merger from constituting a transaction qualifying under Section
368 of the Code. Buyer is not aware of any agreement, plan or other
circumstances that could reasonably be expected to prevent the Merger from so
qualifying under Section 368 of the Code.

      Section 4.23 No Prior Activities. Except for obligations or liabilities
incurred in connection with its incorporation or organization or the negotiation
and consummation of this Agreement and the transactions contemplated hereby
(including any financing), Acquisition Subsidiary has not incurred any
obligations or liabilities, and has not engaged in any business or activities of
any type or kind whatsoever or entered into any agreements or arrangements with
any person or entity. Acquisition Subsidiary is a wholly-owned subsidiary of
Buyer.

                                    ARTICLE 5

                                    COVENANTS

      Section 5.1 Interim Operations of Seller and Buyer. Seller and Buyer each
hereby covenants and agrees with the other that, except (i) as expressly
contemplated by this Agreement, (ii) as set forth in Section 5.1 of the Seller
Disclosure Schedule, (iii) as set forth in Section 5.1 of the Buyer Disclosure
Schedule or (iv) as agreed in writing by Seller and Buyer, after the execution
and delivery of this Agreement and continuing until the earlier of the
termination of this Agreement or the Effective Time:

      (a) the business of such party and its subsidiaries shall be conducted
only in the ordinary and usual course and, to the extent consistent therewith,
each party and its subsidiaries shall use its reasonable commercial efforts to
preserve its business organization intact and maintain its existing relations
with customers, suppliers, employees, creditors and business partners;

      (b) each such party shall not, directly or indirectly, amend its or any of
its subsidiaries' certificate of incorporation or bylaws or similar
organizational documents;

      (c) each such party shall not, and it shall not permit its subsidiaries
to: (i)(A) declare, set aside or pay any dividend or other distribution payable
in cash, stock or property with respect to such party's capital stock or that of
its subsidiaries, or (B) redeem, purchase or otherwise acquire directly or
indirectly any of such party's capital stock (or options, warrants, calls,
commitments or rights of any kind to acquire any shares of capital stock) or
that of its subsidiaries; (ii) issue, sell, pledge, dispose of or encumber any
additional shares of, or securities convertible into or exchangeable for, or
options, warrants, calls, commitments or rights of any kind to acquire, capital
stock of any class of such party or its subsidiaries, other than Common Shares
or Buyer Common Stock issuable upon the exercise of options and warrants
outstanding on the date hereof and described in Section 3.2 of this Agreement or
the Seller Disclosure Schedule or Section 4.2 of this Agreement or the Buyer
Disclosure Schedule; (iii) split, combine or reclassify the outstanding capital
stock of such party or of its subsidiaries; or (iv) amend or otherwise modify
the terms of any rights, warrants or options with respect to such party or of
its subsidiary's capital stock;

                                       21

      (d) each such party shall not, and it shall not permit its subsidiaries
to, acquire or agree to acquire, or dispose of or agree to dispose of, any
material assets, either by purchase, merger, consolidation, sale of shares in
any of its subsidiaries or otherwise, other than in the ordinary course of
business;

      (e) each such party shall not, and it shall not permit its subsidiaries
to, transfer, lease, license, sell, mortgage, pledge or encumber any assets;

      (f) except as contemplated by Section 4.14(b), neither such party nor its
subsidiaries shall: (i) grant any increase in the compensation payable to any of
its officers, directors or key employees; or (ii)(A) adopt any new, or (B)
except as contemplated by Section 2.5, amend or otherwise increase, or
accelerate the payment or vesting of the amounts payable or to become payable
under any existing, bonus, incentive compensation, deferred compensation,
severance, profit sharing, stock option, stock purchase, insurance, pension,
retirement or other employee benefit plan, agreement or arrangement; or (iii)
enter into or modify or amend any employment or severance agreement with or,
except as required by applicable law, grant any severance or termination pay to
any officer, director or employee of Seller or any of its subsidiaries; or (iv)
enter into any collective bargaining agreement;

      (g) neither such party nor any of its subsidiaries shall, without the
other party's prior written consent, which consent shall not be unreasonably
withheld, modify, amend or terminate any of its contracts or waive, release or
assign any rights or claims;

      (h) neither such party nor any of its subsidiaries shall: (i) incur or
assume any indebtedness for money borrowed; (ii) modify any such indebtedness or
other liability; (iii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the obligations of
any other person, other than immaterial amounts in the ordinary course of
business consistent with past practice and other than for any subsidiary; (iv)
make any loans, advances or capital contributions to, or investments in, any
other person (other than to wholly-owned subsidiaries of such party); (v) change
any of its methods of reporting income or deductions for federal income tax
purposes from those employed in the preparation of the federal income tax
returns for the year ended December 31, 1997, or (vi) enter into any material
commitment or transaction except as contemplated by this Agreement;

      (i) neither such party nor any of its subsidiaries shall change any of the
accounting methods, practices or policies used by it unless required by a change
in GAAP;

      (j) such party shall not, and it shall not permit its subsidiaries to,
make or agree to make any new capital expenditures in excess of $10,000 in the
aggregate;

      (k) such party shall not, and it shall not permit its subsidiaries to,
make any tax election (unless required by law) or settle or compromise any
income tax liability; and

      (l) neither party nor any of its subsidiaries will enter into an
agreement, contract, commitment or arrangement to do any of the foregoing, or to
authorize, recommend, propose or announce an intention to do any of the
foregoing.

      Section 5.2 Access; Confidentiality. Each of Seller and Buyer shall (and
Buyer shall cause each of its subsidiaries to) (a) afford to the officers,
employees, accountants, counsel and other representatives of Seller and Buyer,
as the case may be, reasonable access to and the right to inspect and observe,
during normal business hours during the period prior to the Effective Time, its
personnel, accountants, representatives, properties, books, contracts, insurance
policies, commitments and records, offices, plants and other facilities, (b)
make available promptly to Seller or Buyer, as the case may be (i) a copy of
each 

                                       22

report, schedule, registration statement and other document filed or received by
it during such period pursuant to the requirements of federal securities laws,
if applicable and (ii) all other information concerning its business, properties
and personnel as Seller or Buyer may reasonably request. Each party will treat
any such information in accordance with the provisions of the letter agreement
dated the date hereof between Seller and Buyer (the "Confidentiality
Agreement"). No investigation conducted by Seller or Buyer shall impact any
representation or warranty given by Seller to Buyer hereunder.

      Section 5.3 Additional Agreements. Subject to the terms and conditions
herein provided, each of the parties hereto shall use all reasonable commercial
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations, or to remove any injunctions or other impediments or delays, legal
or otherwise, to consummate and make effective the Merger and the other
transactions contemplated by this Agreement. Buyer also agrees to timely file
all filings required to be made with the SEC with respect to such transactions.

      Section 5.4 Consents and Approvals; HSR Act. Each of Seller, Buyer and
Acquisition Subsidiary will take all reasonable actions necessary to comply
promptly with all legal requirements which may be imposed on it with respect to
this Agreement and the transactions contemplated hereby (which actions shall
include, without limitation, furnishing all information required under the HSR
Act and in connection with approvals of or filings with any other Governmental
Entity) and will promptly cooperate with and furnish information to each other
in connection with any such requirements imposed upon any of them or any of
their subsidiaries in connection with this and the transactions contemplated
hereby. Each of Seller, Buyer and Acquisition Subsidiary will, and will cause
its subsidiaries to, take all reasonable actions necessary to obtain (and will
cooperate with each other in obtaining) any consent, authorization, order or
approval of, or any exemption by, any Governmental Entity or other public or
private third party required to be obtained or made by Buyer, Acquisition
Subsidiary, Seller or any of their subsidiaries in connection with the Merger or
the taking of any action contemplated thereby or by this Agreement. Each party
shall promptly inform the other party of any communication with, and any
proposed understanding, undertaking, or agreement with, any Governmental Entity
regarding any such filings or any such transaction.

      Section 5.5 Exclusivity. From the date hereof until the earlier of
termination of this Agreement or consummation of the Merger, neither Seller nor
Buyer nor any of their officers, directors, employees, representatives
(including any investment banker, attorney or accountant retained by them),
agents or affiliates shall directly or indirectly encourage, solicit, initiate,
facilitate or conduct discussions or negotiations with, provide any information
to, or enter into any agreement with, any corporation, partnership, person or
other entity or group concerning or expressing an interest in or proposing any
merger, consolidation, reorganization, share exchange, business combination,
liquidation, dissolution sale of all or other significant assets or securities
or other similar transaction involving such party, except to the extent required
by their fiduciary duties as determined by the Board of Directors of such party
after discussion with their counsel.

      Section 5.6 Publicity. So long as this Agreement is in effect, neither
Seller, Buyer nor any of their respective affiliates shall issue or cause the
publication of any press release or other public announcement with respect to
the Merger, this Agreement or the other transactions between the parties
contemplated hereby without the prior consultation of the other party, except as
may be required by law or by any listing agreement with a national securities
exchange or trading market.

      Section 5.7 Notification of Certain Matters. Seller shall give prompt
notice to Buyer and Acquisition Subsidiary, and Buyer and Acquisition Subsidiary
shall give prompt notice to Seller, of (i) the occurrence or non-occurrence of
any event the occurrence or non-occurrence of which would cause any
representation or warranty made by such party or parties in this Agreement to be
untrue or inaccurate in any 

                                       23

material respect at or prior to the Effective Time and (ii) any failure of
Seller, Buyer or Acquisition Subsidiary, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 5.7 shall not limit or otherwise affect the remedies available
hereunder to the party receiving such notice. Seller also shall give prompt
notice to Buyer, and Buyer or Acquisition Subsidiary shall give prompt notice to
Seller, of:

            (i) any notice or other communication from any person alleging that
      the consent of such person is or may be required in connection with the
      transactions contemplated by this Agreement (unless the requirement for
      such consent is set forth in Section 3.4 of the Seller Disclosure Schedule
      or Section 4.4 of the Buyer Disclosure Schedule);

            (ii) any notice or other communication from any Governmental Entity
      in connection with the transactions contemplated by this Agreement;

            (iii) any actions, suits, claims, investigations or proceedings
      commenced or, to its knowledge, threatened against, relating to or
      involving or otherwise affecting it or any of its subsidiaries or which
      relate to the consummation of the transactions contemplated by this
      Agreement; and

            (iv) any occurrence of any event having, or which could reasonably
      be expected to have, a Seller Material Adverse Effect or Buyer Material
      Adverse Effect.

      Section 5.8 Indemnification. Notwithstanding Section 8.7 hereof, Buyer
agrees that all rights to indemnification existing in favor of directors,
officers or employees of Seller as provided in Seller's certificate of
incorporation or bylaws, with respect to matters occurring through the Effective
Time, shall survive the Merger and shall continue in full force and effect. If
the Surviving Corporation or any of its successors or assigns (i) consolidates
with or merges into any other person and shall not be the continuing or
surviving corporation or entity of such consolidation or merger or (ii)
transfers all or substantially all of its properties and assets to any person,
then and in each such case, proper provision shall be made so that the
successors and assigns of the Surviving Corporation assume the obligations set
forth in this Section 5.8.

      Section 5.9 Approval of Stockholders.

      (a) Buyer shall, promptly after the date of this Agreement, take all
actions necessary in accordance with the requirements of the bylaws of the
National Association of Securities Dealers, Inc. ("NASD"), DGCL and its
certificate of incorporation and bylaws to convene a meeting of Buyer's
stockholders to act on this Agreement (the "Buyer Stockholders' Meeting") and
Buyer shall consult with Seller in connection therewith.

      (b) Unless Seller's Board of Directors in the good faith exercise of its
fiduciary duties, after receiving advice from outside legal counsel, determines
not to recommend, or to withdraw its recommendation that such matters be
approved by Seller's stockholders, Seller shall, promptly after the date of this
Agreement, take all actions necessary in accordance with DGCL and its
certificate of incorporation and bylaws to obtain the unanimous written consent
of Seller's stockholders to act on this Agreement, and Seller shall consult with
Buyer in connection therewith.

                                       24

      Section 5.10 Buyer Proxy Statement. Unless the Board of Directors of Buyer
in the good faith exercise of its fiduciary duties determines not to recommend
the Merger and this Agreement to its stockholders (or to withdraw such
recommendation), Buyer, acting through its Board of Directors, shall, in
accordance with applicable law:

            (i) after consultation with Seller and its legal counsel, diligently
      prepare and file with the SEC as soon as reasonably practicable after the
      date of this Agreement (but in no event later than 30 days after the date
      hereof), a preliminary proxy or information statement relating to the
      Merger and this Agreement and use commercially reasonable efforts (x) to
      obtain and furnish the information required to be included by the SEC in
      the Buyer Proxy Statement (as hereinafter defined) and, after consultation
      with Seller and its counsel, to respond promptly to any comments made by
      the SEC with respect to the preliminary proxy or information statement and
      cause a definitive proxy or information statement, including any amendment
      or supplement thereto (the "Buyer Proxy Statement") to be mailed to its
      stockholders, provided that no amendment or supplement to the Buyer Proxy
      Statement will be made by Buyer without consultation with Seller and its
      counsel and (y) to obtain the necessary approvals of the Merger and this
      Agreement by its stockholders;

            (ii) prepare the preliminary proxy statement and prepare and revise
      the Buyer Proxy Statement so that at the date mailed to Buyer's
      stockholders and at the time of the meeting of Buyer's stockholders to be
      held in connection with the Merger, the Buyer Proxy Statement will (x) not
      contain any untrue statement of a material fact or omit to state any
      material fact required to be stated therein or necessary in order that the
      statements made therein, in light of the circumstances under which they
      are made, not misleading (except that Buyer shall not be responsible under
      this clause (ii) with respect to statements made therein based on
      information supplied by Seller expressly for inclusion in the Buyer Proxy
      Statement), and (y) comply in all material respects with the provisions of
      the Exchange Act and the rules and regulations thereunder; and

            (iii) make at the Buyer's Stockholder's Meeting, and include in the
      Proxy Statement, the recommendation of the Board that stockholders of
      Buyer vote in favor of the approval of the Merger and the authorization
      and adoption of this Agreement.

      Section 5.11 Seller Information Statement.

      (a) Seller shall afford Buyer and its legal counsel a reasonable
opportunity to review and comment on any solicitation materials, including
solicitation of action by written consent, that Seller distributes to its
stockholders in connection with the Merger, which shall be diligently prepared
and distributed to Seller's stockholders as soon as reasonably practicable after
the date of this Agreement and, at such date, such solicitation materials will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order that the
statements made therein, in light of the circumstances under which they are
made, not misleading (except that Seller shall not be responsible under this
Section 5.11(a) with respect to statements made therein based on information
supplied by Buyer expressly for inclusion in such solicitation materials). To
the greatest extent practicable, information required to be disclosed in both
the Buyer Proxy Statement and any such solicitation materials shall be disclosed
in an identical manner.

      (b) Seller shall furnish to Buyer, and revise, written information
concerning itself expressly for inclusion in the Buyer Proxy Statement,
including without limitation by reviewing and commenting (with 

                                       25

respect to information concerning Seller) on drafts of the Buyer Proxy Statement
and the preliminary proxy statement to be prepared pursuant to Section 5.10.
Seller shall inform Buyer of any change regarding such information so that such
Seller-furnished information will not, at both the date mailed to Buyer
stockholders and at the time of the meeting of Buyer stockholders to be held in
connection with the Merger, contain any untrue statement of a material fact or
omit to state any material fact required to be stated in Seller furnished
information or necessary in order to make the statements made in
Seller-furnished information, in light of the circumstances under which they are
made, not misleading.

      Section 5.12 Tax Treatment. Each party hereto shall use all reasonable
efforts to cause the Merger to qualify and shall not take, and shall use all
reasonable efforts to prevent any affiliate of such party from taking, any
actions which could prevent the Merger from qualifying as a reorganization under
the provisions of Section 368(a) of the Code.

      Section 5.13 Form S-8. With respect to the Seller Option Plan, Buyer shall
take all corporate action necessary or appropriate to, as soon as practicable
after the Effective Time, file a registration statement on Form S-8 (or any
successor or other appropriate form) with respect to the shares of Buyer Common
Stock which will be subject to options outstanding under such plan as of the
Closing to the extent such registration statement is required under applicable
law in order for such shares of Buyer Common Stock to be sold without
restriction, and Buyer shall use reasonable efforts to maintain the
effectiveness of such registration statements (and maintain the current status
of the prospectuses contained therein) for so long as such options under such
plan remain outstanding.

      Section 5.14 Reservation of Buyer Common Stock. Buyer shall reserve from
its authorized but unissued shares of Buyer Common Stock that number of shares
of Buyer Common Stock issuable upon exercise of the Seller Stock Options assumed
by Buyer.

      Section 5.15 Consolidation of Operations. Buyer and Seller shall cooperate
with one another with a view toward consolidating the operations of Buyer and
Seller at Seller's principal executive offices and eliminating duplicative
staffing and overhead as soon as reasonably possible.

      Section 5.16 Consolidation of Board of Directors. Buyer will utilize good
faith efforts to decrease the membership of the Board of Directors of Buyer to a
total of seven (7) members by the first anniversary of the date of this
Agreement. It is agreed and understood that this Section 5.16 shall not require
(i) Buyer to amend its organizational documents or (ii) Buyer's directors to
take any actions inconsistent with their fiduciary duties.

      Section 5.17 Incentive Bonus Payments. Buyer and Seller agree that the
incentive bonus payments to be made to Robert J. Capetola, pursuant to Section
4.e. of the Capetola Employment Agreement attached as Exhibit A hereto, and to
each of Harry G. Brittain, Cynthia Davis, Laurence B. Katz, Lisa Mastroianni,
Christopher Schaber, Huei Tsai and Thomas Wiswell, pursuant to Section 4.d. of
the employment agreements to be entered into with such individuals in the form
of Exhibit B hereto, shall be determined for each of the above-named individuals
by Buyer's Compensation Committee, shall be paid in either cash or equity as
determined by such Compensation Committee, shall be in the following aggregate
amounts and shall be paid upon the achievement of each of the following
milestones (which are set forth in the aforementioned agreements): (a) $150,000
upon the successful completion of Phase II studies for any compound under
development in Discovery's portfolio (each a "Portfolio Compound"); (b) $500,000
upon the successful completion of Phase II studies for any Portfolio Compound;
and (c) $1,000,000 upon receipt of marketing approval in the United States for
any Portfolio Compound. The aforementioned bonuses shall be paid only once for
each of the milestones.

                                       26

                                    ARTICLE 6

                                   CONDITIONS

      Section 6.1 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligation of each party to effect the Merger shall be subject to
the satisfaction on or prior to the Effective Time of each of the following
conditions, any and all of which may be waived in whole or in part by Seller,
Buyer or Acquisition Subsidiary, as the case may be, to the extent permitted by
applicable law:

            (a) Stockholder Approval. This Agreement shall have been approved by
the requisite vote of the stockholders of Seller, Buyer and Acquisition
Subsidiary;

            (b) Statutes. No statute, rule, order, decree or regulation shall
have been enacted or promulgated by any Governmental Entity which prohibits the
consummation of the Merger;

            (c) Injunctions. There shall be no order or injunction of a court or
other governmental authority of competent jurisdiction in effect precluding,
restraining, enjoining or prohibiting consummation of the Merger;

            (d) Tax Opinions. Buyer shall have received from Roberts, Sheridan &
Kotel, P.C., counsel to Buyer, a written opinion dated as of the Closing Date to
the effect that the Merger, when effected in accordance with this Agreement,
will qualify as a reorganization under Section 368(a) of the Code; Seller shall
have received from Brobeck, Phleger & Harrison LLP, counsel to Seller, a written
opinion dated as of the Closing Date to the effect that the Merger, when
effected in accordance with this Agreement, will qualify as a reorganization
under Section 368(a) of the Code;

            (e) Capetola Employment Agreement. Robert J. Capetola shall have
entered into an employment agreement with Buyer, in the form attached as Exhibit
A hereto;

            (f) Key Executive Employment Agreements. Buyer and each of Harry G.
Brittain, Cynthia Davis, Laurence B. Katz, Lisa Mastroianni, Christopher
Schaber, Huei Tsai and Thomas Wiswell shall have entered into employment
agreements as mutually agreed to by Buyer and Seller, substantially in the form
attached as Exhibit B hereto (the "Key Executive Employment Agreements");

            (g) Exchange Agreement. Buyer shall have entered into the Exchange
Agreement with JJDC.

            (h) Board of Directors. On the Effective Date, the Board of
Directors of Buyer shall consist of Robert J. Capetola, Steve Kanzer, Max Link,
Herbert McDade, David Naveh, Milton Packer, Richard Power, Mark Rogers, Marvin
Rosenthale, and Richard Sperber.

            (i) No Litigation. After the date hereof, there shall not be
threatened, or instituted and continuing, any action, suit or proceeding against
Seller, Buyer or Acquisition Subsidiary, by any Governmental Entity or any other
person directly or indirectly relating to the Merger or any other transactions
contemplated by this Agreement which individually or in the aggregate could
reasonably be expected to have a Seller Material Adverse Effect or Buyer
Material Adverse Effect.

      Section 6.2 Additional Conditions to Obligations of Seller. The obligation
of Seller to effect the Merger is also subject to the fulfillment of the
following conditions:

                                       27

            (a) Representations and Warranties. The representations and
warranties of Buyer and Acquisition Subsidiary contained in this Agreement shall
be true and correct on the date hereof and shall also be true and correct on and
as of the Effective Time, with the same force and effect as if made on and as of
the Effective Time, unless the failure of such representations and warranties to
be true and correct could not reasonably be expected to cause, individually or
in the aggregate, a Buyer Material Adverse Effect (as applied to such dates);
(b) Agreements, Conditions and Covenants. Buyer and Acquisition Subsidiary shall
have performed or complied in all material respects with all agreements,
conditions and covenants required by this Agreement to be performed or complied
with by them on or before the Effective Time;

            (c) Certificate of Chairman of the Board. Seller shall have received
a certificate of the Chairman of the Board of Directors of Buyer to the effect
that each of the conditions specified in clauses (a) and (b) of this Section 6.2
have been satisfied;

            (d) Stock Option Agreements. In addition to the Stock Options
assumed by Buyer under Section 2.4, Buyer shall have granted stock options
pursuant to Buyer Stock Option Plan in the forms of option agreements attached
hereto as Exhibit C, Exhibit D and Exhibit E, to certain of Seller's employees
as set forth on Schedule 6.2(d), for an aggregate of 338,500, 175,000 and
160,000 shares of Common Stock, respectively.

            (e) Opinion. Seller shall have received an opinion dated as of the
Closing Date from Roberts, Sheridan & Kotel P.C., counsel to Buyer and
Acquisition Subsidiary, covering the matters set forth in Schedule 6.2(e).

            (f) Registration Rights Agreement. Buyer shall have entered into a
Registration Rights Agreement with JJDC and The Scripps Research Institute,
substantially in the form attached hereto as Exhibit F.

      Section 6.3 Additional Conditions to Obligations of Buyer and Acquisition
Subsidiary. The obligations of Buyer and Acquisition Subsidiary to effect the
Merger are also subject to the following conditions:

            (a) Representations and Warranties. The representations and
warranties of Seller contained in this Agreement shall be true and correct on
the date hereof and shall also be true and correct on and as of the Effective
Time, with the same force and effect as if made on and as of the Effective Time,
unless the failure of such representations and warranties to be true and correct
as of such dates could not reasonably be expected to cause, individually or in
the aggregate, a Seller Material Adverse Effect (as applied to such dates);

            (b) Agreements, Conditions and Covenants. Seller shall have
performed or complied in all material respects with all agreements, conditions
and covenants required by this Agreement to be performed or complied with by it
on or before the Effective Time;

            (c) Officer's Certificate. Buyer shall have received a certificate
of the Chief Executive Officer of Seller to the effect that each of the
conditions specified in clauses (a) and (b) of this Section 6.3. have been
satisfied.

            (d) Investment Agreement. Each holder of Common Shares shall have
executed and delivered to Buyer the form of Investment Agreement attached as
Exhibit G hereto.

                                       28

            (e) Opinion. Buyer shall have received an opinion dated as of the
Closing Date from Brobeck, Phleger & Harrison LLP, counsel to Seller, covering
the matters set forth in Schedule 6.3(e).

            (f) Dissenting Common Shares. The aggregate number of Common Shares
held by Dissenting Stockholders shall not be equal to or exceed five percent
(5%) of the outstanding Common Shares immediately prior to the Effective Time.

            (g) Contractual Lock-up Agreements. Each common stockholder and
optionholder of Seller shall have entered into an agreement with Buyer
substantially in the form of Exhibit H attached hereto.

            (h) Buyer Stock Option Plan. The 1998 stock option plan of Buyer
(the "1998 Stock Option Plan") in the form attached as Exhibit I hereto, shall
have been approved by the requisite vote of the stockholders of Buyer.

            (i) Termination Agreement. Seller shall enter into a letter
agreement terminating the Co-Sale Agreement dated as of October 28, 1996 by and
between Seller and the stockholders listed on Schedule A thereto.

                                    ARTICLE 7

                                   TERMINATION

      Section 7.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval of the terms of
this Agreement by the stockholders of Buyer or Seller:

            (a) by mutual written consent of the Boards of Directors of Buyer
and Seller;

            (b) by either Buyer or Seller if any Governmental Entity shall have
issued an order, decree or ruling or taken any other action permanently
enjoining, restraining or otherwise prohibiting consummation of the Merger and
such order, decree or ruling or other action shall have become final and
nonappealable;

            (c) by either Buyer or Seller, if the Merger shall not have been
consummated by [July 15], 1998; provided, however, that the right to terminate
this Agreement pursuant to this Section 7.1(c) shall not be available to any
party whose failure (or the failure of the affiliates of which) to perform any
of its obligations under this Agreement has been the cause of, or resulted in,
the failure of the Merger to occur on or before such date; provided, further,
that for this purpose, Buyer and Seller shall not be deemed to be affiliates of
each other; directors, officers and employees of Seller shall be deemed to act
only on behalf of such Seller; and directors, officers and employees of Buyer or
Acquisition Subsidiary shall be deemed to act only on behalf of Buyer and/or
Acquisition Subsidiary; and provided further that an individual holding
positions on the boards of both Seller, on the one hand, and Buyer or
Acquisition Subsidiary, on the other hand, shall be deemed to act only on behalf
of Buyer and/or Acquisition Subsidiary unless such interpretation would be
manifestly unreasonable;

            (d) by Buyer or Acquisition Subsidiary, in the event of a breach by
Seller of any representation, warranty, covenant or other agreement contained in
this Agreement which cannot be or has not been cured within thirty (30) days
after the giving of written notice to Seller and which, individually or in the
aggregate, has had or could reasonably be expected to have, a Seller Material
Adverse Effect; or

                                       29

            (e) by Seller, in the event of a breach by Buyer or Acquisition
Subsidiary of any of their respective representations, warranties, covenants or
other agreements contained in this Agreement, which cannot be or has not been
cured within thirty (30) days after the giving of written notice to Buyer or
Acquisition Subsidiary, and which, individually or in the aggregate, has had or
could reasonably be expected to have, a Buyer Material Adverse Effect.

      Section 7.2 Effect of Termination. In the event of a termination of this
Agreement by either Seller or Buyer as provided in Section 7.1, this Agreement
shall forthwith become void and there shall be no liability or obligation on the
part of Buyer, Acquisition Subsidiary or Seller or their respective officers or
directors, except with respect to Sections 3.16, 4.16, 5.2, this Section 7.2 and
Article 8; provided, however, that nothing herein shall relieve any party of
liability for any breach this Agreement.

                                    ARTICLE 8

                                  MISCELLANEOUS

      Section 8.1 Fees and Expenses. All fees and expenses incurred in
connection with the Merger, this Agreement and the transactions contemplated by
this Agreement shall be paid by the party incurring such fees or expenses,
whether or not the Merger is consummated.

      Section 8.2 Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified and supplemented in any and all respects,
whether before or after any vote of the stockholders of Seller or Buyer
contemplated hereby, by written agreement of the parties hereto, at any time
prior to the Closing Date with respect to any of the terms contained herein;
provided, however, that after the approval of this Agreement by the stockholders
of Seller or Buyer, no such amendment, modification or supplement shall reduce
the amount or change the form of the consideration to be received by Seller
stockholders in the Merger.

      Section 8.3 Nonsurvival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any schedule, instrument
or other document delivered pursuant to this Agreement shall survive the
Effective Time.

      Section 8.4 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given upon receipt, and shall be given to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):

                                       30

            (a)   if to Buyer or Acquisition Subsidiary, to:

                  Discovery Laboratories, Inc.
                  509 Madison Avenue
                  Suite 1406
                  New York, NY 10022
                  Telephone: (212) 223-9504
                  Facsimile: (212) 688-7978

                  Attention: Steve H. Kanzer, Esq.

                  with copies to:

                  Roberts, Sheridan & Kotel, P.C.
                  Tower Forty-Nine
                  12 East 49th Street
                  New York, NY  10017
                  Telephone: (212) 299-8600
                  Facsimile: (212) 299-8686

                  Attention: Kenneth G. Alberstadt, Esq.

            (b)   if to Seller, to:

                  Acute Therapeutics, Inc.
                  3359 Durham Road
                  Doylestown, PA  18901
                  Telephone: (215) 794-3064
                  Facsimile: (215) 794-3239

                  Attention: Robert J. Capetola, Ph. D.

                  with copies to:

                  Brobeck, Phleger & Harrison LLP
                  1633 Broadway
                  47th Floor
                  New York, NY  10019
                  Telephone: (212) 581-1600
                  Facsimile: (212) 586-7878

                  Attention: Ellen B. Corenswet, Esq.

      Section 8.5 Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. Whenever the words "include", "includes" or "including" are
used in this Agreement they shall be deemed to be followed by the words "without
limitation". As used in this Agreement, the term "affiliate(s)" shall have the
meaning set forth in Rule 12b-2 of the Exchange Act. As used in this Agreement,
a "subsidiary" of any entity shall mean 

                                       31

all corporations or other entities in which such entity owns a majority of the
issued and outstanding capital stock or equity or similar interests.

      Section 8.6 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.

      Section 8.7 Entire Agreement; No Third Party Beneficiaries; Rights of
Ownership. This Agreement and the Confidentiality Agreement (including the
documents and the instruments referred to herein and therein): (a) constitute
the entire agreement and supersede all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof,
and (b) other than the provisions of Section 5.8 hereof, nothing expressed or
implied in this Agreement is intended or will be construed to confer upon or
give to any person, firm or corporation other than the parties hereto any rights
or remedies under or by reason of this Agreement or any transaction contemplated
hereby.

      Section 8.8 Severability. If any term, provision, covenant or restriction
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void, unenforceable or against its regulatory policy,
the remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.

      Section 8.9 Governing Law. This Agreement and the legal relations between
the parties hereto will be governed by and construed in accordance with the laws
of the State of Delaware, without giving effect to the choice of law principles
thereof.

      Section 8.10 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties, except that Acquisition Subsidiary may assign, in
its sole discretion, any or all of its rights, interests and obligations
hereunder to Buyer or to any direct or indirect wholly owned subsidiary of
Buyer. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and assigns.

                                       32

      IN WITNESS WHEREOF, Buyer, Acquisition Subsidiary and Seller have caused
this Agreement to be signed by their respective officers thereunto duly
authorized as of the date first written above.

                                    Buyer

                                    By: /s/ James S. Kuo
                                        ----------------------------------------

                                    Name: James S. Kuo, M.D.
                                          --------------------------------------

                                    Title: Chief Executive Officer
                                           -------------------------------------

                                    Acquisition Subsidiary

                                    By: /s/ James S. Kuo
                                        ----------------------------------------

                                    Name: James S. Kuo, M.D.
                                          --------------------------------------

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

                                    Seller

                                    By: /s/ Robert J. Capetola
                                        ----------------------------------------

                                    Name: Robert J. Capetola, Ph.D.
                                          --------------------------------------

                                    Title: President and Chief Executive Officer
                                           -------------------------------------

                                       33

                                    EXHIBIT A

                              EMPLOYMENT AGREEMENT

            This Employment Agreement (the "Agreement") is entered into as of
[_________ __], 1998 by and between Discovery Laboratories, Inc., a Delaware
corporation (the "Company"), and Robert Capetola, Ph.D. (the "Executive").

            WHEREAS, the Company and Executive desire that Executive be employed
by the Company and that the terms and conditions of such employment be defined;

            NOW, THEREFORE, in consideration of the employment of Executive by
the Company, the Company and Executive agree as follows:

            1. Term of the Agreement. The Company shall employ Executive and
Executive shall accept employment for a period of four (4) years commencing on
[__________ __], 1998 (the "Commencement Date") and continuing until [__________
__], 2002, subject, however, to prior termination as hereinafter provided in
Section 5 (the "Employment Period").

            2. Executive's Duties and Obligations.

                  a. Duties. Executive shall serve as President and Chief
Executive Officer of the Company. Executive shall be responsible for overall
management of the Company and all operating managers of the Company shall report
to Executive. Executive shall at all times report to, and shall be subject to
the policies established by, the Company's Board of Directors (the "Board") or
any Executive Committee thereof. The Company agrees that, at all times during
the Employment Period, it will nominate Executive for election to the Board of
Directors of the Company. Executive shall immediately resign from any Board
position held by him at the expiration or termination of the Employment Period.

                  b. Location of Employment. Executive's principal place of
business shall be at the Company's offices to be located within thirty (30)
miles of Doylestown, Pennsylvania. Such office shall serve as the Company's
principal executive office.

                  c. Proprietary Information and Inventions Agreement. Upon
commencement of employment with the Company, Executive shall execute the
Company's standard form of Intellectual Property and Confidential Information
Agreement (the "Confidentiality Agreement") a copy of which is attached to this
Agreement as Exhibit A.

            3. Devotion of Time to Company's Business

                  a. Full-Time Efforts. During his employment with the Company,
Executive shall devote substantially all of his business time, attention and
efforts to the high quality performance of his duties to the Company.

                                       2

                  b. No Other Employment. During his employment with the
Company, Executive shall not, whether directly or indirectly, render any
services of a commercial or professional nature to any other person or
organization, whether for compensation or otherwise, without the prior written
consent of the Company's Executive Committee or Board of Directors.
Notwithstanding the foregoing provisions of this Section 3.b., Executive may
perform services in connection with charitable or civic activities to the extent
such participation does not materially interfere with the performance of
Executive's duties for the Company.

                  c. Non-Competition. During the Employment Period and for
eighteen (18) months after its termination, Executive shall not, directly or
indirectly, either as an employee, employer, consultant, agent, principal,
partner, stockholder, corporate officer, director, or in any other individual or
representative capacity compete with the Company's business of developing or
commercializing pulmonary surfactants, Vitamin D analogs or any other category
of compounds which forms the basis of the Company's products or products under
development (a "Competing Business"), or (ii) directly or indirectly solicit
employees of the Company. Notwithstanding the provisions of this Section 3.c.,
nothing herein shall prohibit Executive from (i) holding less than one percent
(1%) of the outstanding capital stock of a publicly held corporation engaged in
a Competing Business; (ii) serving on one or more Boards of Directors of
for-profit or non-profit corporations so long as, in the aggregate, such
commitments do not interfere with the performance of Executive's duties for the
Company and such corporations are not engaged in any Competing Business; or
(iii) after his employment with the Company terminates for any reason, being
employed by a multi-division corporation that engages in a Competing Business so
long as Executive works in a division of such corporation which is not primarily
engaged in a Competing Business and Executive has no responsibilities for the
direct supervision of, and will not in the ordinary course of discharging his
responsibilities become involved in the analysis of proprietary data or
marketing strategies relating to, any Competing Business.

                                       3

            4. Compensation and Benefits.

                  a. Initial Bonus. The Company shall pay to Executive an
initial sign-on bonus of One Hundred Thousand Dollars ($100,000) upon the
execution of this Agreement.

                  b. Base Compensation. During the first year of the Employment
Period, the Company shall pay to Executive, payable in accordance with the
Company's standard payroll policy, base annual compensation of Two Hundred
Thirty Six Thousand Two Hundred Fifty Dollars ($236,250), less all required
withholdings. Such base salary shall be increased annually during the Employment
Period by a minimum of five percent (5%) per year.

                  c. Bonuses. During the Employment Period, Executive shall be
entitled to a minimum year-end bonus equal to twenty percent (20%) of his base
compensation for each year and, at the discretion of the Compensation Committee
of the Board of Directors of the Company, any additional bonus that may be
awarded him.

                  d. Benefits. During the Employment Period, Executive will be
entitled to all such family health and medical benefits and disability insurance
as are provided to officers of the Company generally. In addition, the Company
will provide to Executive (i) term life insurance on behalf of Executive's
beneficiaries in the amount of Two Million Dollars ($2,000,000) for the term of
this Agreement, and (ii) long-term disability insurance, subject to a combined
premium cap of Fifteen Thousand Dollars ($15,000) per year.

                  e. Incentive Bonus. Executive shall be eligible for incentive
bonuses as follows:

                        (i) Fifty Thousand Dollars ($50,000) upon the execution
of each partnering or similar arrangement involving Surfaxin having a Value (as
hereinafter defined) to the Company in excess of Ten Million Dollars
($10,000,000). For purposes of this Agreement, "Value" shall mean the total
payments, including without limitation, contingent payments prior to or at
receipt of marketing approval for the compound under development in the
Company's portfolio (each a "Portfolio 

                                       4

Compound") involved in the relevant agreement, to be paid to Discovery from
corporate partnering transactions or from any other transactions for the
development, clinical testing, regulatory approval, manufacturing and/or
marketing of a Portfolio Compound, including without limitation upfront fees,
milestone payments, research and development and other contractual commitments.

                        (ii) In amounts to be determined by the Company's
Compensation Committee, to be paid in either cash or equity, upon the
achievement of each of the following milestones (which bonuses shall be paid
only once for each of the milestones): (a) the successful completion of Phase II
studies for any Portfolio Compound; (b) the successful completion of Phase III
studies of any Portfolio Compound; and (c) receipt of marketing approval in the
United States for any Portfolio Compound.

                  f. Stock Options. The Board of Directors of the Company has
granted to Executive, on the date hereof, incentive stock options to purchase:
(i) 115,090 shares of Common Stock, $0.001 par value of the Company (the "Common
Stock"), pursuant to the terms of the Notice of Grant attached hereto as Exhibit
B, (ii) 59,500 shares of Common Stock, subject to acceleration at such time as
the market capitalization of the Company exceeds $75 million, pursuant to the
terms of the Notice of Grant attached hereto as Exhibit C, and (iii) 54,240
shares of Common Stock, subject to acceleration upon consummation of a corporate
partnering deal having a total Value of at least $20 million, pursuant to the
terms of the Notice of Grant attached hereto as Exhibit D.

            5. Termination of Employment.

                  a. Termination for Cause. The Company may terminate
Executive's employment at any time for "Cause," as herein defined. For the
purposes of this Agreement, "Cause" shall mean (i) breach of any contractual
obligations relating to noncompetition, assignment of inventions, protection of
intellectual property or confidentiality, (ii) gross negligence or willful
misconduct relating to the performance of employment responsibility or (iii) the
commission of any felony or any other crime involving moral turpitude.

                                       5

                  b. Termination without Cause. If Executive's employment is
terminated by the Company without Cause, the following provisions shall apply:

                        (i) Executive shall be entitled to any unpaid
compensation accrued through the last day of Executive's employment;

                        (ii) Executive shall be entitled to receive severance
payments equal to his base compensation for an eighteen (18) month period, not
subject to setoff by the Company, but subject to the execution by the Executive
of a Release, substantially in the form attached hereto as Exhibit E, with
respect to all employment-related matters. Such severance shall be payable in
six (6) equal installments, with the first installment payable on the date of
receipt of the foregoing release and the subsequent installments payable at
three (3) month intervals thereafter.

                  c. Death or Disability. This Agreement shall terminate if
Executive dies or is mentally or physically "Disabled" as herein defined. For
the purposes of this Agreement, "Disabled" shall mean a mental or physical
condition that renders Executive incapable of performing his duties and
obligations under this Agreement for three (3) or more consecutive months or for
a total of six (6) months during any twelve (12) consecutive months; provided,
that during such period the Company shall give Executive at least thirty (30)
days' written notice that it considers the time period for disability to be
running. If this Agreement is terminated under this Section 5.c., Executive or
his estate shall be entitled to any unpaid compensation accrued through the last
day of Executive's employment but shall not be entitled to any severance
benefits.

                  d. Lock-up Period. Executive shall not directly or indirectly,
sell, offer, contract to sell, transfer the economic risk of ownership, make any
short sale, pledge or otherwise dispose of any shares of Common Stock issued or
issuable upon the exercise of options, or any securities convertible into or
exchangeable or exercisable for such options, granted to Executive for a
one-year lock-up period following any termination of Executive's employment by
(i) the Company for Cause or (ii) Executive to the extent such termination
constitutes a breach of this Agreement.

                                       6

            6. Miscellaneous.

                  a. Governing Law. This Agreement shall be interpreted,
construed, governed and enforced according to the laws of the Commonwealth of
Pennsylvania as applied to agreements among Pennsylvania residents entered into
and to be performed entirely within Pennsylvania without regards to the
application of choice of law rules.

                  b. Amendments. No amendment or modification of the terms or
conditions of this Agreement shall be valid unless in writing and signed by the
parties hereto.

                  c. Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
construed, if possible, so as to be enforceable under applicable law, else, such
provision shall be excluded from this Agreement and the balance of the Agreement
shall be interpreted as if such provision were so excluded and shall be
enforceable in accordance with its terms.

                  d. Successors and Assigns. The rights and obligations of the
Company under this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Company. Executive shall not be entitled
to assign any of his rights or obligations under this Agreement.

                  e. Notices. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery, on the date of scheduled delivery by a nationally recognized overnight
service or two (2) days after deposit in the United States Post Office, by
registered or certified mail, postage prepaid, addressed to the other party at
the address shown below such party's signature, or at such other address or
addresses as either party shall designate to the other in accordance with this
Section 6.e.

                  f. Entire Agreement. This Agreement, including the exhibits
attached hereto, constitutes the entire agreement between the parties with
respect to the employment of Executive. The Employment Agreement by and between
Executive and Acute Therapeutics, Inc., dated 

                                       7

October 1, 1996, is hereby terminated and shall be of no further force or effect
and that he shall have no further rights under said agreement.

                  IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date set forth above. 

                                      DISCOVERY LABORATORIES, INC.

                                      ------------------------------------------
                                      By: Steve H. Kanzer
                                      Its: Director (on behalf of the Board 
                                           of Directors)

                                      Address: 787 Seventh Avenue
                                               New York, New York 10019

                                      EXECUTIVE:

                                      -----------------------------------------
                                      Robert Capetola, Ph.D.

                                      Address: 6097 Hidden Valley Drive
                                               Doylestown, PA 18901

                                      ACUTE THERAPEUTICS, INC. (for purposes of
                                      Section 6.f. only)

                                      ------------------------------------------
                                      By: Robert J. Capetola, Ph.D.
                                      Its: President and Chief Executive Officer

                                      Address: 3359 Durham Road
                                               Doylestown, PA 18901

                                       8

                                    EXHIBIT B
                          FORM OF EMPLOYMENT AGREEMENT

            This Employment Agreement (the "Agreement") is entered into as of
[_________ __,] 1998 by and between Discovery Laboratories, Inc., a Delaware
corporation (the "Company"), and ________________ (the "Executive").

            WHEREAS, the Company and Executive desire that Executive be employed
by the Company and that the terms and conditions of such employment be defined;

            NOW, THEREFORE, in consideration of the employment of Executive by
the Company, the Company and Executive agree as follows:

            1. Term of the Agreement. The Company shall employ Executive and
Executive shall accept employment for a period of three (3) years commencing on
[_________ __,] 1998 (the "Commencement Date") and continuing until [__________
__,] 2001, subject, however, to prior termination as hereinafter provided in
Section 5 (the "Employment Period").

            2. Executive's Duties and Obligations.

                  a. Duties. Executive shall serve as ______________________.
Executive shall be responsible for _____________________________________.

                  b. Location of Employment. Executive's principal place of
business shall be at the Company's office to be located within thirty (30) miles
of Doylestown, Pennsylvania.

                  c. Proprietary Information and Inventions Agreement. Upon
commencement of employment with the Company, Executive shall execute the
Company's standard form of Intellectual Property and Confidential Information
Agreement (the "Confidentiality Agreement") a copy of which is attached to this
Agreement as Exhibit A.

            3. Devotion of Time to Company's Business

                                       9

                  a. Full-Time Efforts. During his employment with the Company,
Executive shall devote substantially all of his business time, attention and
efforts to the high quality performance of his duties to the Company.

                  b. No Other Employment. During his employment with the
Company, Executive shall not, whether directly or indirectly, render any
services of a commercial or professional nature to any other person or
organization, whether for compensation or otherwise, without the prior written
consent of the Company's Executive Committee or Board of Directors.

                  c. Non-Competition During Employment. During the Employment
Period and for eighteen (18) months after its termination, Executive shall not,
directly or indirectly, either as an employee, employer, consultant, agent,
principal, partner, stockholder, corporate officer, director, or in any other
individual or representative capacity (i) compete with the Company in the
business of developing or commercializing pulmonary surfactants, Vitamin D
analogs or any other category of compounds which forms the basis of the
Company's products or products under development (a "Competing Business"), or
(ii) directly or indirectly solicit employees of the Company.

            4. Compensation and Benefits.

                  a. Base Compensation. During the term of this Agreement, the
Company shall pay to Executive base annual compensation of _________________
($________), less all required withholdings.

                  b. Bonuses.

                        (1) Incentive Bonus. Executive shall be eligible for
incentive bonuses in amounts to be determined by the Company's Compensation
Committee after consultation with the Company's Chief Executive Officer, to be
paid in either cash or equity, upon the achievement of each of the following
milestones (which bonuses shall be paid only once for each of the milestones):
(a) the successful completion of Phase II studies for any compound under
development in the Company's portfolio (each a "Portfolio Compound"); (b) the
successful completion of Phase III studies for any 

                                       10

Portfolio Compound; and (c) receipt of marketing approval in the United States
for any Portfolio Compound.

                        (2) Additional Bonus. Executive shall be eligible for
such year-end bonus, which may be paid in either cash or equity, or both, as is
awarded at the discretion of the Compensation Committee of the Board of
Directors of the Company after consultation with the Company's Chief Executive
Officer.

                  c. Benefits. During her employment with the Company, the
Company shall provide reasonable medical and disability benefits to Executive.
In addition, the Company will provide to Executive term life insurance on behalf
of Executive's beneficiaries in the amount of Executive's annual salary for the
term of this Agreement.

                  d. Stock Options. The Board of Directors of the Company has
granted to Executive, on the date hereof, incentive stock options to purchase:
(i) _______ shares of Common Stock, $0.001 par value of the Company (the "Common
Stock"), pursuant to the terms of the Notice of Grant attached hereto as Exhibit
B, (ii) _______ shares of Common Stock, subject to acceleration at such time as
the market capitalization of the Company exceeds $75 million, pursuant to the
terms of the Notice of Grant attached hereto as Exhibit C, and (iii) _______
shares of Common Stock, subject to acceleration upon consummation of a corporate
partnering deal having a total Value (as hereinafter defined) of at least $20
million, pursuant to the terms of the Notice of Grant attached hereto as Exhibit
D. For purposes of this Agreement, "Value" shall mean the total payments,
including without limitation, contingent payments prior to or at receipt of
marketing approval for the Portfolio Compound involved in the relevant
agreement, to be paid to Discovery from corporate partnering transactions of
from any other transactions for the development, clinical testing, regulatory
approval, manufacturing and/or marketing of a Portfolio Compound, including
without limitation upfront fees, milestone payments, research and development
and other contractual commitments.

                                       11

            5. Termination of Employment.

                  a. Termination for Good Cause. The Company may terminate
Executive's employment at any time for "Good Cause," as herein defined. For the
purposes of this Agreement, "Good Cause" includes, but is not limited to, gross
misconduct, gross neglect of duties, acts involving moral turpitude, material
breach by Executive of this Agreement or the Confidentiality Agreement or any
act or omission involving fraud, embezzlement, or misappropriation of any
property or proprietary information of the Company by Executive which is not
cured by Executive within fifteen (15) days after receipt of written notice from
the Company.

                  b. Termination without Good Cause. If Executive's employment
is terminated by the Company without Good Cause, the following provisions shall
apply:

                        i) Executive shall be entitled to any unpaid
compensation accrued through the last day of Executive's employment;

                        ii) Executive shall be entitled to receive severance
payments equal to his base compensation, payable on normal Company payroll
dates, for a ____ month period, subject to setoff for other employment or
consulting income received by Executive.

                  c. Death or Disability. This Agreement shall terminate if
Executive dies or is mentally or physically "Disabled" as herein defined. For
the purposes of this Agreement, "Disabled" shall mean a mental or physical
condition that renders Executive incapable of performing his duties and
obligations under this Agreement for three (3) or more consecutive months or for
a total of six (6) months during any twelve (12) consecutive months; provided,
that during such period the Company shall give Executive at least thirty (30)
days' written notice that it considers the time period for disability to be
running. If this Agreement is terminated under this Section 5.c., Executive or
his estate shall be entitled to any unpaid compensation accrued through the last
day of Executive's employment but shall not be entitled to any severance
benefits.

                                       12

            6. Miscellaneous.

                  a. Governing Law. This Agreement shall be interpreted,
construed, governed and enforced according to the laws of the Commonwealth of
Pennsylvania as applied to agreements among Pennsylvania residents entered into
and to be performed entirely within Pennsylvania without regards to the
application of choice of law rules.

                  b. Amendments. No amendment or modification of the terms or
conditions of this Agreement shall be valid unless in writing and signed by the
parties hereto.

                  c. Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
construed, if possible, so as to be enforceable under applicable law, else, such
provision shall be excluded from this Agreement and the balance of the Agreement
shall be interpreted as if such provision were so excluded and shall be
enforceable in accordance with its terms.

                  d. Successors and Assigns. The rights and obligations of the
Company under this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Company. Executive shall not be entitled
to assign any of his rights or obligations under this Agreement.

                  e. Notices. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery, on the date of scheduled delivery by a nationally recognized overnight
service or two (2) days after deposit in the United States Post Office, by
registered or certified mail, postage prepaid, addressed to the other party at
the address shown below such party's signature, or at such other address or
addresses as either party shall designate to the other in accordance with this
Section 6.e.

                  f. Entire Agreement. This Agreement, including the exhibits
attached hereto, constitutes the entire agreement between the parties with
respect to the employment of 

                                       13

Executive. The Employment Agreement by and between Executive and Acute
Therapeutics, Inc., dated _______________, is hereby terminated and shall be of
no further force or effect.

                     [REST OF PAGE INTENTIONALLY LEFT BLANK]

                                       14

            IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date set forth above.

                                    DISCOVERY LABORATORIES, INC.

                                    --------------------------------------------
                                    By: Robert Capetola, Ph.D.
                                    Its: President

                           Address: 3359 Durham Road
                                    Doylestown, Pennsylvania 18901

                                   EXECUTIVE:

                                    --------------------------------------------

                           Address:

                                    ACUTE THERAPEUTICS, INC.
                                    (for purposes of Section 6.f. only)

                                    --------------------------------------------
                                    By: Robert Capetola, Ph.D.
                                    Its: President

                           Address: 3359 Durham Road
                                    Doylestown, Pennsylvania 18901

                                       15

                                    EXHIBIT C

                          DISCOVERY LABORATORIES, INC.
                         NOTICE OF GRANT OF STOCK OPTION

            Notice is hereby given of the following option grant (the "Option")
to purchase shares of the Common Stock, par value $0.001 per share, of Discovery
Laboratories, Inc. (the "Corporation"):

            Optionee: ____________________________

            Grant Date: [Closing Date of the Merger]

            Exercise Price: $[FMV as of the closing of the Merger]

            Number of Option Shares: ____________ shares

            Expiration Date: [Tenth anniversary of the closing of the Merger]

            Type of Option: [Incentive Stock Option - Subject to $100,000 Limit]

            Date Exercisable: [Date of the closing of the Merger], subject to
                              vesting as described below.

            Vesting Schedule: The Option Shares shall initially be unvested and
            subject to repurchase by the Corporation, at the Exercise Price paid
            per share. Optionee shall acquire a vested interest in, and the
            Corporation's repurchase right shall lapse with respect to,
            one-third of the Option Shares on each of the first, second and
            third anniversaries of _______________, 1998, (the "Closing Date"),
            the date of closing under the Agreement and Plan of Merger dated
            March ____, 1998 among the Corporation, ATI Acquisition Corp. and
            Acute Therapeutics, Inc. However, in the event that Optionee's
            Service is terminated by the Corporation prior to the third
            anniversary of the Closing Date for any reason other than Cause, as
            defined in the Employment Agreement, or a breach by Optionee of the
            Employment Agreement, vesting of the Option Shares shall accelerate
            so that the Corporation's repurchase right shall lapse with respect
            to, and Optionee shall acquire a vested interest in, all of the
            Option Shares as of the effective date of such termination. In no
            event shall any additional Option Shares vest after Optionee's
            termination of Service.

            Optionee understands and agrees to be bound by the terms of the
Option as set forth in the Stock Option Agreement attached hereto as Exhibit A.
Optionee understands and agrees that 

the Option is granted subject to and in accordance with the terms of the
Corporations's 1998 Stock Incentive Plan (the "Plan") attached hereto as Exhibit
B.

            REPURCHASE RIGHTS. OPTIONEE HEREBY AGREES THAT ALL UNVESTED OPTION
SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO A REPURCHASE
RIGHT EXERCISABLE BY THE CORPORATION AND ITS ASSIGNS. THE TERMS OF SUCH RIGHT
SHALL BE SPECIFIED IN A STOCK PURCHASE AGREEMENT, IN FORM AND SUBSTANCE
SATISFACTORY TO THE CORPORATION, EXECUTED BY OPTIONEE AT THE TIME OF THE OPTION
EXERCISE.

            No Employment or Service Contract. Nothing in this Notice shall
confer upon Optionee any right to continue in Service for any period of specific
duration or interfere with or otherwise restrict in any way the rights of the
Corporation (or any parent or subsidiary employing or retaining Optionee) or of
Optionee, which rights are hereby expressly reserved by each, to terminate
Optionee's Service in accordance with applicable law or the Employment
Agreement.

            Definitions. All capitalized terms used and not otherwise defined in
this Notice shall have the meaning assigned to them in this Notice or in the
Stock Option Agreement.

DATED: ________________, 1998

                                    DISCOVERY LABORATORIES, INC.

                                    By:_________________________________________

                                    Title

                                       _________________________________________
                                                      OPTIONEE

                                    Address:    ________________________________

                                                ________________________________

ATTACHMENTS:
      Exhibit A - Stock Option Agreement
      Exhibit B - 1998 Stock Incentive Plan

                                       2.

                                    EXHIBIT A

                          DISCOVERY LABORATORIES, INC.

                             STOCK OPTION AGREEMENT

RECITALS

      A. Optionee is to render valuable services to the Corporation, and this
Agreement is executed in connection with the Corporation's grant of an option to
Optionee under the Plan, as provided in the Employment Agreement dated as of ,
1998 between the Corporation and Optionee (the "Employment Agreement").

      B. All capitalized terms used and not otherwise defined in this Agreement
shall have the meaning assigned to them in the attached Appendix.

            NOW, THEREFORE, it is hereby agreed as follows:

            1. Grant of Option. The Corporation hereby grants to Optionee, as of
the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The Option Shares shall be purchasable from time
to time during the option term specified in Paragraph 2 at the Exercise Price.

            2. Option Term. This option shall have a term of ten (10) years
measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5, 6 or 16.

            3. Limited Transferability. This option shall be neither
transferable nor assignable by Optionee other than by will or by the laws of
descent and distribution following Optionee's death and may be exercised, during
Optionee's lifetime, only by Optionee. However, if this option is designated a
Non-Statutory Option in the Grant Notice, then this option may, in connection
with Optionee's estate plan, be assigned in whole or in part during Optionee's
lifetime to one or more members of Optionee's immediate family or to a trust
established for the exclusive benefit of one or more such family members. The
assigned portion shall be exercisable only by the person or persons who acquire
a proprietary interest in the option pursuant to such assignment. The terms
applicable to the assigned portion shall be the same as those in effect for this
option immediately prior to such assignment and shall be set forth in such
documents issued to the assignee as the Plan Administrator may deem appropriate.

            4. Exercisability/Vesting.

            (a) This option shall be immediately exercisable for any or all of
the Option Shares, whether or not the Option Shares are vested in accordance
with the Vesting Schedule and shall remain so exercisable until the Expiration
Date or sooner termination of the option term under Paragraph 5, 6 or 16.

            (b) Optionee shall, in accordance with the Vesting Schedule, vest in
the Option Shares in one or more installments over his or her period of Service.
Vesting in the Option Shares may be accelerated pursuant to the provisions of
Paragraph 5 or 6. In no event, however, shall any additional Option Shares vest
following Optionee's cessation of Service.

                                       3.

            5. Cessation of Service. The option term specified in Paragraph 2
shall terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become applicable:

                  (i) Should Optionee cease to remain in Service for any reason
      (other than as specified in any of paragraphs (ii) through (vii) below)
      while this option is outstanding, then this option shall remain
      exercisable until the earlier of (A) the expiration of the three (3)-month
      period measured from the date of such cessation of Service or (B) the
      Expiration Date.

                  (ii) Should Optionee die while this option is outstanding,
      then the personal representative of Optionee's estate or the person or
      persons to whom the option is transferred pursuant to Optionee's will or
      in accordance with the laws of descent and distribution shall have the
      right to exercise this Option. Such right shall lapse and this option
      shall cease to be outstanding upon the earlier of (A) the expiration of
      the twelve (12)-month period measured from the date of Optionee's death or
      (B) the Expiration Date.

                  (iii) Should Optionee cease Service by reason of Disability
      while this option is outstanding, then this option shall remain
      exercisable until the earlier of (A) the expiration of the twelve
      (12)-month period measured from the date of such cessation of Service or
      (B) the Expiration Date.

                  (iv) Should Optionee's Service be terminated by the
      Corporation prior to the third anniversary of the Closing Date for any
      reason other than Cause or a breach by Optionee of the Employment
      Agreement, vesting of the Option Shares shall accelerate so that the
      Corporation's repurchase right shall lapse with respect to, and Optionee
      shall acquire a vested interest in, all of the Option Shares as of the
      effective date of such termination. In such event, this option shall
      remain exercisable until the earlier of (A) the expiration of the twelve
      (12)-month period measured from the date of such termination or (B) the
      Expiration Date.

                  (v) During the limited period of post-Service exercisability,
      this option may not be exercised in the aggregate for more than the number
      of vested option Shares for which the option is exercisable at the time
      of, or as a result of, Optionee's cessation of Service. Upon the
      expiration of such limited exercise period or (if earlier) upon the
      Expiration Date, this option shall terminate and cease to be outstanding
      for any Option Shares for which the Option has not been exercised. To the
      extent Optionee is not vested in the Option Shares at the time of, or as a
      result of, Optionee's cessation of Service, this option shall immediately
      terminate and cease to be outstanding with respect to those shares.

                  (vi) Should Optionee's Service be terminated by the
      Corporation for Cause or should Optionee terminate his or her Service in
      breach of the Employment Agreement, then this option shall terminate
      immediately and cease to remain outstanding.

                  (vii) In the event of a Corporate Transaction, the provisions
      of Paragraph 6 shall govern the period for which this option is to remain
      exercisable following Optionee's cessation of Service and shall supersede
      any provisions to the contrary in this paragraph.

            6. Corporate Transaction.

                                       4.

                  a. In the event of any Corporate Transaction, the Option
Shares at the time subject to this option but not otherwise vested shall
automatically vest in full so that this option shall, immediately prior to the
effective date of the Corporate Transaction, become exercisable for all of the
Option Shares as fully-vested shares and may be exercised for any or all of
those vested shares. However, the Option Shares shall not vest on such an
accelerated basis if and to the extent: (i) this option is assumed by the
successor corporation (or parent thereof) in the Corporate Transaction and the
Corporation's repurchase rights with respect to the unvested Option Shares are
assigned to such successor corporation (or parent thereof) or (ii) this option
is to be replaced with a cash incentive program of the successor corporation
which preserves the spread existing on the unvested Option Shares at the time of
the Corporate Transaction (the excess of the Fair Market Value of those Option
Shares over the Exercise Price payable for such shares) and provides for
subsequent payout in accordance with the same Vesting Schedule applicable to
those unvested Option Shares as set forth in the Grant Notice.

                  b. Immediately following the Corporate Transaction, this
option shall terminate and cease to be outstanding, except to the extent assumed
by the successor corporation (or parent thereof) in connection with the
Corporate Transaction.

                  c. If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise
Price, provided the aggregate Exercise Price shall remain the same.

                  d. Should there occur an Involuntary Termination of Optionee's
Service within eighteen (18) months following a Corporate Transaction in which
this option is assumed or replaced and the Corporation's repurchase rights with
respect to the unvested Option Shares are assigned, all the Option Shares at the
time subject to this option but not otherwise vested shall automatically vest,
and the Corporation's repurchase rights with respect to those Option Shares
shall terminate, so that this option shall immediately become exercisable for
all those Option Shares as fully-vested shares of Common Stock and may be
exercised for any or all of those vested Option Shares at any time prior to the
earlier of (i) the Expiration Date or (ii) the expiration of the one (l)-year
period measured from the date of such Involuntary Termination.

                  e. This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.

            7. Adjustment in Option Shares. Should any change be made to the
Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option and (ii) the Exercise Price in
order to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder.

            8. Stockholder Rights. The holder of this option shall not have any
stockholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become a holder of record
of the purchased shares.

            9. Manner of Exercising Option.

                                       5.

                  a. In order to exercise this option with respect to all or any
part of the Option Shares for which this option is at the time exercisable,
Optionee (or any other person or persons exercising the option) must take the
following actions:

                        (1) To the extent the option is exercised for vested
      Option Shares, deliver to the Secretary of the Corporation an executed
      notice of exercise in substantially the form of Exhibit I to this
      Agreement (the "Exercise Notice") in which there is specified the number
      of Option Shares which are to be purchased under the exercised option. To
      the extent the option is exercised for unvested Option Shares, deliver to
      the Corporation an executed Purchase Agreement.

                        (2) Pay the aggregate Exercise Price for the purchased
      shares in one or more of the following forms:

                              (a) cash or check made payable to the Corporation;
            or

                              (b) a promissory note payable to the Corporation,
            but only to the extent approved by the Plan Administrator in
            accordance with Paragraph 13; or

                              (c) in shares of Common Stock held by Optionee (or
            any other person or persons exercising the option) for the requisite
            period necessary to avoid a charge to the Corporation's earnings for
            financial reporting purposes and valued at Fair Market Value on the
            Exercise Date; or

                              (d) to the extent the option is exercised for
            vested Option Shares, through a special sale and remittance
            procedure pursuant to which Optionee (or any other person or persons
            exercising the option) shall concurrently provide irrevocable
            written instructions (a) to a Corporation-designated brokerage firm
            to effect the immediate sale of the purchased shares and remit to
            the Corporation, out of the sale proceeds available on the
            settlement date, sufficient funds to cover the aggregate Exercise
            Price payable for the purchased shares plus all applicable Federal,
            state and local income and employment taxes required to be withheld
            by the Corporation by reason of such exercise and (b) to the
            Corporation to deliver the certificates for the purchased shares
            directly to such brokerage firm in order to complete the sale.

                  Except to the extent the sale and remittance procedure is
            utilized in connection with the option exercise, payment of the
            Exercise Price must accompany the Exercise Notice (or Purchase
            Agreement) delivered to the Corporation in connection with the
            option exercise.

                        (3) Furnish to the Corporation appropriate documentation
      that the person or persons exercising the option (if other than Optionee)
      have the right to exercise this option.

                                       6.

                        (4) Execute and deliver to the Corporation such written
      representations as may be requested by the Corporation in order for it to
      comply with the applicable requirements of Federal and state securities
      laws.

                        (5) Make appropriate arrangements with the Corporation
      for the satisfaction of all Federal, state and local income and employment
      tax withholding requirements applicable to the option exercise.

                  b. As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto. To the extent any such Option
Shares are unvested, the certificates for those Option Shares shall be endorsed
with an appropriate legend evidencing the Corporation's repurchase rights and
may be held in escrow with the Corporation until such shares vest.

                  c. In no event may this option be exercised for any fractional
shares.

            10. Compliance with Laws and Regulations.

                  a. The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by the Corporation and
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange or inter-dealer quotation system on
which the Common Stock may be listed for trading at the time of such exercise
and issuance.

                  b. The inability of the Corporation to obtain approval from
any regulatory body having authority deemed by the Corporation to be necessary
to the lawful issuance and sale of any Common Stock pursuant to this option
shall relieve the Corporation of any liability with respect to the non-issuance
or sale of the Common Stock as to which such approval shall not have been
obtained. The Corporation, however, shall use its best efforts to obtain all
such approvals.

            11. Successors and Assigns. Except to the extent otherwise provided
in Paragraphs 3 and 5, the provisions of this Agreement shall inure to the
benefit of, and be binding upon, the Corporation and its successors and assigns
and Optionee, Optionee's assigns and the legal representatives, heirs and
legatees of Optionee's estate.

            12. Notices. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation, attn: Secretary, at 509 Madison Avenue, 14th Floor, New
York, New York 10022, or any other address provided in writing to Optionee. Any
notice required to be given or delivered to Optionee shall be in writing and
addressed to Optionee at the address indicated below Optionee's signature line
on the Grant Notice. All notices shall be deemed effective upon personal
delivery or upon deposit in the U.S. mail, postage prepaid and properly
addressed to the party to be notified.

            13. Financing. The Corporation may, in its absolute discretion and
without any obligation to do so, permit Optionee to pay the Exercise Price for
the purchased Option Shares by delivering a promissory note. The terms of any
such promissory note (including the interest rate, the requirements for
collateral and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion.

            14. Construction. This Agreement and the option evidenced hereby are
made and granted pursuant to the Plan and are in all respects limited by and
subject to the terms of the Plan. All 

                                       7.

decisions of the Plan Administrator or the Board with respect to any question or
issue arising under the Plan or this Agreement shall be conclusive and binding
on all persons having an interest in this option.

            15. Governing Law. The interpretation, performance and enforcement
of this Agreement shall be governed by the laws of the Commonwealth of
Pennsylvania without resort to that State's conflict-of-laws rules.

            16. Stockholder Approval.

                  a. The grant of this option is subject to approval of the Plan
by the Corporation's stockholders within twelve (12) months after the adoption
of the Plan by the Board. Notwithstanding any provision of this Agreement to the
contrary, this option may not be exercised in whole or in part until such
stockholder approval is obtained. In the event that such stockholder approval is
not obtained, then this option shall terminate in its entirety and Optionee
shall have no further rights to acquire any Option Shares hereunder.

                  b. If the Option Shares covered by this Agreement exceed, as
of the Grant Date, the number of shares of Common Stock which may without
stockholder approval be issued under the Plan, then this option shall be void
with respect to such excess shares, unless stockholder approval of an amendment
sufficiently increasing the number of shares of Common Stock issuable under the
Plan is obtained in accordance with the provisions of the Plan.

            17. Additional Terms Applicable to an Incentive Option. In the event
this option is designated an Incentive Option in the Grant Notice, the following
terms and conditions shall also apply to the grant:

                  (a) This option shall cease to qualify for favorable tax
treatment as an Incentive Option if (and to the extent) this option is exercised
for one or more Option Shares: (i) more than three (3) months after the date
Optionee ceases to be an Employee for any reason

other than death or Permanent Disability or (ii) more than twelve (12) months
after the date Optionee ceases to be an Employee by reason of Permanent
Disability.

                  (b) This option shall not become exercisable in the calendar
year in which granted if (and to the extent) the aggregate Fair Market Value
(determined at the Grant Date) of the Common Stock for which this option would
otherwise first become exercisable in such calendar year would, when added to
the aggregate value (determined as of the respective date or dates of grant) of
the Common Stock and any other securities for which one or more other Incentive
Options granted to Optionee prior to the Grant Date (whether under the Plan or
any other option plan of the Corporation or any Parent or Subsidiary) first
become exercisable during the same calendar year, exceed One Hundred Thousand
Dollars ($100,000) in the aggregate. To the extent the exercisability of this
option is deferred by reason of the foregoing limitation, the deferred portion
shall become exercisable in the first calendar year or years thereafter in which
the One Hundred Thousand Dollar ($100,000) limitation of this Paragraph 18(b)
would not be contravened, but such deferral shall in all events end immediately
prior to the effective date of a Corporate Transaction in which this option is
not to be assumed, whereupon the option shall become immediately exercisable as
a Non-Statutory Option for the deferred portion of the Option Shares.

                  (c) Should Optionee hold, in addition to this option, one or
more other options to purchase Common Stock which become exercisable for the
first time in the same calendar year as this 

                                       8.

option, then the foregoing limitations on the exercisability of such options as
Incentive Options shall be applied on the basis of the order in which such
options are granted.

            18. Market Stand-Off. In connection with any public offering of the
Corporation's securities, the Plan Administrator may require that Optionee be
subject to a lock-up for such period following the public offering as may be
required by the underwriter or underwriters of such public offering. During such
period, Optionee agrees not to directly or indirectly sell, offer to sell,
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other than to
individuals who agree to be similarly bound) any Option Shares during such
period without the prior written consent of such underwriter or underwriters.

                                       9.

                                    APPENDIX

            The following definitions shall be in effect under the Agreement:

      A. Agreement shall mean this Stock Option Agreement.

      B. Board shall mean the Corporation's Board of Directors.

      C. Cause shall have the meaning assigned to such term in the Employment
Agreement.

      D. Closing Date shall mean ____________, 1998, the date of closing of the
Merger.

      E. Code shall mean the Internal Revenue Code of 1986, as amended.

      F. Common Stock shall mean the Corporation's common stock.

      G. Corporate Transaction shall mean either of the following
stockholder-approved transactions (other than the Merger) to which the
Corporation is a party:

                  (i) a merger or consolidation in which securities possessing
            more than fifty percent (50%) of the total combined voting power of
            the Corporation's outstanding securities are transferred to a person
            or persons different from the persons holding those securities
            immediately prior to such transaction, or

                  (ii) the sale, transfer or other disposition of all or
            substantially all of the Corporation's assets in complete
            liquidation or dissolution of the Corporation.

      H. Corporation shall mean Discovery Laboratories, Inc., a Delaware
corporation.

      I. Disability shall have the meaning assigned to such term in the
Employment Agreement. Disability shall be deemed to constitute Permanent
Disability in the event that such Disability is expected to result in death or
has lasted or can be expected to last for a continuous period of twelve (12)
months or more.

      J. Employee shall mean an individual who is in the employ of the
Corporation, subject to the control and direction of the employer entity as to
both the work to be performed and the manner and method of performance.

      K. Employment Agreement shall have the meaning ascribed to such term set
forth in recital A to this Stock Option Agreement.

      L. Exercise Date shall mean the date on which the option shall have been
exercised in accordance with Paragraph 9 of the Agreement.

      M. Exercise Price shall mean the exercise price per share as specified in
the Grant Notice.

      N. Expiration Date shall mean the date on which the option expires as
specified in the Grant Notice.

                                      10.

      O. Fair Market Value per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:

                  (i) If the Common Stock is at the time traded on the Nasdaq
            National Market or Nasdaq SmallCap Market, then the Fair Market
            Value shall be the closing selling price per share of Common Stock
            on the date in question, as the price is reported by the National
            Association of Securities Dealers on such market or any successor
            system. If there is no closing selling price for the Common Stock on
            the date in question, then the Fair Market Value shall be the
            closing selling price on the last preceding date for which such
            quotation exists.

                  (ii) If the Common Stock is at the time listed on any Stock
            Exchange, then the Fair Market Value shall be the closing selling
            price per share of Common Stock on the date in question on the Stock
            Exchange determined by the Board to be the primary market for the
            Common Stock, as such price is officially quoted in the composite
            tape of transactions on such exchange. If there is no closing
            selling price for the Common Stock on the date in question, then the
            Fair Market Value shall be the closing selling price on the last
            preceding date for which such quotation exists.

                  (iii) If the Common Stock is at the time neither listed on any
            Stock Exchange nor traded on the Nasdaq National Market or SmallCap
            Market, then the Fair Market Value shall be determined by the Board
            after taking into account such factors as the Board shall deem
            appropriate.

      P. Grant Date shall mean the date of grant of the option as specified in
the Grant Notice.

      Q. Grant Notice shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.

      R. Incentive Option shall mean an option which satisfies the requirements
of Code Section 422.

      S. Involuntary Termination shall mean the termination of Optionee's
Service, during the term of the Employment Agreement or any successor Employment
Agreement which occurs by reason of:

                  (i) Optionee's involuntary dismissal or discharge by the
            Corporation for reasons other than Cause, or

                  (ii) Optionee's voluntary resignation following (A) a change
            in Optionee's position with the Corporation (or Parent or Subsidiary
            employing Optionee) which materially reduces Optionee's level of
            responsibility, (B) a reduction in Optionee's level of compensation
            (including base salary, fringe benefits and participation in
            corporate-performance based bonus or incentive programs) by more
            than fifteen percent (15%) or (C) a relocation of Optionee's place
            of employment by more than fifty (50) miles, provided and only if
            such change, reduction or relocation is effected by the Corporation
            without Optionee's consent.

                                      11.

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

      U. Merger shall mean the merger of the Corporation and Acute Therapeutics,
Inc. ("ATI") pursuant to the Agreement and Plan of Merger dated as of March 5,
1998 among the Corporation, ATI Acquisition Corp. and ATI.

      V. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.

      W. Option Shares shall mean the number of shares of Common Stock subject
to the option.

      X. Optionee shall mean the person to whom the option is granted as
specified in the Grant Notice.

      Y. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

      Z. Plan shall mean the Corporation's 1998 Stock Incentive Plan.

      AA. Plan Administrator shall mean either the Board or a committee
appointed by the Board, to the extent the committee is at the time responsible
for the administration of the Plan.

      BB. Purchase Agreement shall mean the stock purchase agreement (in form
and substance satisfactory to the Corporation) which must be executed at the
time the option is exercised for unvested Option Shares and which will
accordingly (i) grant the Corporation the right to repurchase, at the Exercise
Price, any and all of those Option Shares in which Optionee is not otherwise
vested at the time of his or her cessation of Service and (ii) preclude the
sale, transfer or other disposition of any of the Option Shares purchased under
such agreement while those Option Shares remain subject to the repurchase right.

      CC. Service shall mean the provision of services to the Corporation
pursuant to the Employment Agreement or otherwise as an Employee or non-employee
member of the Board of Directors of, or a consultant or independent advisor to,
the Corporation (or any Parent or Subsidiary).

      DD. Stock Exchange shall mean the American Stock Exchange or the New York
Stock Exchange.

      EE. Subsidiary shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.

      FF. Vesting Schedule shall mean the vesting schedule specified in the
Grant Notice, as such vesting schedule is subject to acceleration in the event
of an Involuntary Termination or Corporate Transaction.

                                      12.

                                    EXHIBIT D

                          DISCOVERY LABORATORIES, INC.
                         NOTICE OF GRANT OF STOCK OPTION

            Notice is hereby given of the following option grant (the "Option")
to purchase shares of the Common Stock, par value $0.001 per share, of Discovery
Laboratories, Inc. (the "Corporation"):

            Optionee: ______________________________________

            Exercise Price: $[FMV as of the closing of the Merger]

            Number of Option Shares: _____________ shares

            Expiration Date: [Tenth anniversary of the closing of the Merger]

            Type of Option: [Incentive Stock Option - subject to $100,000 limit]

            Date Exercisable: [Date of the closing of the Merger], subject to
                              vesting as described below.

            Vesting Schedule: The Option Shares shall initially be unvested and
            subject to repurchase by the Corporation at the Exercise Price paid
            per share. The Corporation's repurchase right shall lapse with
            respect to, and Optionee shall vest in, all of the Option Shares in
            the event that the market capitalization of the Corporation
            (determined by multiplying the average of the Fair Market Value per
            share of the Common Stock for each of 30 consecutive trading days by
            the average of the number of shares of Common Stock outstanding on
            each such day) exceeds $75 million. In no event shall any additional
            Option Shares vest after Optionee's cessation of service.

            Optionee understands and agrees to be bound by the terms of the
Option as set forth in the Stock Option Agreement attached hereto as Exhibit A.
Optionee understands and agrees that the Option is granted subject to and in
accordance with the terms of the Corporations's 1998 Stock Incentive Plan (the
"Plan") attached hereto as Exhibit B.

            No Employment or Service Contract. Nothing in this Notice shall
confer upon Optionee any right to continue in Service for any period of specific
duration or interfere with or otherwise restrict in any way the rights of the
Corporation (or any parent or subsidiary employing or retaining Optionee) or of
Optionee, which rights are hereby expressly reserved by each, to terminate
Optionee's Service in accordance with applicable law or the Employment
Agreement.

            REPURCHASE RIGHTS. OPTIONEE HEREBY AGREES THAT ALL UNVESTED OPTION
SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO A REPURCHASE
RIGHT EXERCISABLE BY THE 

CORPORATION AND ITS ASSIGNS. THE TERMS OF SUCH RIGHT SHALL BE SPECIFIED IN A
STOCK PURCHASE AGREEMENT, IN FORM AND SUBSTANCE SATISFACTORY TO THE CORPORATION,
EXECUTED BY OPTIONEE AT THE TIME OF THE OPTION EXERCISE.

            Definitions. All capitalized terms used and not otherwise defined in
this Notice shall have the meaning assigned to them in this Notice or in the
Stock Option Agreement.

DATED:____________, 1998

                                    DISCOVERY LABORATORIES, INC.

                                    By:_________________________________________

                                    Title:______________________________________

                                    ____________________________________________
                                                    OPTIONEE

                                    Address:    ________________________________

                                                ________________________________

Attachments:
Exhibit A - Stock Option Agreement
Exhibit B - 1998 Stock Incentive Plan

                                    EXHIBIT A

                          DISCOVERY LABORATORIES, INC.

                             STOCK OPTION AGREEMENT

RECITALS

      A. Optionee is to render valuable services to the Corporation, and this
Agreement is executed in connection with the Corporation's grant of an option to
Optionee under the Plan, as provided in the Employment Agreement dated as of ,
1998 between the Corporation and Optionee (the "Employment Agreement").

      B. All capitalized terms used and not otherwise defined in this Agreement
shall have the meaning assigned to them in the attached Appendix.

            NOW, THEREFORE, it is hereby agreed as follows:

            1. Grant of Option. The Corporation hereby grants to Optionee, as of
the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The Option Shares shall be purchasable from time
to time during the option term specified in Paragraph 2 at the Exercise Price.

            2. Option Term. This option shall have a term of ten (10) years
measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5, 6 or 17.

            3. Limited Transferability. This option shall be neither
transferable nor assignable by Optionee other than by will or by the laws of
descent and distribution following Optionee's death and may be exercised, during
Optionee's lifetime, only by Optionee. However, if this option is designated a
Non-Statutory Option in the Grant Notice, then this option may, in connection
with Optionee's estate plan, be assigned in whole or in part during Optionee's
lifetime to one or more members of Optionee's immediate family or to a trust
established for the exclusive benefit of one or more such family members. The
assigned portion shall be exercisable only by the person or persons who acquire
a proprietary interest in the option pursuant to such assignment. The terms
applicable to the assigned portion shall be the same as those in effect for this
option immediately prior to such assignment and shall be set forth in such
documents issued to the assignee as the Plan Administrator may deem appropriate.

            4. Exercisability/Vesting.

            (a) This option shall be immediately exercisable for any or all of
the Option Shares, whether or not the Option Shares are vested in accordance
with the Vesting Schedule and shall remain so exercisable until the Expiration
Date or sooner termination of the option term under Paragraph 5, 6 or 17.

            (b) Optionee shall, in accordance with the Vesting Schedule, vest in
the Option Shares in one or more installments over his or her period of Service.
Vesting in the Option Shares may be accelerated pursuant to the provisions of
Paragraph 6. In no event, however, shall any additional Option Shares vest
following Optionee's cessation of Service.

            5. Cessation of Service. The option term specified in Paragraph 2
shall terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become applicable:

                  (i) Should Optionee cease to remain in Service for any reason
      (other than as specified in any of paragraphs (ii) through (v) below)
      while this option is outstanding, then this option shall remain
      exercisable until the earlier of (A) the expiration of the three (3)-month
      period measured from the date of such cessation of Service or (B) the
      Expiration Date.

                  (ii) Should Optionee die while this option is outstanding,
      then the personal representative of Optionee's estate or the person or
      persons to whom the option is transferred pursuant to Optionee's will or
      in accordance with the laws of descent and distribution shall have the
      right to exercise this Option. Such right shall lapse and this option
      shall cease to be outstanding upon the earlier of (A) the expiration of
      the twelve (12)-month period measured from the date of Optionee's death or
      (B) the Expiration Date.

                  (iii) Should Optionee cease Service by reason of Disability
      while this option is outstanding, then this option shall remain
      exercisable until the earlier of (A) the expiration of the twelve
      (12)-month period measured from the date of such cessation of Service or
      (B) the Expiration Date.

                  (iv) During the limited period of post-Service exercisability,
      this option may not be exercised in the aggregate for more than the number
      of vested option Shares for which the option is exercisable at the time of
      Optionee's cessation of Service. Upon the expiration of such limited
      exercise period or (if earlier) upon the Expiration Date, this option
      shall terminate and cease to be outstanding for any Option Shares for
      which the Option has not been exercised. To the extent Optionee is not
      vested in the Option Shares at the time of Optionee's cessation of
      Service, this option shall immediately terminate and cease to be
      outstanding with respect to those shares.

                  (v) Should Optionee's Service be terminated by the Corporation
      for Cause or by Optionee in breach of the Employment Agreement, then this
      option shall terminate immediately and cease to remain outstanding.

            6. Corporate Transaction.

                  a. In the event of any Corporate Transaction, the Option
Shares at the time subject to this option but not otherwise vested shall
automatically vest in full so that this option shall, immediately prior to the
effective date of the Corporate Transaction, become exercisable for all of the
Option Shares as fully-vested shares and may be exercised for any or all of
those vested shares. However, the Option Shares shall not vest on such an
accelerated basis if and to the extent: (i) this option is assumed by the
successor corporation (or parent thereof) in the Corporate Transaction and the
Corporation's repurchase rights with respect to the unvested Option Shares are
assigned to such successor corporation (or parent thereof) or (ii) this option
is to be replaced with a cash incentive program of the successor corporation
which preserves the spread existing on the unvested Option Shares at the time of
the Corporate Transaction (the excess of the Fair Market Value of those Option
Shares over the Exercise Price payable for such shares) and provides for
subsequent payout in accordance with the same Vesting Schedule applicable to
those unvested Option Shares as set forth in the Grant Notice.

                  b. Immediately following the Corporate Transaction, this
option shall terminate and cease to be outstanding, except to the extent assumed
by the successor corporation (or parent thereof) in connection with the
Corporate Transaction.

                  c. If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise
Price, provided the aggregate Exercise Price shall remain the same.

                  d. This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.

            7. Adjustment in Option Shares. Should any change be made to the
Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option and (ii) the Exercise Price in
order to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder.

            8. Stockholder Rights. The holder of this option shall not have any
stockholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become a holder of record
of the purchased shares.

            9. Manner of Exercising Option.

                  a. In order to exercise this option with respect to all or any
part of the Option Shares for which this option is at the time exercisable,
Optionee (or any other person or persons exercising the option) must take the
following actions:

                        (1) To the extent the option is exercised for vested
      Option Shares, deliver to the Secretary of the Corporation an executed
      notice of exercise in substantially the form of Exhibit I to this
      Agreement (the "Exercise Notice") in which there is specified the number
      of Option Shares which are to be purchased under the exercised option. To
      the extent the option is exercised for unvested Option Shares, deliver to
      the Corporation an executed Purchase Agreement.

                        (2) Pay the aggregate Exercise Price for the purchased
      shares in one or more of the following forms:

                              (a) cash or check made payable to the Corporation;
            or

                              (b) a promissory note payable to the Corporation,
            but only to the extent approved by the Plan Administrator in
            accordance with Paragraph 13; or

                              (c) in shares of Common Stock held by Optionee (or
            any other person or persons exercising the option) for the requisite
            period necessary to avoid a charge to the Corporation's earnings for
            financial reporting purposes and valued at Fair Market Value on the
            Exercise Date; or

                              (d) to the extent the option is exercised for
            vested Option Shares, through a special sale and remittance
            procedure pursuant to which Optionee (or any other person or persons
            exercising the option) shall concurrently provide irrevocable
            written instructions (a) to a Corporation-designated brokerage firm
            to effect the immediate sale of the purchased shares and remit to
            the Corporation, out of the sale proceeds available on the
            settlement date, sufficient funds to cover the aggregate Exercise
            Price payable for the purchased shares plus all applicable Federal,
            state and local income and employment taxes required to be withheld
            by the Corporation by reason of such exercise and (b) to the
            Corporation to deliver the certificates for the purchased shares
            directly to such brokerage firm in order to complete the sale.

                  Except to the extent the sale and remittance procedure is
            utilized in connection with the option exercise, payment of the
            Exercise Price must accompany the Exercise Notice (or Purchase
            Agreement) delivered to the Corporation in connection with the
            option exercise.

                        (3) Furnish to the Corporation appropriate documentation
      that the person or persons exercising the option (if other than Optionee)
      have the right to exercise this option.

                        (4) Execute and deliver to the Corporation such written
      representations as may be requested by the Corporation in order for it to
      comply with the applicable requirements of Federal and state securities
      laws.

                        (5) Make appropriate arrangements with the Corporation
      for the satisfaction of all Federal, state and local income and employment
      tax withholding requirements applicable to the option exercise.

                  b. As soon as practical after the Exercise Date, the
Corporation shall issue to or on behalf of Optionee (or any other person or
persons exercising this option) a certificate for the purchased Option Shares,
with the appropriate legends affixed thereto. To the extent any such Option
Shares are unvested, the certificates for those Option Shares shall be endorsed
with an appropriate legend evidencing the Corporation's repurchase rights and
may be held in escrow with the Corporation until such shares vest.

                  c. In no event may this option be exercised for any fractional
shares.

            10. Compliance with Laws and Regulations.

                  a. The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by the Corporation and
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange or inter-dealer quotation system on
which the Common Stock may be listed for trading at the time of such exercise
and issuance.

                  b. The inability of the Corporation to obtain approval from
any regulatory body having authority deemed by the Corporation to be necessary
to the lawful issuance and sale of any Common Stock pursuant to this option
shall relieve the Corporation of any liability with respect to the non-issuance
or sale of the Common Stock as to which such approval shall not have been
obtained. The Corporation, however, shall use its best efforts to obtain all
such approvals.

            11. Successors and Assigns. Except to the extent otherwise provided
in Paragraphs 3 and 5, the provisions of this Agreement shall inure to the
benefit of, and be binding upon, the Corporation and its successors and assigns
and Optionee, Optionee's assigns and the legal representatives, heirs and
legatees of Optionee's estate.

            12. Notices. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation, attn: Secretary, at 509 Madison Avenue, 14th Floor, New
York, New York 10022, or any other address provided in writing to Optionee. Any
notice required to be given or delivered to Optionee shall be in writing and
addressed to Optionee at the address indicated below Optionee's signature line
on the 

Grant Notice. All notices shall be deemed effective upon personal delivery or
upon deposit in the U.S. mail, postage prepaid and properly addressed to the
party to be notified.

            13. Financing. The Corporation may, in its absolute discretion and
without any obligation to do so, permit Optionee to pay the Exercise Price for
the purchased Option Shares by delivering a promissory note. The terms of any
such promissory note (including the interest rate, the requirements for
collateral and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion.

            14. Construction. This Agreement and the option evidenced hereby are
made and granted pursuant to the Plan and are in all respects limited by and
subject to the terms of the Plan. All decisions of the Plan Administrator or the
Board with respect to any question or issue arising under the Plan or this
Agreement shall be conclusive and binding on all persons having an interest in
this option.

            15. Governing Law. The interpretation, performance and enforcement
of this Agreement shall be governed by the laws of the Commonwealth of
Pennsylvania without resort to that State's conflict-of-laws rules.

            16. Stockholder Approval.

                  a. The grant of this option is subject to approval of the Plan
by the Corporation's stockholders within twelve (12) months after the adoption
of the Plan by the Board. Notwithstanding any provision of this Agreement to the
contrary, this option may not be exercised in whole or in part until such
stockholder approval is obtained. In the event that such stockholder approval is
not obtained, then this option shall terminate in its entirety and Optionee
shall have no further rights to acquire any Option Shares hereunder.

                  b. If the Option Shares covered by this Agreement exceed, as
of the Grant Date, the number of shares of Common Stock which may without
stockholder approval be issued under the Plan, then this option shall be void
with respect to such excess shares, unless stockholder approval of an amendment
sufficiently increasing the number of shares of Common Stock issuable under the
Plan is obtained in accordance with the provisions of the Plan.

            17. Additional Terms Applicable to an Incentive Option. In the event
this option is designated an Incentive Option in the Grant Notice, the following
terms and conditions shall also apply to the grant:

                  (a) This option shall cease to qualify for favorable tax
treatment as an Incentive Option if (and to the extent) this option is exercised
for one or more Option Shares: (i) more than three (3) months after the date
Optionee ceases to be an Employee for any reason other than death or Permanent
Disability or (ii) more than twelve (12) months after the date Optionee ceases
to be an Employee by reason of Permanent Disability.

                  (b) This option shall not become exercisable in the calendar
year in which granted if (and to the extent) the aggregate Fair Market Value
(determined at the Grant Date) of the Common Stock for which this option would
otherwise first become exercisable in such 

calendar year would, when added to the aggregate value (determined as of the
respective date or dates of grant) of the Common Stock and any other securities
for which one or more other Incentive Options granted to Optionee prior to the
Grant Date (whether under the Plan or any other option plan of the Corporation
or any Parent or Subsidiary) first become exercisable during the same calendar
year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. To the
extent the exercisability of this option is deferred by reason of the foregoing
limitation, the deferred portion shall become exercisable in the first calendar
year or years thereafter in which the One Hundred Thousand Dollar ($100,000)
limitation of this Paragraph 18(b) would not be contravened, but such deferral
shall in all events end immediately prior to the effective date of a Corporate
Transaction in which this option is not to be assumed, whereupon the option
shall become immediately exercisable as a Non-Statutory Option for the deferred
portion of the Option Shares.

                  (c) Should Optionee hold, in addition to this option, one or
more other options to purchase Common Stock which become exercisable for the
first time in the same calendar year as this option, then the foregoing
limitations on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.

            18. Market Stand-Off. In connection with any public offering of the
Corporation's securities, the Plan Administrator may require that Optionee be
subject to a lock-up for such period following the public offering as may be
required by the underwriter or underwriters of such public offering. During such
period, Optionee agrees not to directly or indirectly sell, offer to sell,
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other than to
individuals who agree to be similarly bound) any Option Shares during such
period without the prior written consent of such underwriter or underwriters.

                                   APPENDIX

            The following definitions shall be in effect under the Agreement:

      .A. Agreement shall mean this Stock Option Agreement.

      .B. Board shall mean the Corporation's Board of Directors.

      .C. Cause shall have the meaning assigned to such term in the Employment
Agreement.

      .D. Closing Date shall mean ____________, 1998, the date of closing of the
Merger.

      .E. Code shall mean the Internal Revenue Code of 1986, as amended.

      .F. Common Stock shall mean the Corporation's common stock.

      .G. Corporate Transaction shall mean either of the following
stockholder-approved transactions (other than the Merger) to which the
Corporation is a party:

                  (i) a merger or consolidation in which securities possessing
            more than fifty percent (50%) of the total combined voting power of
            the Corporation's outstanding securities are transferred to a person
            or persons different from the persons holding those securities
            immediately prior to such transaction, or

                  (ii) the sale, transfer or other disposition of all or
            substantially all of the Corporation's assets in complete
            liquidation or dissolution of the Corporation.

      .H. Corporation shall mean Discovery Laboratories, Inc., a Delaware
corporation.

      .I. Disability shall have the meaning assigned to such term in the
Employment Agreement. Disability shall be deemed to constitute Permanent
Disability in the event that such Disability is expected to result in death or
has lasted or can be expected to last for a continuous period of twelve (12)
months or more.

      .J. Employee shall mean an individual who is in the employ of the
Corporation, subject to the control and direction of the employer entity as to
both the work to be performed and the manner and method of performance.

      .K. Employment Agreement shall have the meaning ascribed to such term set
forth in recital A to this Stock Option Agreement.

      .L. Exercise Date shall mean the date on which the option shall have been
exercised in accordance with Paragraph 9 of the Agreement.

      .M. Exercise Price shall mean the exercise price per share as specified in
the Grant Notice.

      .N. Expiration Date shall mean the date on which the option expires as
specified in the Grant Notice.

      .O. Fair Market Value per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:

                  (i) If the Common Stock is at the time traded on the Nasdaq
            National Market or Nasdaq SmallCap Market, then the Fair Market
            Value shall be the closing selling price per share of Common Stock
            on the date in question, as the price is reported by the National
            Association of Securities Dealers on such market or any successor
            system. If there is no closing selling price for the Common Stock on
            the date in question, then the Fair Market Value shall be the
            closing selling price on the last preceding date for which such
            quotation exists.

                  (ii) If the Common Stock is at the time listed on any Stock
            Exchange, then the Fair Market Value shall be the closing selling
            price per share of Common Stock on the date in question on the Stock
            Exchange determined by the Board to be the primary market for the
            Common Stock, as such price is officially quoted in the composite
            tape of transactions on such exchange. If there is no closing
            selling price for the Common Stock on the date in question, then the
            Fair Market Value shall be the closing selling price on the last
            preceding date for which such quotation exists.

                  (iii) If the Common Stock is at the time neither listed on any
            Stock Exchange nor traded on the Nasdaq National Market or SmallCap
            Market, then the Fair Market Value shall be determined by the Board
            after taking into account such factors as the Board shall deem
            appropriate.

      .P. Grant Date shall mean the date of grant of the option as specified in
the Grant Notice.

      .Q. Grant Notice shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.

      .R. Incentive Option shall mean an option which satisfies the requirements
of Code Section 422.

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

      .T. Merger shall mean the merger of the Corporation and Acute
Therapeutics, Inc. ("ATI") pursuant to the Agreement and Plan of Merger dated as
of March 5, 1998 among the Corporation, ATI Acquisition Corp. and ATI.

      .U. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.

      .V. Option Shares shall mean the number of shares of Common Stock subject
to the option.

      .W. Optionee shall mean the person to whom the option is granted as
specified in the Grant Notice.

      .X. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the 

Corporation) owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.

      .Y. Plan shall mean the Corporation's 1998 Stock Incentive Plan.

      .Z. Plan Administrator shall mean either the Board or a committee of Board
members, to the extent the committee is at the time responsible for the
administration of the Plan.

      .AA. Purchase Agreement shall mean the stock purchase agreement (in form
and substance satisfactory to the Corporation) which must be executed at the
time the option is exercised for unvested Option Shares and which will
accordingly (i) grant the Corporation the right to repurchase, at the Exercise
Price, any and all of those Option Shares in which Optionee is not otherwise
vested at the time of his or her cessation of Service and (ii) preclude the
sale, transfer or other disposition of any of the Option Shares purchased under
such agreement while those Option Shares remain subject to the repurchase right.

      .BB. Service shall mean the provision of services to the Corporation
pursuant to the Employment Agreement or otherwise as an Employee or non-employee
member of the Board of Directors of, or a consultant or independent advisor to,
the Corporation (or any Parent or Subsidiary).

      .CC. Stock Exchange shall mean the American Stock Exchange or the New York
Stock Exchange.

      .DD. Subsidiary shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.

      .EE. Vesting Schedule shall mean the vesting schedule specified in the
Grant Notice, as such vesting schedule is subject to acceleration in the event
of a Corporate Transaction.

                                    EXHIBIT E

                          DISCOVERY LABORATORIES, INC.
                         NOTICE OF GRANT OF STOCK OPTION

            Notice is hereby given of the following option grant (the "Option")
to purchase shares of the Common Stock, par value $0.001 per share, of Discovery
Laboratories, Inc. (the "Corporation"):

            Optionee: _______________________

            Grant Date: [Closing Date of the Merger]

            Exercise Price: $[FMV as of the closing of the Merger]

            Number of Option Shares: ____________ shares

            Expiration Date: [Tenth anniversary of the closing of the Merger]

            Type of Option: [Incentive Stock Option - Subject to $100,000 limit]

            Date Exercisable: [Date of the closing of the Merger], subject to
                              vesting as described below.

            Vesting Schedule: The Option Shares shall initially be unvested and
            subject to repurchase by the Corporation at the Exercise Price paid
            per share. The Corporation's repurchase right shall lapse with
            respect to, and Optionee shall vest in, all of the Option Shares in
            the event that the Corporation consummates a transaction having a
            total Value (as defined in the Stock Option Agreement) of at least
            $20 million and involving the development, clinical testing,
            regulatory approval, manufacturing and/or marketing of a portfolio
            compound of the Corporation jointly with a business entity not
            affiliated with the Corporation. In no event shall any additional
            Option Shares vest after Optionee's cessation of service.

            Optionee understands and agrees to be bound by the terms of the
Option as set forth in the Stock Option Agreement attached hereto as Exhibit A.
Optionee understands and agrees that the Option is granted subject to and in
accordance with the terms of the Corporations's 1998 Stock Incentive Plan (the
"Plan") attached hereto as Exhibit B.

            No Employment or Service Contract. Nothing in this Notice shall
confer upon Optionee any right to continue in Service for any period of specific
duration or interfere with or otherwise restrict in any way the rights of the
Corporation (or any parent or subsidiary employing or retaining Optionee) or of
Optionee, which rights are hereby expressly reserved by each, to terminate
Optionee's Service in accordance with applicable law or the Employment
Agreement.

            REPURCHASE RIGHTS. OPTIONEE HEREBY AGREES THAT ALL UNVESTED OPTION
SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO A REPURCHASE
RIGHT EXERCISABLE BY THE CORPORATION AND ITS ASSIGNS. THE TERMS OF SUCH RIGHT
SHALL BE SPECIFIED IN A STOCK PURCHASE AGREEMENT, IN FORM AND SUBSTANCE
SATISFACTORY TO THE CORPORATION, EXECUTED BY OPTIONEE AT THE TIME OF THE OPTION
EXERCISE.

            Definitions. All capitalized terms used and not otherwise defined in
this Notice shall have the meaning assigned to them in this Notice or in the
Stock Option Agreement.

DATED: ______________, 1998

                                    DISCOVERY LABORATORIES, INC.

                                    By: ________________________________________

                                    Title: _____________________________________

                                    ____________________________________________
                                                      OPTIONEE
     
                                    Address:     _______________________________

                                                 _______________________________

Attachments:
Exhibit A - Stock Option Agreement
Exhibit B - 1998 Stock Incentive Plan

                                    EXHIBIT A

                          DISCOVERY LABORATORIES, INC.

                             STOCK OPTION AGREEMENT

RECITALS

      A. Optionee is to render valuable services to the Corporation, and this
Agreement is executed in connection with the Corporation's grant of an option to
Optionee under the Plan, as provided in the Employment Agreement dated as of ,
1998 between the Corporation and Optionee (the "Employment Agreement").

      B. All capitalized terms used and not otherwise defined in this Agreement
shall have the meaning assigned to them in the attached Appendix.

            NOW, THEREFORE, it is hereby agreed as follows:

            1. Grant of Option. The Corporation hereby grants to Optionee, as of
the Grant Date, an option to purchase up to the number of Option Shares
specified in the Grant Notice. The Option Shares shall be purchasable from time
to time during the option term specified in Paragraph 2 at the Exercise Price.

            2. Option Term. This option shall have a term of ten (10) years
measured from the Grant Date and shall accordingly expire at the close of
business on the Expiration Date, unless sooner terminated in accordance with
Paragraph 5, 6 or 17.

            3. Limited Transferability. This option shall be neither
transferable nor assignable by Optionee other than by will or by the laws of
descent and distribution following Optionee's death and may be exercised, during
Optionee's lifetime, only by Optionee. However, if this option is designated a
Non-Statutory Option in the Grant Notice, then this option may, in connection
with Optionee's estate plan, be assigned in whole or in part during Optionee's
lifetime to one or more members of Optionee's immediate family or to a trust
established for the exclusive benefit of one or more such family members. The
assigned portion shall be exercisable only by the person or persons who acquire
a proprietary interest in the option pursuant to such assignment. The terms
applicable to the assigned portion shall be the same as those in effect for this
option immediately prior to such assignment and shall be set forth in such
documents issued to the assignee as the Plan Administrator may deem appropriate.

            4. Exercisability/Vesting.

            (a) This option shall be immediately exercisable for any or all of
the Option Shares, whether or not the Option Shares are vested in accordance
with the Vesting Schedule and shall remain so exercisable until the Expiration
Date or sooner termination of the option term under Paragraph 5, 6 or 17.

            (b) Optionee shall, in accordance with the Vesting Schedule, vest in
the Option Shares in one or more installments over his or her period of Service.
Vesting in the Option Shares may be accelerated pursuant to the provisions of
Paragraph 6. In no event, however, shall any additional Option Shares vest
following Optionee's cessation of Service.

            5. Cessation of Service. The option term specified in Paragraph 2
shall terminate (and this option shall cease to be outstanding) prior to the
Expiration Date should any of the following provisions become applicable:

                  (i) Should Optionee cease to remain in Service for any reason
      (other than as specified in any of paragraphs (ii) through (vii) below)
      while this option is outstanding, then this option shall remain
      exercisable until the earlier of (A) the expiration of the three (3)-month
      period measured from the date of such cessation of Service or (B) the
      Expiration Date.

                  (ii) Should Optionee die while this option is outstanding,
      then the personal representative of Optionee's estate or the person or
      persons to whom the option is transferred pursuant to Optionee's will or
      in accordance with the laws of descent and distribution shall have the
      right to exercise this Option. Such right shall lapse and this option
      shall cease to be outstanding upon the earlier of (A) the expiration of
      the twelve (12)-month period measured from the date of Optionee's death or
      (B) the Expiration Date.

                  (iii) Should Optionee cease Service by reason of Disability
      while this option is outstanding, then this option shall remain
      exercisable until the earlier of (A) the expiration of the twelve
      (12)-month period measured from the date of such cessation of Service or
      (B) the Expiration Date.

                  (iv) During the limited period of post-Service exercisability,
      this option may not be exercised in the aggregate for more than the number
      of vested option Shares for which the option is exercisable at the time of
      Optionee's cessation of Service. Upon the expiration of such limited
      exercise period or (if earlier) upon the Expiration Date, this option
      shall terminate and cease to be outstanding for any Option Shares for
      which the Option has not been exercised. To the extent Optionee is not
      vested in the Option Shares at the time of Optionee's cessation of
      Service, this option shall immediately terminate and cease to be
      outstanding with respect to those shares.

                  (v) Should Optionee's Service be terminated by the Corporation
      for Cause or should Optionee terminate his or her Service in breach of the
      Employment Agreement, then this option shall terminate immediately and
      cease to remain outstanding.

            6. Corporate Transaction.

                  a. In the event of any Corporate Transaction, the Option
Shares at the time subject to this option but not otherwise vested shall
automatically vest in full so that this option shall, immediately prior to the
effective date of the Corporate Transaction, become exercisable for all of the
Option Shares as fully-vested shares and may be exercised for any or all of
those vested shares. However, the Option Shares shall not vest on such an
accelerated basis if and to the extent: (i) this option is assumed by the
successor corporation (or parent thereof) in the Corporate Transaction and the
Corporation's repurchase rights with respect to the unvested Option Shares are
assigned to such successor corporation (or parent thereof) or (ii) this option
is to be replaced with a cash incentive program of the successor corporation
which preserves the spread existing on the unvested Option Shares at the time of
the Corporate Transaction (the excess of the Fair Market Value of those Option
Shares over the Exercise Price payable for such shares) and provides for
subsequent payout in accordance with the same Vesting Schedule applicable to
those unvested Option Shares as set forth in the Grant Notice.

                  b. Immediately following the Corporate Transaction, this
option shall terminate and cease to be outstanding, except to the extent assumed
by the successor corporation (or parent thereof) in connection with the
Corporate Transaction.

                  c. If this option is assumed in connection with a Corporate
Transaction, then this option shall be appropriately adjusted, immediately after
such Corporate Transaction, to apply to the number and class of securities which
would have been issuable to Optionee in consummation of such Corporate
Transaction had the option been exercised immediately prior to such Corporate
Transaction, and appropriate adjustments shall also be made to the Exercise
Price, provided the aggregate Exercise Price shall remain the same.

                  d. This Agreement shall not in any way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.

            7. Adjustment in Option Shares. Should any change be made to the
Common Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Corporation's receipt of
consideration, appropriate adjustments shall be made to (i) the total number
and/or class of securities subject to this option and (ii) the Exercise Price in
order to reflect such change and thereby preclude a dilution or enlargement of
benefits hereunder. 

            8. Stockholder Rights. The holder of this option shall not have any
stockholder rights with respect to the Option Shares until such person shall
have exercised the option, paid the Exercise Price and become a holder of record
of the purchased shares.

            9. Manner of Exercising Option.

                  a. In order to exercise this option with respect to all or any
part of the Option Shares for which this option is at the time exercisable,
Optionee (or any other person or persons exercising the option) must take the
following actions:

                        (1) To the extent the option is exercised for vested
      Option Shares, deliver to the Secretary of the Corporation an executed
      notice 

      of exercise in substantially the form of Exhibit I to this Agreement (the
      "Exercise Notice") in which there is specified the number of Option Shares
      which are to be purchased under the exercised option. To the extent the
      option is exercised for unvested Option Shares, deliver to the Corporation
      an executed Purchase Agreement.

                        (2) Pay the aggregate Exercise Price for the purchased
      shares in one or more of the following forms:

                              (a) cash or check made payable to the Corporation;
            or

                              (b) a promissory note payable to the Corporation,
            but only to the extent approved by the Plan Administrator in
            accordance with Paragraph 13; or

                              (c) in shares of Common Stock held by Optionee (or
            any other person or persons exercising the option) for the requisite
            period necessary to avoid a charge to the Corporation's earnings for
            financial reporting purposes and valued at Fair Market Value on the
            Exercise Date; or

                              (d) to the extent the option is exercised for
            vested Option Shares, through a special sale and remittance
            procedure pursuant to which Optionee (or any other person or persons
            exercising the option) shall concurrently provide irrevocable
            written instructions (a) to a Corporation-designated brokerage firm
            to effect the immediate sale of the purchased shares and remit to
            the Corporation, out of the sale proceeds available on the
            settlement date, sufficient funds to cover the aggregate Exercise
            Price payable for the purchased shares plus all applicable Federal,
            state and local income and employment taxes required to be withheld
            by the Corporation by reason of such exercise and (b) to the
            Corporation to deliver the certificates for the purchased shares
            directly to such brokerage firm in order to complete the sale.

                  Except to the extent the sale and remittance procedure is
            utilized in connection with the option exercise, payment of the
            Exercise Price must accompany the Exercise Notice (or Purchase
            Agreement) delivered to the Corporation in connection with the
            option exercise.

                              (3)   Furnish  to  the  Corporation  appropriate
      documentation that the person or persons exercising the option (if other
      than Optionee) have the right to exercise this option.

                              (4)   Execute  and  deliver  to the  Corporation
      such written representations as may be requested by the Corporation in
      order for it to comply with the applicable requirements of Federal and
      state securities laws.

                              (5)   Make  appropriate  arrangements  with  the
      Corporation for the satisfaction of all Federal, state and local income
      and employment tax withholding requirements applicable to the option
      exercise.

            b. As soon as practical after the Exercise Date, the Corporation
shall issue to or on behalf of Optionee (or any other person or persons
exercising this option) a certificate for the purchased Option Shares, with the
appropriate legends affixed thereto. To the extent any such Option Shares are
unvested, the certificates for those Option Shares shall be endorsed with an
appropriate legend evidencing the Corporation's repurchase rights and may be
held in escrow with the Corporation until such shares vest.

            c. In no event may this option be exercised for any fractional
shares.

            10. Compliance with Laws and Regulations.

                  a. The exercise of this option and the issuance of the Option
Shares upon such exercise shall be subject to compliance by the Corporation and
Optionee with all applicable requirements of law relating thereto and with all
applicable regulations of any stock exchange or inter-dealer quotation system on
which the Common Stock may be listed for trading at the time of such exercise
and issuance.

                  b. The inability of the Corporation to obtain approval from
any regulatory body having authority deemed by the Corporation to be necessary
to the lawful issuance and sale of any Common Stock pursuant to this option
shall relieve the Corporation of any liability with respect to the non-issuance
or sale of the Common Stock as to which such approval shall not have been
obtained. The Corporation, however, shall use its best efforts to obtain all
such approvals.

            11. Successors and Assigns. Except to the extent otherwise provided
in Paragraphs 3 and 5, the provisions of this Agreement shall inure to the
benefit of, and be binding upon, the Corporation and its successors and assigns
and Optionee, Optionee's assigns and the legal representatives, heirs and
legatees of Optionee's estate.

            12. Notices. Any notice required to be given or delivered to the
Corporation under the terms of this Agreement shall be in writing and addressed
to the Corporation, attn: Secretary, at 509 Madison Avenue, 14th Floor, New
York, New York 10022, or any other address provided in writing to Optionee. Any
notice required to be given or delivered to Optionee shall be in writing and
addressed to Optionee at the address indicated below Optionee's signature line
on the Grant Notice. All notices shall be deemed effective upon personal
delivery or upon deposit in the U.S. mail, postage prepaid and properly
addressed to the party to be notified.

            13. Financing. The Corporation may, in its absolute discretion and
without any obligation to do so, permit Optionee to pay the Exercise Price for
the purchased Option Shares by delivering a promissory note. The terms of any
such promissory note (including the interest rate, the requirements for
collateral and the terms of repayment) shall be established by the Plan
Administrator in its sole discretion.

            14. Construction. This Agreement and the option evidenced hereby are
made and granted pursuant to the Plan and are in all respects limited by and
subject to the terms of the Plan. All decisions of the Plan Administrator or the
Board with respect to any question or issue arising under the Plan or this
Agreement shall be conclusive and binding on all persons having an interest in
this option.

            15. Governing Law. The interpretation, performance and enforcement
of this Agreement shall be governed by the laws of the Commonwealth of
Pennsylvania without resort to that State's conflict-of-laws rules.

            16. Stockholder Approval.

                  a. The grant of this option is subject to approval of the Plan
by the Corporation's stockholders within twelve (12) months after the adoption
of the Plan by the Board. Notwithstanding any provision of this Agreement to the
contrary, this option may not be exercised in whole or in part until such
stockholder approval is obtained. In the event that such stockholder approval is
not obtained, then this option shall terminate in its entirety and Optionee
shall have no further rights to acquire any Option Shares hereunder.

                  b. If the Option Shares covered by this Agreement exceed, as
of the Grant Date, the number of shares of Common Stock which may without
stockholder approval be issued under the Plan, then this option shall be void
with respect to such excess shares, unless stockholder approval of an amendment
sufficiently increasing the number of shares of Common Stock issuable under the
Plan is obtained in accordance with the provisions of the Plan.

            17. Additional Terms Applicable to an Incentive Option. In the event
this option is designated an Incentive Option in the Grant Notice, the following
terms and conditions shall also apply to the grant:

                  (a) This option shall cease to qualify for favorable tax
treatment as an Incentive Option if (and to the extent) this option is exercised
for one or more Option Shares: (i) more than three (3) months after the date
Optionee ceases to be an Employee for any reason other than death or Permanent
Disability or (ii) more than twelve (12) months after the date Optionee ceases
to be an Employee by reason of Permanent Disability.

                  (b) This option shall not become exercisable in the calendar
year in which granted if (and to the extent) the aggregate Fair Market Value
(determined at the Grant Date) of the Common Stock for which this option would
otherwise first become exercisable in such calendar year would, when added to
the aggregate value (determined as of the respective date or dates of grant) of
the Common Stock and any other securities for which one or more other Incentive
Options granted to Optionee prior to the Grant Date (whether under the Plan or
any other option plan of the Corporation or any Parent or Subsidiary) first
become exercisable during the same calendar year, exceed One Hundred Thousand
Dollars ($100,000) in the aggregate. To the extent the exercisability of this
option is deferred by reason of the foregoing limitation, the deferred portion
shall become exercisable in the first calendar year or years thereafter in which
the One Hundred Thousand Dollar ($100,000) limitation of this Paragraph 18(b)
would not be contravened, 

but such deferral shall in all events end immediately prior to the effective
date of a Corporate Transaction in which this option is not to be assumed,
whereupon the option shall become immediately exercisable as a Non-Statutory
Option for the deferred portion of the Option Shares.

                  (c) Should Optionee hold, in addition to this option, one or
more other options to purchase Common Stock which become exercisable for the
first time in the same calendar year as this option, then the foregoing
limitations on the exercisability of such options as Incentive Options shall be
applied on the basis of the order in which such options are granted.

            18. Market Stand-Off. In connection with any public offering of the
Corporation's securities, the Plan Administrator may require that Optionee be
subject to a lock-up for such period following the public offering as may be
required by the underwriter or underwriters of such public offering. During such
period, Optionee agrees not to directly or indirectly sell, offer to sell,
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other than to
individuals who agree to be similarly bound) any Option Shares during such
period without the prior written consent of such underwriter or underwriters.

                                   APPENDIX

            The following definitions shall be in effect under the Agreement:

      .A. Agreement shall mean this Stock Option Agreement.

      .B. Board shall mean the Corporation's Board of Directors.

      .C. Cause shall have the meaning assigned to such term in the Employment
Agreement.

      .D. Closing Date shall mean ____________, 1998, the date of closing of the
Merger.

      .E. Code shall mean the Internal Revenue Code of 1986, as amended.

      .F. Common Stock shall mean the Corporation's common stock.

      .G. Corporate Transaction shall mean either of the following
stockholder-approved transactions (other than the Merger) to which the
Corporation is a party:

            (i) a merger or consolidation in which securities possessing more
      than fifty percent (50%) of the total combined voting power of the
      Corporation's outstanding securities are transferred to a person or
      persons different from the persons holding those securities immediately
      prior to such transaction, or

            (ii) the sale, transfer or other disposition of all or substantially
      all of the Corporation's assets in complete liquidation or dissolution of
      the Corporation.

      .H. Corporation shall mean Discovery Laboratories, Inc., a Delaware
corporation.

      .I. Disability shall have the meaning assigned to such term in the
Employment Agreement. Disability shall be deemed to constitute Permanent
Disability in the event that such Disability is expected to result in death or
has lasted or can be expected to last for a continuous period of twelve (12)
months or more.

      .J. Employee shall mean an individual who is in the employ of the
Corporation, subject to the control and direction of the employer entity as to
both the work to be performed and the manner and method of performance.

      .K. Employment Agreement shall have the meaning ascribed to such term set
forth in recital A to this Stock Option Agreement.

      .L. Exercise Date shall mean the date on which the option shall have been
exercised in accordance with Paragraph 9 of the Agreement.

      .M. Exercise Price shall mean the exercise price per share as specified in
the Grant Notice.

      .N. Expiration Date shall mean the date on which the option expires as
specified in the Grant Notice.

      .O. Fair Market Value per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:

                  (i) If the Common Stock is at the time traded on the Nasdaq
            National Market or Nasdaq SmallCap Market, then the Fair Market
            Value shall be the closing selling price per share of Common Stock
            on the date in question, as the price is reported by the National
            Association of Securities Dealers on such market or any successor
            system. If there is no closing selling price for the Common Stock on
            the date in question, then the Fair Market Value shall be the
            closing selling price on the last preceding date for which such
            quotation exists.

                  (ii) If the Common Stock is at the time listed on any Stock
            Exchange, then the Fair Market Value shall be the closing selling
            price per share of Common Stock on the date in question on the Stock
            Exchange determined by the Board to be the primary market for the
            Common Stock, as such price is officially quoted in the composite
            tape of transactions on such exchange. If there is no closing
            selling price for the Common Stock on the date in question, then the
            Fair Market Value shall be the closing selling price on the last
            preceding date for which such quotation exists.

                  (iii) If the Common Stock is at the time neither listed on any
            Stock Exchange nor traded on the Nasdaq National Market or SmallCap
            Market, then the Fair Market Value shall be determined by the Board
            after taking into account such factors as the Board shall deem
            appropriate.

      .P. Grant Date shall mean the date of grant of the option as specified in
the Grant Notice.

      .Q. Grant Notice shall mean the Notice of Grant of Stock Option
accompanying the Agreement, pursuant to which Optionee has been informed of the
basic terms of the option evidenced hereby.

      .R. Incentive Option shall mean an option which satisfies the requirements
of Code Section 422.

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

      .T. Merger shall mean the merger of the Corporation and Acute
Therapeutics, Inc. ("ATI") pursuant to the Agreement and Plan of Merger dated as
of March 5, 1998 among the Corporation, ATI Acquisition Corp., Inc. and ATI.

      .U. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.

      .V. Option Shares shall mean the number of shares of Common Stock subject
to the option.

      .W. Optionee shall mean the person to whom the option is granted as
specified in the Grant Notice.

      .X. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the 

Corporation) owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.

      .Y. Plan shall mean the Corporation's 1998 Stock Incentive Plan.

      .Z. Plan Administrator shall mean either the Board or a committee of Board
members, to the extent the committee is at the time responsible for the
administration of the Plan.

      .AA. Purchase Agreement shall mean the stock purchase agreement (in form
and substance satisfactory to the Corporation) which must be executed at the
time the option is exercised for unvested Option Shares and which will
accordingly (i) grant the Corporation the right to repurchase, at the Exercise
Price, any and all of those Option Shares in which Optionee is not otherwise
vested at the time of his or her cessation of Service and (ii) preclude the
sale, transfer or other disposition of any of the Option Shares purchased under
such agreement while those Option Shares remain subject to the repurchase right.

      .BB. Service shall mean the provision of services to the Corporation
pursuant to the Employment Agreement or otherwise as an Employee or non-employee
member of the Board of Directors of, or a consultant or independent advisor to,
the Corporation (or any Parent or Subsidiary).

      .CC. Stock Exchange shall mean the American Stock Exchange or the New York
Stock Exchange.

      .DD. Subsidiary shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.

      .EE. Vesting Schedule shall mean the vesting schedule specified in the
Grant Notice, as such vesting schedule is subject to acceleration in the event
of a Corporate Transaction.

      .FF. Value shall mean, with respect to any agreement to which the
Corporation is a party, the total payments, including without limitation,
contingent payments prior to or at receipt of marketing approval for the
compound involved in such agreement, including without limitation upfront fees,
milestone payments and research and development and other contractual
commitments.

                                                                       EXHIBIT F

                      FORM OF REGISTRATION RIGHTS AGREEMENT

            THIS REGISTRATION RIGHTS AGREEMENT is made as of the ___ day of
_________, 1998, by and among DISCOVERY LABORATORIES, INC., a Delaware
corporation, (the "Company"), JOHNSON & JOHNSON DEVELOPMENT CORPORATION, a New
Jersey Corporation ("J&J") and THE SCRIPPS RESEARCH INSTITUTE, a California
not-for-profit organization ("Scripps") (J&J and Scripps are herein collectively
referred to as the "Stockholders").

                                    RECITALS

            WHEREAS, Acute Therapeutics, Inc. ("ATI") and Scripps are parties to
the Scripps Stock Purchase Agreement dated as of October 28, 1996 (the "Scripps
Agreement"), pursuant to which Scripps acquired 40,000 shares of common stock,
$0.001 par value per share of ATI (the "ATI Common Stock");

            WHEREAS, J&J, its affiliate, Ortho Pharmaceutical Corporation and
ATI are parties to the Inventory Transfer/Stock Purchase Agreement dated as of
October 28, 1996 (the "Inventory Transfer Agreement"), pursuant to which ATI
issued to J&J 2,200 shares of its Non-Voting Series B Preferred Stock, $0.001
par value per share (the "ATI Series B Preferred Stock") and 40,000 shares of
ATI Common Stock;

            WHEREAS, ATI, Scripps and J&J are parties to a Registration Rights
Agreement dated as of October 28, 1996 (the "ATI Registration Rights Agreement")
pursuant to which Scripps and J&J were granted certain registration rights;

            WHEREAS, the Company and ATI are parties to an agreement dated March
__, 1998, whereby a newly-formed subsidiary of the Company will merge with and
into ATI and ATI will become a wholly-owned subsidiary of the Company (the
"Merger Agreement");

            WHEREAS, pursuant to the Merger Agreement, each of the issued and
outstanding shares of ATI Common Stock shall be automatically converted into
3.91 shares of Common Stock of the Company, $0.001 par value per share ("the
Common Stock");

            WHEREAS, the Company and J&J are parties to the Stock Exchange
Agreement of even date herewith pursuant to which J&J will exchange its ATI
Series B Preferred Stock for 2,039 shares of Series C Preferred Stock, $0.001
par value per share, of the Company ("Series C Preferred Stock") and pursuant to
which the Company will issue J&J shares of Common Stock (the "Dividend Shares")
in lieu of the accrued but unpaid dividend accrued through the date of the
Merger on its shares of ATI Series B Preferred Stock (the "Stock Exchange
Agreement");

            WHEREAS, the Stockholders and the Company hereby agree that this
Registration Rights Agreement (the "Agreement") shall govern the rights of the
Stockholders to cause the Company to register the shares of Common Stock held by
the Stockholders;

            NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:

            1. Registration Rights. The Company covenants and agrees as follows:

            1.1 Definitions. For purposes of this Section 1:

            (a) The term "Act" means the Securities Act of 1933, as amended.

            (b) The term "Holder" means any person owning or having the right to
acquire Registrable Securities or any assignee thereof in accordance with
Section 1.8 hereof.

            (c) The term "1934 Act" shall mean the Securities Exchange Act of
1934, as amended.

            (d) The term "register", "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Act, and the declaration or ordering of
effectiveness of such registration statement or document.

            (e) The term "Registrable Securities" means (i) the Common Stock
issued by the Company pursuant to the Merger Agreement in exchange for the
shares of ATI Common Stock originally issued to Scripps pursuant to the Scripps
Purchase Agreement, (ii) the Common Stock issued by the Company pursuant to the
Merger Agreement in exchange for the shares of ATI Common Stock originally
issued to J&J pursuant to the Inventory Transfer Agreement, (iii) any Common
Stock issued upon conversion or redemption of the Series C Preferred Stock, (iv)
the Dividend Shares and (v) any Common Stock of the Company issued as (or
issuable upon the conversion or exercise of any warrant, right or other security
which is issued as) a dividend or other distribution with respect to, or in
exchange for or in replacement of the shares referenced in (i)-(iv) above, that
cannot be publicly resold by the holder thereof without registration under the
Act or sold in a single transaction exempt from the registration and prospectus
delivery requirement of the Act pursuant to Rule 144 thereunder, it being
understood, for the purposes of this Agreement, that Registrable Securities
shall cease to be Registrable Securities when (1) a registration statement
covering such Registrable Securities has been declared effective and they have
been disposed of pursuant to such effective registration statement, (2) they are
transferred on the open market pursuant to any available exemption under the
Act, (3) they have been otherwise transferred and the Company has delivered new
certificates or other evidences of ownership for them not subject to any stop
transfer order or other restriction on transfer and not bearing any legend
restricting transfer in the absence of an effective registration or an exemption
from the registration requirements of the Act, (4) they have been sold,
assigned, pledged, hypothecated or otherwise disposed of by the Holder in a
transaction in which the Holder's rights under this Agreement are not assigned
or assignable, or (5) the rights of the Holder under Section 1.2 have terminated
pursuant to Section 1.9.

            (f) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are Registrable Securities.

            (g) The term "SEC" shall mean the Securities and Exchange
Commission.

            1.2 Company Registration.

            (a) If (but without any obligation to do so) the Company proposes to
register (including for this purpose a registration effected by the Company for
stockholders other than the Holders) any of its stock or other securities under
the Act in connection with the public offering of such securities solely for
cash (other than a registration relating solely to the sale of securities to
participants in a Company stock plan, a registration on any form which does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of the Registrable Securities or a
registration in which the only Common Stock being registered is Common Stock
issuable upon conversion of debt securities which are also being registered),
the Company shall, at such time, promptly give each Holder written notice of
such registration. Upon the written request of each Holder given within twenty
(20) days after mailing of such notice by the Company in accordance with Section
2.5, the Company shall cause to be registered under the Act all of the
Registrable Securities that each such Holder has requested to be registered.

            (b) Notwithstanding any other provision of this Section 1.2, if the
managing underwriter of an underwritten distribution advises in writing the
Company and the Holders of the Registrable Securities requesting participation
in such registration that in its good faith judgment the number of shares of
Registrable Securities and the other securities requested to be registered under
this Section 1.2 exceeds the number of shares of Registrable Securities and
other securities which can be sold in such offering, then (i) the number of
shares of Registrable Securities and other securities so requested to be
included in the offering shall be reduced to that number of shares which in the
good faith judgment of the managing underwriter can be sold in such offering
(except for shares to be issued by the Company, which shall have priority over
the Registrable Securities), and (ii) such reduced number of shares shall be
allocated among all participating Holders of Registrable Securities and holders
of other securities in proportion, as nearly as practicable, to the respective
number of shares of Registrable Securities and other securities held by such
Holders at the time of filing the registration statement; provided, however,
that a minimum of thirty percent (30%) of the shares to be underwritten shall be
allocated, on a pro rata basis, to the Holders requesting inclusion in such
offering (the "selling stockholders"). For purposes of clause (ii) above
concerning apportionment, for any selling stockholder which is a holder of
Registrable Securities and which is a partnership or corporation, the affiliates
(as defined in the rules and regulations promulgated under the Act), partners,
retired partners and stockholders of such holder, or the estates and family
members of any such partners and retired partners and any trusts for the benefit
of any of the foregoing persons shall be deemed to be a single "selling
stockholder", and any pro-rata reduction with respect to such "selling
stockholder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"selling stockholder", as defined in this sentence.

            1.3 Obligations of the Company. Whenever required under this Section
1 to effect the registration of any Registrable Securities, the Company shall,
as expeditiously as reasonably possible:

            (a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for a period of up to one hundred twenty (120)
days or until the distribution contemplated in the Registration Statement has
been completed; provided, however, that (i) such 120-day period shall be
extended for a period of time equal to the period the Holder refrains from
selling any securities included in such registration at the request of an
underwriter of Common Stock (or other securities) of the Company; and (ii) in
the case of any registration of Registrable 

Securities on Form S-3 which are intended to be offered on a continuous or
delayed basis, such 120-day period shall be extended, if necessary, to keep the
registration statement effective until all such Registrable Securities are sold,
provided that Rule 415, or any successor rule under the Act, permits an offering
on a continuous or delayed basis, and provided further that applicable rules
under the Act governing the obligation to file a post-effective amendment
permit, in lieu of filing a post-effective amendment which (I) includes any
prospectus required by Section 10(a)(3) of the Act or (II) reflects facts or
events representing a material or fundamental change in the information set
forth in the registration statement, the incorporation by reference of
information required to be included in (I) and (II) above to be contained in
periodic reports filed pursuant to Section 13 or 15(d) of the 1934 Act in the
registration statement.

            (b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement.

            (c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them.

            (d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders;
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions, unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Act.

            (e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering. Each Holder participating
in such underwriting shall also enter into and perform its obligations under
such an agreement.

            (f) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed.

            (g) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.

            (h) Notify the participating Holders at any time when a prospectus
relating to any Registrable Securities covered by such registration statement is
required to be delivered under the Act, of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing and promptly
file such amendments and supplements as may be necessary so that, as thereafter
delivered to such Holders of such Registrable Securities, such prospectus shall
not include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances then existing and use its best
efforts to cause each such amendment and supplement to become effective.

            (i) Furnish on the closing date of an underwritten public offering
(i) an opinion, dated such date, of the counsel representing the Company, for
purposes of such registration, in form and substance as is customarily given by
company counsel to the underwriters in an underwritten public offering,
addressed to the underwriters, and (ii) a letter dated such date, from the
independent certified public accountants of the Company, in form and substance
as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the underwriters.

            1.4 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities.

            1.5 Expenses of Company Registration. The Company shall bear and pay
all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Section 1.2 for each Holder (which right may be assigned as provided
in Section 1.8), including (without limitation) all federal and state
registration, filing, qualification fees, printers and accounting fees relating
or apportionable thereto and reasonable fees and disbursements of one counsel
for the participating Holders together, but excluding underwriting discounts and
commissions relating to Registrable Securities.

            1.6 Delay of Registration. No Holder shall have any right to obtain
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.

            1.7 Indemnification. In the event any Registrable Securities are
included in a registration statement under this Section 1:

            (a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, any underwriter (as defined in the Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the Act or the 1934 Act, and each officer, director, employee and
agent thereof against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the Act, or the 1934 Act or
other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively a
"Violation"): (i) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) 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, or (iii) any violation or alleged violation by the
Company of the Act, the 1934 Act, any state securities law or any rule or
regulation promulgated under the Act, or the 1934 Act or any state securities
law; and the Company will pay to each such Holder, underwriter or controlling
person, and each officer, director, employee and agent thereof as incurred, 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 indemnity agreement contained in this subsection
1.7(a) 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), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability,
or action to the extent that it arises out of or is 

based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling person.

            (b) To the extent permitted by law, each selling Holder (severally
and not jointly) will indemnify and hold harmless the Company, each of its
directors, each of its officers who has signed the registration statement, each
person, if any, who controls the Company within the meaning of the Act, any
underwriter, any other Holder selling securities in such registration statement
and any controlling person of any such underwriter or other Holder, against any
losses, claims, damages, or liabilities (joint or several) to which any of the
foregoing persons may become subject, under the Act, or the 1934 Act or other
federal or state law, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with such registration; and each such
Holder will pay, as incurred, any legal or other expenses reasonably incurred by
any person intended to be indemnified pursuant to this subsection 1.7(a), in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this subsection 1.7(a) 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 Holder, which consent shall not be unreasonably
withheld; provided, that, in no event shall any indemnity under this subsection
1.10(b) exceed the gross proceeds from the offering received by such Holder.

            (c) Promptly after receipt by an indemnified party under this
Section 1.7 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.7, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.7, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.7.

            (d) If the indemnification provided for in this Section 1.7 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any loss, liability, claim, damage, or expense referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage, or expense
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 in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage, or expense as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party 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.

            (e) Notwithstanding the foregoing, to the extent that the provisions
on indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in conflict
with the foregoing provisions, the provisions in the underwriting agreement
shall control.

            (f) The obligations of the Company and Holders under this Section
1.7 shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 1, and otherwise.

            1.8 Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Section 1 may be
assigned (but only with all related obligations) by a Holder to a transferee or
assignee of such securities, provided: (a) the Company is, within a reasonable
time after such transfer, furnished with written notice of the name and address
of such transferee or assignee and the securities with respect to which such
registration rights are being assigned; (b) such transferee or assignee agrees
in writing to be bound by and subject to the terms and conditions of this
Agreement; and (c) such assignment shall be effective only if immediately
following such transfer the further disposition of such securities by the
transferee or assignee is restricted under the Act.

            1.9 Termination of Registration Rights. No Holder shall be entitled
to exercise any right provided for in this Section 1 after the fifth anniversary
of the date of this Agreement.

            1.10 Reports Under 1934 Act. With a view to making available to the
Holders the benefits of Rule 144 promulgated under the Act and any other rule or
regulation of the SEC that may at any time permit a Holder to sell Registrable
Securities to the public without registration, the Company agrees to:

                  (a) make and keep available public information, as those terms
are understood and defined in Rule 144;

                  (b) file with the SEC in a timely manner all reports and other
documents required of the Company nuder the Act and the 1934 Act; and

                  (c) furnish to a Holder owning any Registrable Securities upon
request (i) a written statement by the Company that it has complied with the
reporting requirements of Rule 144 (at any time after 90 days after the
effective date of the first registration statement filed by the Company for an
offering of its securities to the general public), the Act and the 1934 Act (at
any time after the Company has become subject to the reporting requirements of
the 1934 Act), (ii) a copy of the most recent annual or quarterly report of the
company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably required in availing any Holder of
Registrable Securities of any rule or regulation of the SEC which permits the
selling of any such Registrable Securities without registration or pursuant to
such form (at any time after the company has become subject to the reporting
requirements of the 1934 Act).

            1.11 Granting of Registration Rights. The Company shall not, without
the prior written consent of the Holders of at least 50.1% of the Registrable
Securities then outstanding, grant any 

rights to any persons to register any shares of capital stock or other
securities of the Company that would limit the Holders' proportional rights
under Section 1.2(b). The grant of registration rights to any person that would
entitle such person to participate on a pro rata basis in an offering under
Section 1.2(b) shall not be deemed a limitation to the Holders' proportional
rights under Section 1.2(b), pursuant to this Section 1.11; provided that in no
circumstance will fewer than ten percent (10%) of the shares to be underwritten
pursuant to Section 1.2(b) be allocated to the Holders, regardless of any
subsequent registration rights granted by the Company.

            2. Miscellaneous.

            2.1 Successors and Assigns. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any shares of Registrable Securities). Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.

            2.2 Governing Law. This Agreement shall be governed by and construed
under the laws of the Commonwealth of Pennsylvania without regard to its
conflict of laws principles.

            2.3 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

            2.4 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.

            2.5 Notices. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.

            2.6 Expenses. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.

            2.7 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Registrable Securities then outstanding. Any amendment or
waiver effected in accordance with this paragraph shall be binding upon each
holder of any Registrable Securities then outstanding, each future holder of all
such Registrable Securities, and the Company.

            2.8 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.

            2.9 Aggregation of Stock. All shares of Registrable Securities held
or acquired by affiliated entities or persons shall be aggregated together for
the purpose of determining the availability of any rights under this Agreement.

            2.10 Entire Agreement; Amendment; Waiver; No Further Rights. This
Agreement (including the Exhibits hereto, if any) constitutes the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof. The Stockholders hereby agree that they have no
further rights under the ATI Registration Rights Agreement.

                [THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK]

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

                                   DISCOVERY LABORATORIES, INC.

                                   By: _________________________________________
                                       Robert J. Capetola, Ph.D.
                                       President

                        Address:       _________________________________________
                                       _________________________________________

                                   Stockholders:

                                   JOHNSON & JOHNSON DEVELOPMENT CORPORATION

                                   By: _________________________________________

                        Address:       _________________________________________
                                       _________________________________________

                                   THE SCRIPPS RESEARCH INSTITUTE

                                   By: _________________________________________

                        Address:       _________________________________________
                                       _________________________________________

                                    EXHIBIT G

            INVESTOR AGREEMENT dated as of ___________, 1998 between the
            undersigned (the "Securityholder") and Discovery Laboratories, Inc.
            ("Discovery")

                                    Recitals

            Discovery, ATI Acquisition Corp. ("Sub") and Acute Therapeutics,
Inc. ("ATI") have entered into an Agreement and Plan of Merger dated as of March
5, 1998 (the "Merger Agreement") pursuant to which Sub will merge with and into
ATI (the "Merger") on the terms and conditions specified therein. As a result of
the Merger, the Securityholder will receive shares of the Common Stock, par
value $0.001 per share, of Discovery (the "Discovery Stock"), which Discovery
Stock will be received in exchange for shares of the Common Stock, par value
$0.001 per share, of ATI, or upon exercise of options exercisable prior to the
Merger for such shares, owned by the Securityholder. The Securityholder is
entering into this Agreement with Discovery as a material inducement for
Discovery to enter into the Merger Agreement, and the Securityholder understands
that Discovery will rely upon this Agreement in entering into the Merger
Agreement and in consummating the transactions contemplated thereby.

SECTION 1. Representations and Warranties of the Securityholder. The
Securityholder hereby represents and warrants to Discovery and covenants with
Discovery as follows:

            a. The Securityholder has received and carefully reviewed a copy of
            the [consent solicitation document distributed to ATI
            securityholders] in connection with the Merger Agreement (the
            "Disclosure Statement") and Discovery's Annual Report on Form 10-KSB
            for the year ended December 31, 1997 (including without limitation
            the section thereof entitled "Important Considerations Regarding
            Forward-Looking Statements"), has been afforded the opportunity to
            ask questions of and receive answers from duly authorized officers
            or other representatives of Discovery concerning the terms and
            conditions of the transactions contemplated by the Merger Agreement
            (the "Merger") and has received any additional information regarding
            Discovery which the Securityholder has requested.

            b. The Securityholder's consent to the Merger was not obtained by
            means of any form of general solicitation or general advertising,
            and in connection therewith the Securityholder did not: (A) 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 (B) attend any seminar meeting or industry investor
            conference whose attendees were invited by any general solicitation
            or general advertising.

            c. The Securityholder is an accredited investor within the meaning
            of Rule 501 under the Securities Act of 1933, as amended (the
            "Securities Act"), and the Securityholder, if an entity, was not
            formed for the purpose of receiving the Discovery Stock. The
            Securityholder, either by reason of the Securityholder's business or
            financial experience or the business or financial experience of the
            Securityholder's purchaser representative (within the meaning of
            Rule 501 under the Securities Act ), which purchaser representative,
            if any, is unaffiliated with and is not compensated by Discovery or
            any affiliate of Discovery, directly or indirectly, has the capacity
            to protect the Securityholder's interests in connection with the
            Merger.

            d. The Securityholder recognizes that the acquisition of the
            securities to be distributed to the Securityholder in the Merger
            (the "Shares") by virtue of the Securityholder's consent to the
            Merger involves a high degree of risk in that (i) an investment in
            Discovery is highly speculative and (ii) the Securityholder could
            sustain the loss of the Securityholder's entire investment.

            e. The Securityholder hereby acknowledges that the issuance of the
            Discovery Stock to the Securityholder has not been registered under
            the Securities Act and is intended to be exempt from the
            registration requirements of Section 5 of the Securities Act
            pursuant to Sections 4(2) of the Securities Act and Regulation D
            promulgated thereunder. The Securityholder agrees that the
            Securityholder will not sell or otherwise transfer the Discovery
            Stock received by the Securityholder unless (i) such sale or
            transfer is registered under the Securities Act or (ii) in the
            opinion of counsel reasonably acceptable to Discovery, such sale or
            transfer is otherwise exempt from registration under the Securities
            Act.

            f. The Securityholder understands that Discovery is under no
            obligation to register the sale or other transfer of the Discovery
            Stock under the Securities Act or, except as provided in Section 3
            below, to take any other action necessary in order to make
            compliance with an exemption from such registration available.

SECTION 2. Securities Act Legends; Stop Transfer Instructions. The
Securityholder agrees that each certificate representing the Shares shall bear a
legend substantially similar to the following:

      THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
      UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES
      LAWS, AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED
      ABSENT SUCH REGISTRATION UNLESS EVIDENCE SATISFACTORY TO COUNSEL FOR THE
      COMPANY THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE HAS BEEN
      DELIVERED TO THE COMPANY.

and that such certificates may also have such additional legends, if any, as may
be required in order to comply with the "blue sky" laws of any jurisdiction. The
Securityholder further agrees to the issuance by Discovery to its transfer agent
of stop transfer instructions with respect to any sale or other transfer of the
Discovery Stock by the Securityholder absent registration under the Securities
Act or the establishment by the Securityholder of an exemption therefrom in
accordance with this Agreement.

            3. Rule 144 Undertaking. For so long as and to the extent necessary
to permit the Securityholder to sell the Discovery Stock pursuant to Rule 144
under the Securities Act, Discovery shall use reasonable efforts to file, on a
timely basis, all reports and data required to be filed with the Securities and
Exchange commission by Discovery pursuant to Section 13 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Discovery has filed all
repots required to be so filed by it during the preceding 12 months.

            4. Miscellaneous. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. This Agreement
constitutes the entire agreement among the parties hereto with respect to its

subject matter and supersedes all prior agreements, whether written or oral,
with respect to the subject matter hereof. This Agreement shall be governed by
and construed in accordance with the laws of the State of New York (without
regard to conflicts of law principles). All representations and warranties made
herein by the Securityholder shall survive the execution and delivery of this
Agreement.

                                       SECURITYHOLDER:

                                       _________________________________________
                                       Name:

                                          DISCOVERY LABORATORIES, INC.

                                    By _________________________________________
                                       Name:
                                      Title:

                                    EXHIBIT H

                                [FORM OF LOCK-UP]

                                                               ___________, 1998

Discovery Laboratories, Inc.
509 Madison Avenue, 14th Floor
New York, New York  10022

Ladies and Gentlemen:

      This letter agreement is in connection with the Agreement and Plan of
Merger dated as of March 5, 1998 (the "Merger Agreement") by and among Discovery
Laboratories, Inc., a Delaware corporation (the "Company"), ATI Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of the Company
("Acquisition Sub"), and Acute Therapeutics, Inc., a Delaware corporation
("Acute") pursuant to which, subject to the terms and conditions of the Merger
Agreement, the undersigned may receive securities of the Company (the "Merger
Securities").

      In consideration of the foregoing and in order to induce you to consummate
the merger of Acquisition Sub with and into Acute pursuant to the Merger
Agreement (the "Merger"), the undersigned hereby irrevocably agrees that it will
not on or before November 25, 1998, directly or indirectly, sell, offer,
contract to sell, transfer the economic risk of ownership in, make any short
sale, pledge or otherwise dispose of any shares of the Company's Common Stock,
or any securities convertible into or exchangeable or exercisable for or any
other rights to purchase or acquire the Company's Common Stock, in each case
which are attributable to the Merger Securities, without the prior written
consent of the Company.

      Notwithstanding the foregoing, if the undersigned is an individual, he or
she may transfer any shares of Common Stock or securities convertible into or
exchangeable or exercisable for the Company's Common Stock, in each case which
are attributable to the Merger Securities, either during his or her lifetime or
on death by will or intestacy to his or her immediate family or to a trust the
beneficiaries of which are exclusively the undersigned and/or a member or
members of his or her immediate family; provided, however, that prior to any
such transfer each transferee shall execute an agreement, satisfactory to the
Company, pursuant to which each transferee shall agree to receive and hold such
shares of Common Stock, or securities convertible into or exchangeable or
exercisable for the Common Stock, subject to the provisions hereof, and there
shall be no further transfer except in accordance with the provisions hereof.
For the purposes of this paragraph, "immediate family" shall mean lineal
descendant, father, mother, brother or sister of the transferor.

      The undersigned understands that the agreements of the undersigned are
irrevocable and shall be binding upon the undersigned's heirs, legal
representatives, successors and assigns. The undersigned agrees and consents to
the entry of stop transfer instructions with the Company's transfer agent
against the transfer of the Company's Common Stock or other securities of the
Company received by the undersigned pursuant to the Merger Agreement except in
compliance with this agreement and further agrees that any stock certificates of
the Company, and any other document evidencing ownership of securities of the
Company, issued to the undersigned 

pursuant to the Merger Agreement shall bear restrictive legends prohibiting
transfers except in accordance with the terms of this letter.

      This agreement shall be governed by and construed in accordance with the
laws of the State of Delaware as applied to agreements entered into and
performed by Delaware residents and entirely to be performed within Delaware.

                                          Very truly yours,

Dated: _______________                    __________________________
                                          Signature

                                          __________________________
                                          Printed Name and Title

                                                                         Annex B

                                                                      EXHIBIT I
                                                                    [to Annex A]
                           DISCOVERY LABORATORIES, INC
                            1998 STOCK INCENTIVE PLAN

                                   ARTICLE ONE

                               GENERAL PROVISIONS

      I. PURPOSE OF THE PLAN

            This 1998 Stock Incentive Plan (the "Plan") is intended to promote
the interests of Discovery Laboratories, Inc., a Delaware corporation, by
providing eligible persons with the opportunity to acquire a proprietary
interest, or otherwise increase their proprietary interest, in the Corporation
as an incentive for them to remain in the service of the Corporation.

            The Plan shall serve as the successor to the Corporation's 1995
Stock Option Plan ( the "Predecessor Plan"), and no further option grants shall
be made under the Predecessor Plan after the date on which the Plan is approved
by the Corporation's stockholders (the "Stockholder Approval Date"). All options
outstanding under the Predecessor Plan on the Stockholder Approval Date shall be
incorporated into the Plan at that time and shall be treated as outstanding
options under the Plan. However, each outstanding option so incorporated shall
continue to be governed solely by the terms of the documents evidencing such
option, and no provision of the Plan shall be deemed to affect or otherwise
modify the rights or obligations of the holders of such incorporated options
with respect to their acquisition of shares of Common Stock.

            Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.

      II. STRUCTURE OF THE PLAN

            A. The Plan shall be divided into three separate equity programs:

                  (i) the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock,

                  (ii) the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of Common
Stock directly, either through the immediate purchase of such shares or as a
bonus for services rendered the Corporation (or any Parent or Subsidiary), and

                  (iii) the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive option grants at periodic
intervals to purchase shares of Common Stock.

            B. The provisions of Articles One and Five shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.

      III. ADMINISTRATION OF THE PLAN

            A. The Primary Committee shall have sole and exclusive authority to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to Section 16 Insiders. Administration of the Discretionary Option Grant
and Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in the
Primary Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons. The members of the
Secondary Committee may be Board members who are Employees eligible to receive
discretionary option grants or direct stock issuances under the Plan or any
other stock option, stock appreciation, stock bonus or other stock plan of the
Corporation (or any Parent or Subsidiary).

            B. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.

            C. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.

            D. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.

      IV. ELIGIBILITY

            A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:

                  (i) Employees,

                  (ii) non-employee members of the Board or the board of
      directors of any Parent or Subsidiary, and

                  (iii) consultants and other independent advisors who provide
      services to the Corporation (or any Parent or Subsidiary).

            B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time or times
when such option grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an Incentive Option
or a Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive stock issuances, the time or times when such issuances
are to be made, the number of shares to be issued to each Participant, the
vesting schedule (if any) applicable to the issued shares and the consideration
for such shares.

            C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.

            D. Only non-employee members of the Board [who are not 10%
Stockholders] shall be eligible to participate in the Automatic Option Grant
Program.

      V. STOCK SUBJECT TO THE PLAN

            A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed 
[         ] shares. Such authorized share reserve is comprised of (i) the number
of shares which remain available for issuance, as of the Stockholder Approval
Date, under the Predecessor Plan as last approved by the Corporation's
stockholders, comprised of the shares subject to the outstanding options to be
incorporated into the Plan as of the Stockholder Approval Date and the
additional shares which would otherwise be available for future grant under the
Predecessor Plan (estimated to be 395,800 shares in the aggregate as of March 1,
1998), plus (ii) an additional increase of [            ] shares authorized by 
the Board on [         ], 1998, subject to approval by the Corporation's 
stockholders at the 1998 Annual Meeting.

            B. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than [250,000] shares of Common Stock in the aggregate per calendar year,
beginning with the 1998 calendar year.

            C. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plan) shall be
available for subsequent issuance under the Plan to the extent those options
expire or terminate for any reason prior to exercise in full. Unvested shares
issued under the Plan and subsequently cancelled or repurchased by the
Corporation, at the original issue price paid per share, pursuant to the
Corporation's repurchase 

rights under the Plan shall be added back to the number of shares of Common
Stock reserved for issuance under the Plan and shall accordingly be available
for reissuance through one or more subsequent option grants or direct stock
issuances under the Plan. However, should the exercise price of an option under
the Plan be paid with shares of Common Stock or should shares of Common Stock
otherwise issuable under the Plan be withheld by the Corporation in satisfaction
of the withholding taxes incurred in connection with the exercise of an option
or the vesting of a stock issuance under the Plan, then the number of shares of
Common Stock available for issuance under the Plan shall be reduced by the gross
number of shares for which the option is exercised or which vest under the stock
issuance, and not by the net number of shares of Common Stock issued to the
holder of such option or stock issuance.

            D. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities for which any one person may be
granted stock options, separately exercisable stock appreciation rights and
direct stock issuances under this Plan per calendar year, (iii) the number
and/or class of securities for which grants are subsequently to be made under
the Automatic Option Grant Program to new and continuing non-employee Board
members, (iv) the number and/or class of securities and the exercise price per
share in effect under each outstanding option under the Plan and (v) the number
and/or class of securities and price per share in effect under each outstanding
option incorporated into this Plan from the Predecessor Plan. Such adjustments
to the outstanding options are to be effected in a manner which shall preclude
the enlargement or dilution of rights and benefits under such options. The
adjustments determined by the Plan Administrator shall be final, binding and
conclusive.

                                   ARTICLE TWO

                       DISCRETIONARY OPTION GRANT PROGRAM

      I. OPTION TERMS

            Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.

            A. Exercise Price.

                  1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the option grant date.

                  2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Five and the documents evidencing the option, be payable in one or more
of the forms specified below:

                        (i) cash or check made payable to the Corporation,

                        (ii) shares of Common Stock held for the requisite
      period necessary to avoid a charge to the Corporation's earnings for
      financial reporting purposes and valued at Fair Market Value on the
      Exercise Date, or

                        (iii) to the extent the option is exercised for vested
      shares, through a special sale and remittance procedure pursuant to which
      the Optionee shall concurrently provide irrevocable written instructions
      to (a) a Corporation-designated brokerage firm to effect the immediate
      sale of the purchased shares and remit to the Corporation, out of the sale
      proceeds available on the settlement date, sufficient funds to cover the
      aggregate exercise price payable for the purchased shares plus all
      applicable Federal, state and local income and employment taxes required
      to be withheld by the Corporation by reason of such exercise and (b) the
      Corporation to deliver the certificates for the purchased shares directly
      to such brokerage firm in order to complete the sale.

            Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.

            B. Exercise and Term of Options. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.

            C. Effect of Termination of Service.

                  1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:

                        (i) Should the Optionee cease to remain in Service for
      any reason other than death, Disability or Misconduct, then the Optionee
      shall have a period of three (3) months following the date of such
      cessation of Service during which to exercise each outstanding option held
      by such Optionee.

                        (ii) Should the Optionee's Service terminate by reason
      of Disability, then the Optionee shall have a period of twelve (12) months
      following the date of such cessation of Service during which to exercise
      each outstanding option held by such Optionee.

                        (iii) If the Optionee dies while holding an outstanding
      option, then the personal representative of his or her estate or the
      person or persons to whom the option is transferred pursuant to the
      Optionee's will or the laws of inheritance shall have a twelve (12)-month
      period following the date of the Optionee's death to exercise such option.

                        (iv) Under no circumstances, however, shall any such
      option be exercisable after the specified expiration of the option term.

                        (v) During the applicable post-Service exercise period,
      the option may not be exercised in the aggregate for more than the number
      of vested shares for which the option is exercisable on the date of the
      Optionee's cessation of Service plus any additional Option Shares for
      which vesting is, pursuant to the terms of the applicable option
      agreement, to accelerate at the time of such cessation of Service. Upon
      the expiration of the applicable exercise period or (if earlier) upon the
      expiration of the option term, the option shall terminate and cease to be
      outstanding for any vested shares for which the option has not been
      exercised. However, the option shall, immediately upon the Optionee's
      cessation of Service, terminate and cease to be outstanding with respect
      to any and all option shares for which the option is not otherwise at the
      time exercisable or in which the Optionee is not otherwise at that time
      vested (after taking into account any vesting acceleration provisions tied
      to the Optionee's cessation of Service).

                        (vi) Should the Optionee's Service be terminated for
      Misconduct, then all outstanding options held by the Optionee shall
      terminate immediately and cease to remain outstanding.

                  2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding, to:

                        (i) extend the period of time for which the option is to
      remain exercisable following the Optionee's cessation of Service from the
      limited exercise period otherwise in effect for that option to such
      greater period of time as the Plan Administrator shall deem appropriate,
      but in no event beyond the expiration of the option term, and/or

                        (ii) permit the option to be exercised, during the
      applicable post-Service exercise period, not only with respect to the
      number of vested shares of Common Stock for which such option is
      exercisable at the time of the Optionee's cessation of Service but also
      with respect to one or more additional installments in which the Optionee
      would have vested had the Optionee continued in Service.

            D. Stockholder Rights. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.

            E. Repurchase Rights. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.

            F. Limited Transferability of Options. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. However, a Non-Statutory Option
may, in connection with the Optionee's estate plan, be assigned in whole or in
part during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for one or more such
family members. The assigned portion may only be exercised by the person or
persons who acquire a proprietary interest in the option pursuant to the
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for the option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Plan Administrator may
deem appropriate.

      II. INCENTIVE OPTIONS

            The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Five shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall not be subject to the terms of this Section II.

            A. Eligibility. Incentive Options may only be granted to Employees.

            B. Dollar Limitation. The aggregate Fair Market Value of the shares
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.

            C. 10% Stockholder. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.

      III. CORPORATE TRANSACTION/CHANGE IN CONTROL

            A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable with respect to the total number of shares of Common Stock at
the time subject to such option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, an outstanding option
shall not so accelerate if and to the extent: (i) such option is, in connection
with the Corporate Transaction, either to be assumed by the successor
corporation (or parent thereof) or to be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation (or parent
thereof), (ii) such option is to be replaced with a cash incentive program of
the successor corporation which preserves the spread existing on the unvested
option shares at the time of the Corporate Transaction and provides for
subsequent payout in accordance with the same vesting schedule applicable to
those option shares or (iii) the acceleration of such option is subject to other
limitations imposed by the Plan Administrator at the time of the option grant.
The determination of option comparability under clause (i) above shall be made
by the Plan Administrator, and its determination shall be final, binding and
conclusive.

            B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Corporate Transaction,
except to the extent: (i) those repurchase rights are to be assigned to the
successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.

            C. The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding options upon the occurrence of a Corporate Transaction, whether or
not those options are to be assumed or replaced in the Corporate Transaction.

            D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments to reflect such Corporate Transaction shall also be made
to (i) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
the same, (ii) the maximum number and/or class of securities available for
issuance over the remaining term of the Plan and (iii) the maximum number and/or
class of securities for which any one person may be granted stock options,
separately exercisable stock appreciation rights and direct stock issuances
under the Plan per calendar year.

            E. Notwithstanding Section III.A. of this Article Two, the Plan
Administrator shall have the discretionary authority, exercisable either at the
time the option is granted or at any time while the option remains outstanding,
to provide for the automatic acceleration of one or more outstanding options
under the Discretionary Option Grant Program upon the occurrence of a Corporate
Transaction, whether or not those options are to be assumed or replaced in the
Corporate Transaction. In addition, the Plan Administrator may provide that one
or more of the Corporation's outstanding repurchase rights with respect to
shares held by the Optionee at the time of such Corporate Transaction shall
immediately terminate, and the shares subject to those terminated repurchase
rights shall accordingly vest in full, even in the event the options are to be
assumed.

            F. The Plan Administrator shall have full power and authority
exercisable, either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration of one or
more outstanding options under the Discretionary Option Grant Program in the
event the Optionee's Service terminates by reason of an Involuntary Termination
within a designated period (not to exceed eighteen (18) months) following the
effective date of any Corporate Transaction in which those options are assumed
or replaced and do not otherwise accelerate. Any options so accelerated shall
remain exercisable for fully-vested shares until the earlier of (i) the
expiration of the option term or (ii) the expiration of the one (1)-year period
measured from the effective date of the Involuntary Termination. In addition,
the Plan Administrator may provide that one or more of the Corporation's
outstanding repurchase rights with respect to shares held by the Optionee at the
time of such Involuntary Termination shall immediately terminate, and the shares
subject to those terminated repurchase rights shall accordingly vest in full.

            G. The Plan Administrator shall have full power and authority,
exercisable either at the time the option is granted or at any time while the
option remains outstanding, to provide for the automatic acceleration of one or
more outstanding options under the Discretionary Option Grant Program upon (i) a
Change in Control or (ii) the termination of the Optionee's Service by reason of
an Involuntary Termination within a designated period (not to exceed eighteen
(18) months) following the effective date of such Change in Control. Each option
so accelerated shall remain exercisable for fully-vested shares until the
earlier of (i) the expiration of the option term or (ii) the expiration of the
one (1)-year period measured from the effective date of the Optionee's cessation
of Service. In addition, the Plan Administrator may provide that one or more of
the Corporation's outstanding repurchase rights with respect to shares held by
the Optionee at the time 

of such Change in Control or Involuntary Termination shall immediately
terminate, and the shares subject to those terminated repurchase rights shall
accordingly vest in full.

            H. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
limitation is not exceeded. To the extent such dollar limitation is exceeded,
the accelerated portion of such option shall be exercisable as a Non-Statutory
Option under the Federal tax laws.

            I. The outstanding options shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.

      IV. CANCELLATION AND REGRANT OF OPTIONS

            The Plan Administrator shall have the authority to effect, at any
time and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program (including outstanding options incorporated from the Predecessor
Plan) and to grant in substitution therefor new options covering the same or
different number of shares of Common Stock but with an exercise price per share
based on the Fair Market Value per share of Common Stock on the new grant date.

      V. STOCK APPRECIATION RIGHTS

            A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.

            B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:

                        (i) One or more Optionees may be granted the right,
      exercisable upon such terms as the Plan Administrator may establish, to
      elect between the exercise of the underlying option for shares of Common
      Stock and the surrender of that option in exchange for a distribution from
      the Corporation in an amount equal to the excess of (a) the Fair Market
      Value (on the option surrender date) of the number of shares in which the
      Optionee is at the time vested under the surrendered option (or
      surrendered portion thereof) over (b) the aggregate exercise price payable
      for such shares.

                        (ii) No such option surrender shall be effective unless
      it is approved by the Plan Administrator, either at the time of the actual
      option surrender or at any earlier time. If the surrender is so approved,
      then the distribution to which the Optionee shall be entitled may be made
      in shares of Common Stock valued at Fair Market Value on the option
      surrender date, in cash, or partly in shares and partly in cash, as the
      Plan Administrator shall in its sole discretion deem appropriate.

                        (iii) If the surrender of an option is not approved by
      the Plan Administrator, then the Optionee shall retain whatever rights the
      Optionee had under the surrendered option (or surrendered portion thereof)
      on the option surrender date and may exercise such rights at any time
      prior to the later of (a) five (5) business days after the receipt of the
      rejection notice or (b) the last day on which the option is otherwise
      exercisable in accordance with the terms of the documents evidencing such
      option, but in no event may such rights be exercised more than ten (10)
      years after the option grant date.

            C. The following terms shall govern the grant and exercise of
limited stock appreciation rights:

                        (i) One or more Section 16 Insiders may be granted
      limited stock appreciation rights with respect to their outstanding
      options.

                        (ii) Upon the occurrence of a Hostile Take-Over, each
      individual holding one or more options with such a limited stock
      appreciation right shall have the unconditional right (exercisable for a
      thirty (30)-day period following such Hostile Take-Over) to surrender each
      such option to the Corporation, to the extent the option is at the time
      exercisable for vested shares of Common Stock. In return for the
      surrendered option, the Optionee shall receive a cash distribution from
      the Corporation in an amount equal to the excess of (A) the Take-Over
      Price of the shares of Common Stock which are at the time vested under
      each surrendered option (or surrendered portion thereof) over (B) the
      aggregate exercise price payable for such shares. Such cash distribution
      shall be paid within five (5) days following the option surrender date.

                        (iii) Neither the approval of the Plan Administrator nor
      the consent of the Board shall be required in connection with such option
      surrender and cash distribution.

                        (iv) The balance of the option (if any) shall remain
      outstanding and exercisable in accordance with the documents evidencing
      such option.

                                  ARTICLE THREE

                             STOCK ISSUANCE PROGRAM

      I. STOCK ISSUANCE TERMS

            Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.

            A. Purchase Price.

                  1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Common Stock on the issuance date.

                  2. Subject to the provisions of Section I of Article Five,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:

                        (i) cash or check made payable to the Corporation, or

                        (ii) past services rendered to the Corporation (or any
      Parent or Subsidiary).

            B. Vesting Provisions.

                  1. Shares of Common Stock issued under the Stock Issuance
Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives.

                  2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

                  3. The Participant shall have full stockholder rights with
respect to any shares of Common Stock issued to the Participant under the Stock
Issuance Program, whether or not the Participant's interest in those shares is
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.

                  4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock issued under the Stock
Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Common Stock, then those shares
shall be immediately surrendered to the Corporation for cancellation, and the
Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to the surrendered shares.

                  5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Common Stock which
would otherwise occur upon the cessation of the Participant's Service or the
non-attainment of the performance objectives applicable to those shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares as to which the waiver applies. Such waiver may be effected at any
time, whether before or after the Participant's cessation of Service or the
attainment or non-attainment of the applicable performance objectives.

      II. CORPORATE TRANSACTION/CHANGE IN CONTROL

            A. All of the Corporation's outstanding repurchase rights under the
Stock Issuance Program shall terminate automatically, and all the shares of
Common Stock subject to those terminated rights shall immediately vest in full,
in the event of any Corporate Transaction, except to the extent (i) those
repurchase rights are to be assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed in the Stock Issuance
Agreement.

            B. The Plan Administrator shall have the discretion, exercisable
either at the time the unvested shares are issued or at any time while the
Corporation's repurchase right remains outstanding, to provide for the automatic
termination of one or more of those outstanding rights and the immediate vesting
of the shares of Common Stock subject to such rights upon the occurrence of a
Corporate Transaction.

            C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall automatically terminate in whole or
in part, and the shares of Common Stock subject to those terminated rights shall
immediately vest, in the event the Participant's Service should terminate by
reason of an Involuntary Termination within a designated period (not to exceed
eighteen (18) months) following the effective date of any Corporate Transaction
in which those repurchase rights are assigned to the successor corporation (or
parent thereof).

            D. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights remain outstanding under the Stock Issuance
Program, to provide that those rights shall 

automatically terminate in whole or in part, and the shares of Common Stock
subject to those terminated rights shall immediately vest upon (i) a Change in
Control or (ii) the termination of the Participant's Service by reason of an
Involuntary Termination within a designated period (not to exceed eighteen (18)
months) following the effective date of such Change in Control.

      III. SHARE ESCROW/LEGENDS

            Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.

                                  ARTICLE FOUR

                         AUTOMATIC OPTION GRANT PROGRAM

      I. OPTION TERMS

            A. Grant Dates. Option grants shall be made on the dates specified
below:

                  1. Each individual who is first elected or appointed as a
non-employee Board member at any time after the Plan Effective Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase 20,000 shares of Common Stock, provided that
individual has not previously been a director of or in the employ of the
Corporation or any Parent or Subsidiary .

                  2. On the date of the 1998 Annual Meeting (the Stockholder
Approval Date) and on the date of each Annual Stockholders Meeting held after
such date, each individual who is to continue to serve as an Eligible Director,
whether or not that individual is standing for re-election to the Board at that
particular Annual Meeting, shall automatically be granted a Non-Statutory Option
to purchase 10,000 shares of Common Stock, provided that with respect to each
Annual Stockholders Meetings held after the 1998 Annual Meeting, such individual
has served as a non-employee Board member for at least six (6) months. There
shall be no limit on the number of such 10,000-share option grants any one
Eligible Director may receive over his or her period of Board service, and
non-employee Board members who have previously been in the employ of the
Corporation (or any Parent or Subsidiary) shall be eligible to receive one or
more such annual option grants over their period of continued Board service.

            B. Exercise Price.

                  1. The exercise price per share shall be equal to sixty 
percent (60%) of the Fair Market Value per share of Common Stock on the option
grant date.

                  2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.

            C. Option Term. Each option shall have a term of ten (10) years
measured from the option grant date.

            D. Exercise and Vesting of Options. Each option shall be immediately
exercisable for any or all of the option shares. However, any shares purchased
under the option shall be subject to repurchase by the Corporation, at the
exercise price paid per share, upon the Optionee's cessation of Board service
prior to vesting in those shares. Each option grant shall vest, and the
Corporation's repurchase right shall lapse, in a series of four (4) successive
equal annual installments upon the Optionee's completion of each year of Board
service over the four (4)-year 

period commencing six (6) months following the option grant date, with the first
such installment to vest eighteen (18) month after the option grant date.

            E. Termination of Board Service. The following provisions shall
govern the exercise of any options held by the Optionee at the time the Optionee
ceases to serve as a Board member:

                        (i) The Optionee (or, in the event of the Optionee's
      death, the personal representative of the Optionee's estate or the person
      or persons to whom the option is transferred pursuant to the Optionee's
      will or in accordance with the laws of descent and distribution) shall
      have a twelve (12)-month period following the date of such cessation of
      Board service in which to exercise each such option.

                        (ii) During the twelve (12)-month post-service exercise
      period, the option may not be exercised in the aggregate for more than the
      number of vested shares of Common Stock for which the option is
      exercisable at the time of the Optionee's cessation of Board service.

                        (iii) Should the Optionee cease to serve as a Board
      member by reason of death or Permanent Disability, then all shares at the
      time subject to the option shall immediately vest so that such option may,
      during the twelve (12)-month exercise period following such cessation of
      Board service, be exercised for all or any portion of those shares as
      fully-vested shares of Common Stock.

                        (iv) In no event shall the option remain exercisable
      after the expiration of the option term. Upon the expiration of the twelve
      (12)-month post-service exercise period or (if earlier) upon the
      expiration of the option term, the option shall terminate and cease to be
      outstanding for any vested shares for which the option has not been
      exercised. However, the option shall, immediately upon the Optionee's
      cessation of Board service for any reason other than death or Permanent
      Disability, terminate and cease to be outstanding to the extent the option
      is not otherwise at that time exercisable for vested shares.

      II. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER

            A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for all or any portion of those shares as
fully-vested shares of Common Stock. Immediately following the consummation of
the Corporate Transaction, each automatic option grant shall terminate and cease
to be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

            B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Change in Control, become fully exercisable
for all of the shares of Common Stock at the time subject to such option and may
be exercised for all or any portion of those shares as fully-vested shares of
Common Stock. Each such option shall remain exercisable for such fully-vested
option shares until the expiration or sooner termination of the option term or
the surrender of the option in connection with a Hostile Take-Over.

            C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding automatic option grants. The Optionee shall in return be
entitled to a cash distribution from the Corporation in an amount equal to the
excess of (i) the Take-Over Price of the shares of Common Stock at the time
subject to each surrendered option (whether or not the Optionee is otherwise at
the time vested in those shares) over (ii) the aggregate exercise price payable
for such shares. Such cash distribution shall be paid within five (5) days
following the surrender of the option to the Corporation. No approval or consent
of the Board or any Plan Administrator shall be required in connection with such
option surrender and cash distribution.

            D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.

            E. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.

      III. REMAINING TERMS

            The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.

                                  ARTICLE FIVE

                                  MISCELLANEOUS

      I. FINANCING

            The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.

      II. TAX WITHHOLDING

            A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.

            B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant Program) with the right to use shares of Common Stock in
satisfaction of all or part of the Taxes incurred by such holders in connection
with the exercise of their options or the vesting of their shares. Such right
may be provided to any such holder in either or both of the following formats:

                  Stock Withholding: The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.

                  Stock Delivery: The election to deliver to the Corporation, at
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.

      III. EFFECTIVE DATE AND TERM OF THE PLAN

            A. The Plan shall become effective immediately upon the Plan
Effective Date. Options may be granted under the Discretionary Option Grant or
Automatic Option Grant Program at any time on or after the Plan Effective Date.
However, no options granted under the Plan may be exercised, and no shares shall
be issued under the Plan, until the Stockholder Approval Date. If the
Stockholder Approval Date does not occur within twelve (12) months after the
Plan Effective Date, then all options previously granted under this Plan shall
terminate and cease to be outstanding, and no further options shall be granted
and no shares shall be issued under the Plan.

            B. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Corporate Transactions and Changes in Control, may, in the Plan
Administrator's discretion, be extended to one or more options incorporated from
the Predecessor Plan on the Stockholder Approval Date which do not otherwise
contain such provisions.

            C. The Plan shall terminate upon the earliest of (i) March 24,
2008 (ii) the date on which all shares available for issuance under the Plan
shall have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. Upon such plan
termination, all outstanding option grants and unvested stock issuances shall
thereafter continue to have force and effect in accordance with the provisions
of the documents evidencing such grants or issuances.

      IV. AMENDMENT OF THE PLAN

            A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.

            B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant Programs and shares of Common Stock may be issued
under the Stock Issuance Program that are in each instance in excess of the
number of shares then available for issuance under the Plan, provided any excess
shares actually issued under those programs shall be held in escrow until there
is obtained stockholder approval of an amendment sufficiently increasing the
number of shares of Common Stock available for issuance under the Plan. If such
stockholder approval is not obtained within twelve (12) months after the date
the first such excess issuances are made, then (i) any unexercised options
granted on the basis of such excess shares shall terminate and cease to be
outstanding and (ii) the Corporation shall promptly refund to the Optionees and
the Participants the exercise or purchase price paid for any excess shares
issued under the Plan and held in escrow, together with interest (at the
applicable Short Term Federal Rate) for the period the shares were held in
escrow, and such shares shall thereupon be automatically cancelled and cease to
be outstanding.

      V. USE OF PROCEEDS

            Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.

      VI. REGULATORY APPROVALS

            A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.

            B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.

      VII. NO EMPLOYMENT/SERVICE RIGHTS

            Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.

                                    APPENDIX

            The following definitions shall be in effect under the Plan:

      A. Automatic Option Grant Program shall mean the automatic option grant
program in effect under the Plan.

      B. Board shall mean the Corporation's Board of Directors.

      C. Change in Control shall mean a change in ownership or control of the
Corporation effected through either of the following transactions:

                  (i) the acquisition, directly or indirectly by any person or
      related group of persons (other than the Corporation or a person that
      directly or indirectly controls, is controlled by, or is under common
      control with, the Corporation), of beneficial ownership (within the
      meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than
      fifty percent (50%) of the total combined voting power of the
      Corporation's outstanding securities pursuant to a tender or exchange
      offer made directly to the Corporation's stockholders which the Board does
      not recommend such stockholders to accept, or

                  (ii) a change in the composition of the Board over a period of
      thirty-six (36) consecutive months or less such that a majority of the
      Board members ceases, by reason of one or more contested elections for
      Board membership, to be comprised of individuals who either (A) have been
      Board members continuously since the beginning of such period or (B) have
      been elected or nominated for election as Board members during such period
      by at least a majority of the Board members described in clause (A) who
      were still in office at the time the Board approved such election or
      nomination.

      D. Code shall mean the Internal Revenue Code of 1986, as amended.

      E. Common Stock shall mean the Corporation's common stock.

      F. Corporate Transaction shall mean either of the following
stockholder-approved transactions to which the Corporation is a party:

                  (i) a merger or consolidation in which securities possessing
      more than fifty percent (50%) of the total combined voting power of the
      Corporation's outstanding securities are transferred to a person or
      persons different from the persons holding those securities immediately
      prior to such transaction, or

                                      A-1.

                  (ii) the sale, transfer or other disposition of all or
      substantially all of the Corporation's assets in complete liquidation or
      dissolution of the Corporation.

      G. Corporation shall mean Discovery Laboratories, Inc., a Delaware
corporation, and its successors.

      H. Discretionary Option Grant Program shall mean the discretionary option
grant program in effect under the Plan.

      I. Eligible Director shall mean a non-employee Board member who is not a
10% Stockholder.

      J. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.

      K. Exercise Date shall mean the date on which the Corporation shall have
received written notice of the option exercise.

      L. Fair Market Value per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:

                  (i) If the Common Stock is at the time traded on the Nasdaq
      SmallCap Market or Nasdaq National Market, then the Fair Market Value
      shall be deemed equal to the closing selling price per share of Common
      Stock on the date in question, as such price is reported on such market or
      any successor system. If there is no closing selling price for the Common
      Stock on the date in question, then the Fair Market Value shall be the
      closing selling price on the last preceding date for which such quotation
      exists.

                  (ii) If the Common Stock is at the time listed on any Stock
      Exchange, then the Fair Market Value shall be deemed equal to the closing
      selling price per share of Common Stock on the date in question on the
      Stock Exchange determined by the Plan Administrator to be the primary
      market for the Common Stock, as such price is officially quoted in the
      composite tape of transactions on such exchange. If there is no closing
      selling price for the Common Stock on the date in question, then the Fair
      Market Value shall be the closing selling price on the last preceding date
      for which such quotation exists.

      M. Hostile Take-Over shall mean the acquisition, directly or indirectly,
by any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities 

                                      A-2.

pursuant to a tender or exchange offer made directly to the Corporation's
stockholders which the Board does not recommend such stockholders to accept.

      N. Incentive Option shall mean an option which satisfies the requirements
of Code Section 422.

      O. Involuntary Termination shall mean the termination of the Service of
any individual which occurs by reason of:

                  (i) such individual's involuntary dismissal or discharge by
      the Corporation for reasons other than Misconduct, or

                  (ii) Optionee's voluntary resignation following (A) a change
      in Optionee's position with the Corporation (or Parent or Subsidiary
      employing Optionee) which materially reduces Optionee's duties and
      responsibilities or the level of management to which Optionee reports, (B)
      a reduction in Optionee's level of compensation (including base salary,
      fringe benefits and target bonus under any corporate performance-based
      bonus or incentive programs) by more than fifteen percent (15%) or (C) a
      relocation of Optionee's place of employment by more than fifty (50)
      miles, provided and only if such change, reduction or relocation is
      effected by the Corporation without Optionee's consent.

      P. Misconduct shall mean the commission of any act of fraud, embezzlement
or dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any other intentional misconduct by such
person adversely affecting the business or affairs of the Corporation (or any
Parent or Subsidiary) in a material manner. The foregoing definition shall not
be deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or discharge
of any Optionee, Participant or other person in the Service of the Corporation
(or any Parent or Subsidiary).

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

      R. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.

      S. Optionee shall mean any person to whom an option is granted under the
Discretionary Option Grant or Automatic Option Grant Program.

      T. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

                                      A-3.

      U. Participant shall mean any person who is issued shares of Common Stock
under the Stock Issuance Program.

      V. Permanent Disability or Permanently Disabled shall mean the inability
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more. However, solely for purposes of the Automatic Option Grant Program,
Permanent Disability or Permanently Disabled shall mean the inability of the
non-employee Board member to perform his or her usual duties as a Board member
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more.

      W. Plan shall mean the Corporation's 1998 Stock Incentive Plan, as set
forth in this document.

      X. Plan Administrator shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.

      Y. Plan Effective Date shall mean [__________________], 1998, the date on 
which the Plan was adopted by the Board.

      Z. Predecessor Plan shall mean the Corporation's 1995 Stock Option Plan in
effect immediately prior to the Plan Effective Date hereunder.

      AA. Primary Committee shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders.

      BB. Secondary Committee shall mean a committee of one (1) or more Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.

      CC. Section 16 Insider shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.

      DD. Service shall mean the performance of services for the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.

                                      A-4.

      EE. Stock Exchange shall mean either the American Stock Exchange or the
New York Stock Exchange.

      FF. Stockholder Approval Date shall mean the date on which the Plan is
approved by the Corporation's stockholders.

      GG. Stock Issuance Agreement shall mean the agreement entered into by the
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.

      HH. Stock Issuance Program shall mean the stock issuance program in effect
under the Plan.

      II. Subsidiary shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.

      JJ. Take-Over Price shall mean the greater of (i) the Fair Market Value
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.

      KK. Taxes shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.

      LL. 10% Stockholder shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).

                                      A-5.

                                                                     EXHIBIT 3.1

                      RESTATED CERTIFICATE OF INCORPORATION

                                       OF

                          DISCOVERY LABORATORIES, INC.

The Corporation was originally incorporated on November 6, 1992 under the name
"Ansan, Inc."

            FIRST: The name of the corporation (hereinafter called the
"Corporation") is Discovery Laboratories, Inc.

            SECOND: The address, including street, number, city, and county, of
the registered office of the Corporation in the State of Delaware is 1209 Orange
Street, City of Wilmington, County of New Castle; and the name of the registered
agent of the Corporation in the State of Delaware at such address is The
Corporation Trust Company.

            THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.

            FOURTH: A. Authorization.

            The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 25,000,000 consisting of 20,000,000
shares of common stock, par value $.001 per share (the "Common Stock"), and
5,000,000 shares of preferred stock, par value $.001 per share (the "Preferred
Stock").

            The Board of Directors may divide the Preferred Stock into any
number of series, fix the designation and number of shares of each such series,
and determine or change the designation, relative rights, preferences, and
limitations of any series of Preferred Stock. The Board of Directors (within the
limits and restrictions of any resolutions adopted by it originally fixing the
number of any shares of any series of Preferred Stock) may increase or decrease
the number of shares initially fixed for any series, but no such decrease shall
reduce the number below the number of shares then outstanding and shares duly
reserved for issuance.

      B. Series B Convertible Preferred Stock.

      1. Designation and Amount. There shall be a series of preferred stock
designated as "Series B Convertible Preferred Stock" and the number of shares
constituting such series shall be 2,420,282. Such series is referred to herein
as the "Series B Convertible Preferred Stock". Such number of shares may be
increased or decreased by resolution of the Board of Directors of the
Corporation; provided, however, that no decrease shall reduce the number of
shares of Series B Convertible Preferred Stock to less than the number of shares
then issued and outstanding.

      2. Dividends. Subject to the prior and superior rights of the holders of
any shares of any series or class of capital stock ranking prior and superior to
the shares of Series B Convertible Preferred Stock with respect to dividends and
distributions, the holders of shares of Series B Convertible Preferred Stock,
shall be entitled to receive dividends and distributions, when, as and if
declared by the Board of Directors out of funds legally available for such
purpose. If the Corporation declares a dividend or distribution on the Common
Stock, of the Corporation, the holders of shares of Series B Convertible
Preferred Stock shall be entitled to receive for each share of Series B
Convertible Preferred Stock a dividend or distribution in the amount of the
dividend or distribution that would be received by a holder of the Common Stock
into which such share of Series B Convertible Preferred Stock is convertible on
the record date for such dividend or distribution. If the Corporation declares a
dividend or distribution on any other class or series of preferred stock, the
holders of shares of Series B Convertible Preferred Stock shall be entitled to
receive a dividend or distribution in an amount per share in proportion to the
dividend or distribution declared on a share of such other class or series based
on the liquidation preference of a share of the Series B Convertible Preferred
Stock relative to that of a share of such other class or series, unless the
holders of at least 66.67% of the outstanding shares of Series B Convertible
Preferred Stock consent otherwise. In any such case, the Corporation shall
declare a dividend or distribution on the Series B Convertible Preferred Stock
at the same time that it declares a dividend or distribution on the Common Stock
or such other series of preferred stock and shall establish the same record date
for the dividend or distribution on the Series B Convertible Preferred Stock as
is established for such dividend or distribution on the Common Stock or such
other series of preferred stock. Each such dividend or distribution will be
payable to holders of record of the Series B Convertible Preferred Stock as they
appeared on the records of the Corporation at the close of business on the
record date declared for such dividend or distribution, as shall be fixed by the
Board of Directors. Any dividend or distribution payable to the holders of the
Series B Preferred Stock pursuant to this Article Fourth, Section B.2 shall be
paid to such holders at the same time as the dividend or distribution on the
Common Stock by which it is measured or paid. If the Corporation declares or
pays a dividend or distribution on the Series B Convertible Preferred Stock as a
result of the declaration or payment of a dividend or distribution on the Common
Stock or any other series of preferred stock as described above, the holders of
the Series B Convertible Preferred Stock shall not be entitled to any additional
dividend or distribution solely because such first dividend or distribution also
required the declaration or payment of a dividend or distribution on any other
series of preferred stock. Any reference to "dividend" or "distribution"
contained in this Article Fourth, Section B.2 shall not be deemed to include any
dividend or distribution made in connection with or in lieu of any Liquidation
Event (as defined below).

      3. Liquidation Preference. In the event of a (i) liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, (ii) a sale
or other disposition of all or substantially all of the assets of the
Corporation or (iii) any consolidation, merger, combination, reorganization or
other transaction in which the Corporation is not the surviving entity or the
shares of Common Stock constituting in excess of 50% of the voting power of the
Corporation are exchanged for or changed into other stock or securities, cash
and/or any other property (a "Merger Transaction") (subparagraphs (i),(ii) and
(iii) being collectively referred to as a "Liquidation Event"), after payment or
provision for payment of debts and other liabilities of the Corporation, the
holders of the Series B Convertible Preferred Stock then outstanding shall be

                                        2

entitled to be paid out of the assets of the Corporation available for
distribution to its shareholders, whether such assets are capital, surplus, or
earnings, before any payment or declaration and setting apart for payment of any
amount shall be made in respect of the stock junior to the Series B Convertible
Preferred Stock, an amount equal to $13.50 per share plus an amount equal to all
declared and unpaid dividends thereon; provided, however, in the case of a
Merger Transaction, such $13.50 per share may be paid in cash and/or securities
(valued at the closing price (as defined in Article Fourth, Section B.5) of such
security) of the entity surviving such Merger Transaction. If upon any
Liquidation Event, whether voluntary or involuntary, the assets to be
distributed to the holders of the Series B Convertible Preferred Stock shall be
insufficient to permit the payment to such shareholders of the full preferential
amounts aforesaid, then all of the assets of the Corporation to be distributed
shall be so distributed ratably to the holders of the Series B Convertible
Preferred Stock on the basis of the number of shares of Series B Convertible
Preferred Stock held. A consolidation or merger of the Corporation with or into
another corporation, other than in a Merger Transaction, shall not be considered
a liquidation, dissolution or winding up of the Corporation or a sale or other
disposition of all or substantially all of the assets of the Corporation and
accordingly the Corporation shall make appropriate provision to ensure that the
terms of this Article Fourth survive any such transaction. All shares of Series
B Convertible Preferred Stock shall rank as to payment upon the occurrence of
any Liquidation Event senior to the Common Stock as provided herein and, unless
the terms of such series shall provide otherwise, senior to all other series of
the Corporation's preferred stock.

      4. Conversion.

            (a) Right of Conversion. The shares of Series B Convertible
Preferred Stock shall be convertible, in whole or in part, at the option of the
holder thereof and upon notice to the Corporation as set forth in paragraph (b)
below, into fully paid and nonassessable shares of Common Stock and such other
securities and property as hereinafter provided. The shares of Series B
Convertible Preferred Stock shall be convertible initially at the rate of
1.556628 shares of Common Stock for each full share of Series B Convertible
Preferred Stock and shall be subject to adjustment as provided herein. The
initial conversion price per share of Common Stock is $6.4242 and shall be
subject to adjustment as provided herein. For purposes of this resolution, the
"conversion rate" applicable to a share of Series B Convertible Preferred Stock
shall be the number of shares of Common Stock and number or amount of any other
securities and property as hereinafter provided into which a share of Series B
Convertible Preferred Stock is then convertible and shall be determined by
dividing the then existing conversion price into $10.00.

            The conversion price (subject to adjustments pursuant to the
provisions of paragraph (c) below) in effect immediately prior to the date (the
"Reset Date") that is 12 months after the first date on which shares of the
Common Stock issued by the Corporation to the former stockholders of the former
Delaware corporation known as "Discovery Laboratories, Inc." in connection with
the consummation of a merger of such former corporation with and into the
Corporation on or about the date of filing of this certificate are traded on the
NASDAQ SmallCap Market or the NASDAQ National Market (collectively referred to
as "NASDAQ") or on any other national securities exchange or on the NASD
Electronic Bulletin Board, shall be

                                       3

adjusted and reset effective as of the Reset Date if the average closing bid
price of the Common Stock for the 30 consecutive trading days immediately
preceding the Reset Date (the "12-Month Trade Price") is less than 135% of the
then applicable conversion price (a "Reset Event"). Upon the occurrence of a
Reset Event, the conversion price shall be reduced to be equal to the greater of
(A) the 12-Month Trade Price divided by 1.35 and (B) 50% of the then applicable
conversion price. If there is any change in the conversion price as a result of
the preceding sentence, then the conversion rate shall be changed accordingly,
and shall be determined by dividing the new conversion price into $10.00. The
Corporation shall prepare a certificate signed by the principal financial
officer of the Corporation setting forth the conversion rate as of the Reset
Date, showing in reasonable detail the facts upon which such conversion rate is
based, and such certificate shall be forthwith filed with the transfer agent of
the Series B Convertible Preferred Stock. Notwithstanding the provisions of
subparagraph (vi) of paragraph (c) below, a notice stating that the conversion
rate has been adjusted pursuant to this paragraph, or that no adjustment is
necessary, and setting forth the conversion rate in effect as of the Reset Date
shall be mailed as promptly as practicable after the Reset Date by the
Corporation to all record holders of the Series B Convertible Preferred Stock at
their last addresses as they shall appear in the stock transfer books of the
Corporation.

            The "closing bid price" for each trading day shall be the reported
closing bid price of the Common Stock on NASDAQ or, if the Common Stock is not
quoted on NASDAQ, on the principal national securities exchange on which the
Common Stock is listed or admitted to trading (based on the aggregate dollar
value or all securities listed or admitted to trading), or if not listed or
admitted to trading on any national securities exchange or quoted on NASDAQ, the
closing bid price in the over-the-counter market as furnished by any NASD member
firm selected from time to time by the Corporation for that purpose, or, if such
prices are not available, the fair market value set by, or in a manner
established by, the Board of Directors of the Corporation in good faith.
"Trading day" shall mean a day on which NASDAQ or the national securities
exchange used to determine the closing bid price is open for the transaction of
business or the reporting of trades or, if the closing bid price is not so
determined, a day on which NASDAQ is open for the transaction of business.

            (b) Conversion Procedures. Any holder of shares of Series B
Convertible Preferred Stock desiring to convert such shares into Common Stock
shall surrender the certificate or certificates evidencing such shares of Series
B Convertible Preferred Stock at the office of the transfer agent for the Series
B Convertible Preferred Stock, which certificate or certificates, if the
Corporation shall so require, shall be duly endorsed to the Corporation or in
blank, or accompanied by proper instruments of transfer to the Corporation or in
blank, accompanied by irrevocable written notice to the Corporation that the
holder elects so to convert such shares of Series B Convertible Preferred Stock
and specifying the name or names (with address) in which a certificate or
certificates evidencing shares of Common Stock are to be issued. The Corporation
need not deem a notice of conversion to be received unless the holder complies
with all the provisions hereof. The Corporation will instruct the transfer agent
(which may be the Corporation) to make a notation of the date that a notice of
conversion is received, which date shall be deemed to be the date of receipt for
purposes hereof.

                                       4

            The Corporation shall, as soon as practicable after such deposit of
certificates evidencing shares of Series B Convertible Preferred Stock
accompanied by the written notice and compliance with any other conditions
herein contained, deliver at such office of such transfer agent to the person
for whose account such Shares of Series B Convertible Preferred Stock were so
surrendered, or to the nominee or nominees of such person, certificates
evidencing the number of full shares of Common Stock to which such person shall
be entitled as aforesaid, together with a cash adjustment of any fraction of a
share as hereinafter provided. Subject to the following provisions of this
paragraph, such conversion shall be deemed to have been made as of the date of
such surrender of the shares of Series B Convertible Preferred Stock to be
converted, and the person or persons entitled to receive the Common Stock
deliverable upon conversion of such Series B Convertible Preferred Stock shall
be treated for all purposes as the record holder or holders of such Common Stock
on such date; provided, however, that the Corporation shall not be required to
convert any shares of Series B Convertible Preferred Stock while the stock
transfer books of the Corporation are closed for any purpose, but the surrender
of Series B Convertible Preferred Stock for conversion during any period while
such books are so closed shall become effective for conversion immediately upon
the reopening of such books as if the surrender had been made on the date of
such reopening, and the conversion shall be at the conversion rate in effect on
such date. No adjustments in respect of any dividends on shares surrendered for
conversion or any dividend on the Common Stock issued upon conversion shall be
made upon the conversion of any shares of Series B Convertible Preferred Stock.

            All notices of conversions shall be irrevocable; provided, however,
that if the Corporation has sent notice of an event pursuant to Sections B.4(f)
or (g) of this Article Fourth, a holder of Series B Convertible Preferred Stock
may, at its election, provide in its notice of conversion that the conversion of
its shares of Series B Convertible Preferred Stock shall be contingent upon the
occurrence of the record date or effectiveness of such event (as specified by
such holder), provided that such notice of conversion is received by the
Corporation prior to such record date or effective date, as the case may be.

            (c) Certain Adjustments of Conversion Rate. In addition to
adjustment pursuant to paragraph (a) above, the conversion rate (and the
corresponding conversion price) shall be subject to adjustment from time to time
as follows:

                  (i) In case the Corporation shall (A) pay a dividend in Common
Stock or make a distribution in Common Stock, (B) subdivide its outstanding
Common Stock, (C) combine its outstanding Common Stock into a smaller number of
shares of Common Stock or (D) issue by reclassification of its Common Stock
other securities of the Corporation, then in each such case the conversion rate
in effect immediately prior thereto shall be adjusted so that the holder of any
shares of Series B Convertible Preferred Stock thereafter surrendered for
conversion shall be entitled to receive the kind and number of shares of Common
Stock or other securities of the Corporation which such holder would have owned
or would have been entitled to receive immediately after the happening of any of
the events described above had such shares of Series B Convertible Preferred
Stock been converted immediately prior to the happening of such event or any
record date with respect thereto. Any adjustment made pursuant to this
subparagraph (i) shall become effective immediately after the effective date of
such event retroactive to the record date, if any, for such event.

                                       5

                  (ii) In case the Corporation shall issue rights, options,
warrants or convertible securities to all or substantially all holders of its
Common Stock, without any charge to such holders, entitling them to subscribe
for or purchase Common Stock at a price per share which is lower at the record
date mentioned below than both (A) the then effective conversion price and (B)
the closing bid price (as defined in Section B.4 of this Article Fourth) for the
trading day immediately prior to such record date (the "Current Market Price"),
then the conversion rate shall be determined by multiplying the conversion rate
theretofore in effect by a fraction, of which the numerator shall be the number
of shares of Common Stock outstanding immediately prior to the issuance of such
rights, options, warrants or convertible securities plus the number of
additional shares of Common Stock offered for subscription or purchase, and of
which the denominator shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such rights, options, warrants or
convertible securities plus the number of shares which the aggregate offering
price of the total number of shares offered would purchase at such Current
Market Price. Such adjustment shall be made whenever such rights, options,
warrants or convertible securities are issued, and shall become effective
immediately and retroactive to the record date for the determination of
stockholders entitled to receive such rights, options, warrants or convertible
securities. Notwithstanding any of the foregoing, no adjustment shall be made
pursuant to the provisions of this subsection (ii), if such adjustment would
result in a decrease of the conversion rate.

                  (iii) In case the Corporation shall distribute to all or
substantially all holders of its Common Stock evidences of its indebtedness or
assets (excluding cash dividends or distributions out of earnings) or rights,
options, warrants or convertible securities containing the right to subscribe
for or purchase Common Stock (excluding those referred to in subparagraph (ii)
above), then in each case the conversion rate shall be determined by multiplying
the conversion rate theretofore in effect by a fraction, of which the numerator
shall be the then fair value as determined in good faith by the Corporation's
Board of Directors on the date of such distribution, and of which the
denominator shall be such fair value on such date minus the then fair value (as
so determined) of the portion of the assets or evidences of indebtedness so
distributed or of such subscription rights, options, warrants or convertible
securities applicable to one share. Such adjustment shall be made whenever any
such distribution is made and shall become effective on the date of distribution
retroactive to the record date for the determination of stockholders entitled to
receive such distribution.

                  (iv) Upon the expiration of any rights, options, warrants or
conversion privileges, if such shall not have been exercised, the conversion
rate shall, upon such expiration, be readjusted and shall thereafter be such as
it would have been had it been originally adjusted (or had the original
adjustment not been required, as the case may be) on the basis of (A) the fact
that Common Stock, if any, actually issued or sold upon the exercise of such
rights, options, warrants or conversion privileges, and (B) the fact that such
shares of Common Stock, if any, were issued or sold for the consideration
actually received by the Corporation upon such exercise plus the consideration,
if any, actually received by the Corporation for the issuance, sale or grant of
all such rights, options, warrants or conversion privileges whether or not
exercised.

                  (v) No adjustment in the conversion rate shall be required
unless such adjustment would require an increase or decrease of at least 1% in
such rate; provided, however,

                                       6

that the Corporation may make any such adjustment at its election; and provided,
further, that any adjustments which by reason of this subparagraph (v) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this Article Fourth, Section B.4
shall be made to the nearest cent or to the nearest one-hundredth of a share, as
the case may be.

                  (vi) Whenever the conversion rate is adjusted as provided in
any provision of this Article Fourth, Section B.4:

                        (A) the Corporation shall compute (or may retain a firm
                  of independent public accountants of recognized national
                  standing (which may be any such firm regularly employed by the
                  Corporation) to compute) the adjusted conversion rate in
                  accordance with this Article Fourth, Section B.4 and shall
                  prepare a certificate signed by the principal financial
                  officer of the Corporation (or cause any such independent
                  public accountants to execute a certificate) setting forth the
                  adjusted conversion rate and showing in reasonable detail the
                  facts upon which such adjustment is based, and such
                  certificate shall forthwith be filed with the transfer agent
                  of the Series B Convertible Preferred Stock; and

                        (B) a notice stating that the conversion rate has been
                  adjusted and setting forth the adjusted conversion rate shall
                  forthwith be required, and as soon as practicable after it is
                  required, such notice shall be mailed by the Corporation to
                  all record holders of Series B Convertible Preferred Stock at
                  their last addresses as they shall appear in the stock
                  transfer books of the Corporation.

                  (vii) In the event that at any time, as a result of any
adjustment made pursuant to this Article Fourth, Section B.4, the holder of any
shares of Series B Convertible Preferred Stock thereafter surrendered for
conversion shall become entitled to receive any shares of the Corporation other
than shares of Common Stock or to receive any other securities, the number of
such other shares or securities so receivable upon conversion of any share of
Series B Convertible Preferred Stock shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions contained in this Article Fourth, Section B.4 with respect to the
Common Stock.

            (d) No Fractional Shares. No fractional shares or scrip representing
fractional shares of Common Stock shall be issued upon conversion of Series B
Convertible Preferred Stock. If more than one certificate evidencing shares of
Series B Convertible Preferred Stock shall be surrendered for one certificate
evidencing shares of Series B Convertible Preferred Stock shall be surrendered
for conversion at one time by the same holder, the number of full shares
issuable upon conversion thereof shall be computed on the basis of the aggregate
number of shares of Series B Convertible Preferred Stock so surrendered. Instead
of any fractional share of Common Stock which would otherwise be issuable upon
conversion of any shares of Series B Convertible Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fractional interest
in an amount equal to the same fraction of the market price per share of

                                       7

Common Stock (which shall be the closing price as defined in Article Fourth,
Section B.5) at the close of business on the day of conversion.

            (e) Reservation of Shares; Transfer Taxes, Etc. The Corporation
shall at all times reserve and keep available, out of its authorized and
unissued stock, solely for the purpose of effecting the conversion of the Series
B Convertible Preferred Stock, such number of shares of its Common Stock free of
preemptive rights as shall from time to time be sufficient to effect the
conversion of all shares of Series B Convertible Preferred Stock from time to
time outstanding. The Corporation shall use its best efforts from time to time,
in accordance with the laws of the State of Delaware, to increase the authorized
number of shares of Common Stock if at any time the number of shares of Common
Stock not outstanding shall not be sufficient to permit the conversion of all
the then-outstanding shares of Series B Convertible Preferred Stock.

            The Corporation shall pay any and all issue or other taxes that may
be payable in respect of any issue or delivery of shares of Common Stock on
conversion of the Series B Convertible Preferred Stock. The Corporation shall
not, however, be required to pay any tax which may be payable in respect to any
transfer involved in the issue or delivery of Common Stock (or other securities
or assets) in a name other than that in which the shares of Series B Convertible
Preferred Stock so converted were registered, and no such issue or delivery
shall be made unless and until the person requesting such issue has paid to the
Corporation the amount of such tax or has established, to the satisfaction of
the Corporation, that such tax has been paid.

            Notwithstanding anything to the contrary herein, before taking any
action that would cause an adjustment reducing the conversion rate or before any
such adjustment is made as a result of a Reset Event, in either event, such that
the effective conversion price (for all purposes an amount equal to $10.00
divided by the conversion rate as in effect at such time) would be below the
then par value of the Common Stock, the Corporation shall take any corporate
action which may, in the opinion of its counsel, be necessary in order that the
Corporation may validly and legally issue fully paid and nonassessable shares of
Common Stock at the conversion rate as so adjusted.

            (f) Prior Notice of Certain Events. In case:

                  (i) the Corporation shall declare any dividend (or any other
distribution) on its Common Stock; or

                  (ii) the Corporation shall authorize the granting to the
holders of Common stock of rights or warrants to subscribe for or purchase any
shares of stock of any class or of any other rights or warrants; or

                  (iii) of any reclassification of Common Stock (other than a
subdivision or combination of the outstanding Common Stock, or a change in par
value, or from par value to no par value, or from no par value to par value), or
of any consolidation or merger to which the Corporation is a party and for which
approval of any stockholders of the Corporation shall be required, or of the
sale or transfer of all or substantially all of the assets of the Corporation or
of any compulsory share exchange whereby the Common Stock is converted into
other securities, cash or other property; or

                                       8

                  (iv) of the voluntary or involuntary dissolution, liquidation
or winding up of the Corporation or other Liquidation Event:

then the Corporation shall cause to be filed with the transfer agent for the
Series B Convertible Preferred Stock, and shall cause to be mailed to the
holders of record of the Series B Convertible Preferred Stock, at their last
addresses as they shall appear upon the stock transfer books of the Corporation,
at least 20 days prior to the applicable record date hereinafter specified, a
notice stating (x) the date on which a record (if any) is to be taken for the
purpose of such dividend, distribution or granting of rights or warrants or, if
a record is not to be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution, rights or warrants are to
be determined and a description of the cash, securities or other property to be
received by such holders upon such dividend, distribution or granting of rights
or warrants or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, share exchange, dissolution, liquidation or winding up
is expected to become effective, the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon such exchange,
dissolution, liquidation, winding up or other Liquidation Event and the
consideration, including securities or other property, to be received by such
holders upon such exchange; provided, however, that no failure to mail such
notice or any defect therein or in the mailing thereof shall affect the validity
of the corporate action required to be specified in such notice.

            (g) Other Changes in Conversion Rate. The Corporation from time to
time may increase the conversion rate by any amount for any period of time if
the period is at least 20 days and if the increase is irrevocable during the
period. Whenever the conversion rate is so increase, the Corporation shall mail
to holders of record of the Series B Convertible Preferred Stock a notice of the
increase at least 15 days before the date the increased conversion rate takes
effect, and such notice shall state the increased conversion rate and the period
it will be in effect.

            The Corporation may make such increases in the conversion rate, in
addition to those required or allowed by this Article Fourth, Section B.4, as
shall be determined by it, as evidenced by a resolution of the Board of
Directors, to be advisable in order to avoid or diminish any income tax to
holders of Common Stock resulting from any dividend or distribution of stock or
issuance of rights or warrants to purchase or subscribe for stock or from any
even treated as such for income tax purposes.

            (h) Ambiguities/Errors. The Board of Directors of the Corporation
shall have the power to resolve any ambiguity or correct any error in the
provisions relating to the convertibility of the Series B Convertible Preferred
Stock, and its actions in so doing shall be final and conclusive.

      5. Mandatory Conversion. At any time on or after the Reset Date, the
Corporation, at its option, may cause the Series B Convertible Preferred Stock
to be converted in whole, or in part, on a pro rata basis, into fully paid and
nonassessable shares of Common Stock and such other securities and property as
herein provided if the closing price of the Common Stock shall have exceeded
150% of the then applicable conversion price for at least 20 trading days in any
30 consecutive trading day period. Any shares of Series B Convertible Preferred
Stock so

                                       9

converted shall be treated as having been surrendered by the holder thereof for
conversion pursuant to Section 4 on the date of such mandatory conversion
(unless previously converted at the option of the holder).

      Not more than 60 nor less than 20 days prior to the date of any such
mandatory conversion, notice by first class mail, postage prepaid, shall be
given to the holders of record of the Series B Convertible Preferred Stock to be
converted, addressed to such holders at their last addresses as shown on the
stock transfer books of the Corporation. Each such notice shall specify that
date fixed for conversion, the place or places for surrender of shares of Series
B Convertible Preferred Stock, and the then effective conversion rate pursuant
to Section B.4 of Article Fouth.

      The "closing price" for each trading day shall be the reported last sales
price regular way or, in case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices regular way, in either case
on the NASDAQ or, if the Common Stock is not quoted on NASDAQ, on the principal
national securities exchange on which the Common Stock is listed or admitted to
trading (based on the aggregate dollar value of all securities listed or
admitted to trading) or, if not listed or admitted to trading on any national
securities exchange or quoted on NASDAQ, the average of the closing bid and
asked prices in the over-the-counter market as furnished by any NASD member firm
selected from time to time by the Corporation for that purpose, or, if such
prices are not available, the fair market value set by, or in a manner
established by, the Board of Directors of the Corporation in good faith.
"Trading day" shall have the meaning given in Section B.4 of this Article
Fourth.

      Any notice which is mailed as herein provided shall be conclusively
presumed to have been duly given by the Corporation on the date deposited in the
mail, whether or not the holder of the Series B Convertible Preferred Stock
receives such notice; and failure properly to give such notice by mail, or any
defect in such notice, to the holders of the shares to be converted shall not
affect the validity of the proceedings for the conversion of any other shares of
Series B Convertible Preferred Stock. On or after the date fixed for conversion
as stated in such notice, each holder of shares called to be converted shall
surrender the certificate evidencing such shares to the Corporation at the place
designated in such notice for conversion. Notwithstanding that the certificates
evidencing any shares properly called for conversion shall not have been
surrendered, the shares shall no longer be deemed outstanding and all rights
whatsoever with respect to the shares so called for conversion (except that
right of the holders to convert such shares upon surrender of their certificates
therefor) shall terminate.

      6. Voting Rights

            (a) General. Except as otherwise provided herein, in the Certificate
of Incorporation or the By-laws, the holders of shares of Series B Convertible
Preferred Stock, the holders of shares of Common Stock and the holders of any
other class or series of shares entitled to vote with the Common Stock shall
vote together as one class on all matters submitted to a vote of stockholders of
the Corporation. In any such vote, each share of Series B Convertible Preferred
Stock shall entitle the holder thereof to cast the number of votes equal to the
number of votes which could be cast in such vote by a holder of the Common Stock
into which such share

                                       10

of Series B Convertible Preferred Stock is convertible on the record date for
such vote, or if no record date has been established, on the date such vote is
taken. Any shares of Series B Convertible Preferred Stock held by the
Corporation or any entity controlled by the Corporation shall not have voting
rights hereunder and shall not be counted in determining the presence of a
quorum.

            (b) Class Voting Rights. In addition to any vote specified in
paragraph (a) of this Article Fourth, Section B.6, so long as 50% of the shares
of Series B Convertible Preferred Stock (including those shares of Series B
Convertible Preferred Stock issued or issuable upon the exercise of the warrants
of the Corporation issued to Paramount Capital, Inc. or its transferees) shall
be outstanding, the Corporation shall not, without the affirmative vote or
consent of the holders of at least 66.67% of all outstanding Series B
Convertible Preferred Stock voting separately as a class, (i) amend, alter or
repeal any provision of the Certificate of Incorporation, as amended, or the
Bylaws of the Corporation so as adversely to affect the relative rights,
preferences, qualifications, limitations or restrictions of the Series B
Convertible Preferred Stock, (ii) declare any dividend or distribution on the
Common Stock or any other class or series of preferred stock or authorize the
repurchase of any securities of the Corporation or (iii) authorize or issue, or
increase the authorized amount of, any additional class or series of stock, or
any security convertible into stock of such class or series, (A) ranking prior
to, or on a parity with, the Series B Convertible Preferred Stock upon
liquidation, dissolution or winding up of the Corporation or a sale of all or
substantially all of the assets of the Corporation or (B) providing for the
payment of any dividends or distributions. A class vote on the part of the
Series B Convertible Preferred Stock shall, without limitation, specifically not
be deemed to be required (except as otherwise required by law or resolution of
the Corporation's Board of Directors) in connection with: (a) the authorization,
issuance or increase in the authorized amount of Common Stock or of any shares
of any other class or series of stock ranking junior to the Series B Convertible
Preferred Stock in respect of distributions upon liquidation, dissolution or
winding up of the Corporation; (b) the authorization, issuance or increase in
the amount of the Series B Convertible Preferred Stock or any bonds, mortgage,
debentures or other obligations of the Corporation (other than bonds, mortgages,
debentures or other obligations convertible into or exchangeable for or having
option rights to purchase any shares of stock of the Corporation, the
authorization, issuance or increase in amount of which would require the consent
of the holders of the Series B Convertible Preferred Stock); or (c) any
consolidation or merger of the Corporation with or into another corporation in
which the Corporation is not the surviving entity, a sale or transfer of all or
part of the Corporation's assets for cash, securities or other property, or a
compulsory share exchange.

      7. Outstanding Shares. For purposes of this Article Fourth, all shares of
Series B Convertible Preferred Stock shall be deemed outstanding except (i) from
the date, or the deemed date, of surrender of certificates evidencing shares of
Series B Convertible Preferred Stock, all shares of Series B Convertible
Preferred Stock converted into Common Stock, (ii) from the date of registration
of transfer, all shares of Series B Convertible Preferred Stock held of record
by the Corporation or any subsidiary of the Corporation and (iii) any and all
shares of Series B Convertible Preferred Stock held in escrow prior to delivery
of such stock by the Corporation to the initial beneficial owners thereof.

                                       11

      8. Status of Acquired Shares. Shares of Series B Convertible Preferred
Stock received upon conversion pursuant to Section B.4 or Section B.5 of this
Article Fourth or otherwise acquired by the Corporation will be restored to the
status of authorized but unissued shares of Preferred Stock, without designation
as to class, and may thereafter be issued, but not as shares of Series B
Convertible Preferred Stock.

      9. Preemptive Rights. The Series B Convertible Preferred Stock is not
entitled to any preemptive or subscription rights in respect of any securities
of the Corporation.

      10. No Amendment or Impairment. The Corporation shall not amend its
Certificate of Incorporation or participate in any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, for the purpose of avoiding or seeking to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the conversion rights of the holders of the Series B Preferred
Stock against impairment.

      11. Severability of Provisions. Whenever possible, each provision hereof
shall be interpreted in a manner as to be effective and valid under applicable
law, but if any provision hereof is held to be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating or otherwise adversely affecting
the remaining provisions hereof. If a court of competent jurisdiction should
determine that a provision hereof would be valid or enforceable if a period of
time were extended or shortened or a particular percentage were increased or
decreased, then such court may make such change as shall be necessary to render
the provision in question effective and valid under applicable law.

            FIFTH: In furtherance and not in limitation of the powers conferred
by statute, the Board of Directors shall have the power, both before and after
receipt of any payment for any of the Corporation's capital stock, to adopt,
amend, repeal or otherwise after the Bylaws of the Corporation without any
action on the part of the stockholders; provided, however, that the grant of
such power to the Board of Directors shall not divest the stockholders of nor
limit their power to adopt, amend, repeal or otherwise alter the Bylaws.

            SIXTH: Elections of directors need not be by written ballot unless
the Bylaws of the Corporation shall so provide.

            SEVENTH: The Corporation reserves the rights to adopt, repeal,
rescind or amend in any respect any provisions contained in this Certificate of
Incorporation in the manner now or hereafter prescribed by applicable law, and
all rights conferred on stockholders herein are granted subject to this
reservation.

            EIGHTH: A director of the Corporation shall, to the fullest extent
permitted by the Delaware General Corporation Law as it now exists or as it may
hereafter be amended, not be liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. Neither any
amendment nor repeal of this Article EIGHTH, nor the adoption of any

                                       12

provision of this Certificate of Incorporation inconsistent with this Article
EIGHTH, shall eliminate or reduce the effect of this Article EIGHTH in respect
of any matter occurring or any cause of action, suit or claim that, but for this
Article EIGHTH, would accrue or arise prior to such amendment, repeal or
adoption of an inconsistent provision.

            NINTH: This Restated Certificate of incorporation was duly adopted
in accordance with the provisions of Section 245 of the General Corporation Law
of the State of Delaware. This Restated Certificate of Incorporation only
restates and integrates and does not further amend the provisions of the
Corporation's Certificate of Incorporation as heretofore amended and
supplemented, and there is no discrepancy between the provisions of such
Certificate of Incorporation and this Restated Certificate of Incorporation.

            IN WITNESS WHEREOF, Discovery Laboratories, Inc. has caused this
Certificate of Amendment to be signed this 25th day of March, 1998.

                                          DISCOVERY LABORATORIES, INC.

                                          By: /s/ James S. Kuo
                                             ---------------------------------
                                             Name: James S. Kuo, M.D.
                                             Title: Chief Executive Officer

                                       13

                    PARTICIPATION AND REGISTRATION AGREEMENT

This Participation and Co-Registration Agreement, dated March 20, 1996,
effective as of March 20, 1996, by and among RAQ, LLC., having a place of
business at 375 Park Avenue, Suite 1501, New York, New York 10152 ("RAQ"), Triad
Pharmaceuticals, Inc., having a place of business at 375 Park Avenue, Suite
1501, New York, New York 10152 and Dr. Thomas Kennedy, a resident of the State
of Virginia ("Kennedy").

                                  WITNESSETH:

WHEREAS, Triad Pharmaceuticals, Inc., a Delaware corporation ("Corporation"),
has entered into a Stock Purchase Agreement dated as of March 20, 1996 with
Kennedy contemporaneous herewith (the "Agreement");

WHEREAS, RAQ is a shareholder of the Corporation; and

WHEREAS, Kennedy, as a condition precedent to entering into the Agreement,
Kennedy is requiring that the Corporation and RAQ execute and deliver this
Participation and Co-Registration Agreement in favor of Kennedy.

NOW, THEREFORE in consideration of the foregoing, the parties agree as follows:

1.    PARTICIPATION RIGHTS

      RAQ agrees that:

A.    If RAQ is seeking to transfer a number of shares of capital stock of the
      Corporation (the "Transferring Shareholder") other than through a
      registered broker-deaker in a public market transaction, for which there
      is an effective registration under the Securities Act of 1933 or pursuant
      to rule 144, Kennedy may elect to include shares of his stock in the sale
      to the proposed transferee, at such price and upon such terms as have been
      given to the Transferring Shareholder by the transferee. The number of
      shares of Kennedy's stock that Kennedy shall be entitled to have included
      in such sale will be equal to the number of such shares of Common Stock
      times a ratio, the numerator of which is the number of shares of Common
      Stock being transferred by the Transferring Shareholder on a Fully Diluted
      Basis and the denominator of which is the total number of shares of Common
      Stock owned by the Transferring Stockholder as of the date of the Transfer
      Notice on a Fully Diluted Basis. Kennedy must make this election within
      ten (10) days of receiving the notice from the Transferring Shareholder of
      the Transferring Shareholder's intent to transfer by giving written
      notice, such notice stating the number of shares being transferred, the
      purchase price and other material terms of the transfer to the
      Transferring Stockholder of such election to participate in the sale,
      stating in such notice the number of shares desired to be sold. If no such
      notice is given within such ten (10) day period,

                                        1

      Kennedy shall be deemed to have chosen not to participate. This provision
      shall immediately and permanently terminate upon Kennedy's ability to sell
      his shares either pursuant to Rule 144 of the Securities Act of 1933 or
      pursuant to an effective registration statement under the Securities Act
      of 1933.

2.    REDEMPTION RIGHTS The Corporation agrees that:

A.    If at any time the Corporation elects to transfer all or substantially all
      of the assets of the Corporation, (other than (i) in a reorganization
      qualifying under Section 368 of the Internal Revenue Code of 1986, as
      amended in which the shareholders of the Corporation immediately preceding
      the reorganization continue to own 50% or more of voting power of the
      surviving entity and or (ii) in a transaction in which the Corporation
      plans to distribute all of the consideration or proceeds to the
      shareholders of the Corporation) then unless the the Corporation shall
      notify Kennedy in writing at least twenty (20) days before the
      consummation of such transfer. Upon receipt of such notice, Kennedy shall
      have the right to require the Corporation to redeem all, but not less than
      all, of Kennedy's shares of stock of the Corporation by giving written
      notice thereof (the "Redemption Notice") to the Corporation within fifteen
      (15) days of his receipt of the Corporation's notice of its intent to
      transfer such assets. Immediately following its receipt of the Redemption
      Notice, the Corporation shall redeem all of Kennedy's shares at a price
      equal to an amount determined by an appraisal of the value of the
      Corporation by an appraiser to be mutually agreed upon. If the Corporation
      or Kennedy are unable to agree on an appraiser, then the Corporation and
      Kennedy shall within 10 days each choose an appraiser and the value of the
      Corporation shall be the arithmetic mean of the values determined by each
      appraiser. If the parties agree on an appraiser, the cost of appraisal
      shall be divided between them equally. If two appraisers are chosen, the
      Corporation and Kennedy shall pay the costs of the appraiser each has
      chosen. The running of all time periods provided herein shall be tolled
      until such appraisal is completed and delivered to the Corporation and
      Kennedy. This provision shall immediately and permanently terminate after
      the Corporation is a reporting company under the Securities Exchange Act
      of 1934.

B.    Should Kennedy elect to have the Corporation redeem his shares pursuant to
      this section, Kennedy shall, on or before the date of such share
      redemption, deliver to the Corporation during regular business hours, at
      the principal office of the Corporation, the certificate or certificates
      for the number of shares of stock to be redeemed, duly endorsed or
      assigned in blank or to the Corporation (if required by it). On the date
      of such redemption, the Corporation shall deliver to Kennedy a certified
      or cashier's check in respect of the aggregate price for the number of
      shares so redeemed or at the Corporation's option publicly traded
      securities of equivalent fair market value.

                                        2

3.    REGISTRATION RIGHTS

      The Corporation agrees that:

A.    If at any time or from time to time the Corporation proposes to register
      any of its equity securities under the Securities Act of 1933 (the "Act")
      in connection with a primary or secondary public offering of such
      securities solely for cash on a form that would also permit the
      registration of the shares of capital stock of the Corporation purchased
      by Kennedy pursuant to a certain Stock Subscription Agreement between
      Kennedy and the Corporation dated March 20, 1996 (including, without
      limitation, any shares of capital stock of the Corporation which Kennedy
      may purchase pursuant to the anti-dilution provisions thereof and any
      securities of the Corporation issued as a dividend or other distribution
      with respect to, or in exchange or in replacement of any shares of the
      Corporation held by Kennedy), the Corporation shall, each such time,
      promptly give Kennedy written notice of such determination. Upon the
      written request of Kennedy given within fifteen (15) days after mailing of
      any such notice by the Corporation, the Corporation shall use its best
      efforts to cause to be registered under the Act all shares of capital
      stock of the Corporation held by Kennedy that Kennedy has requested be
      registered. This right shall terminate upon Kennedy's ability to resell in
      whole or in part his shares under Rule 144 of the Securities Act of 1933,
      as amended. The Corporation shall bear all registration and qualification
      fees and expenses (excluding underwriters' discounts and commissions),
      including any additional costs and disbursements of counsel for the
      Corporation that result from the inclusion of securities held by Kennedy
      in such registration.

B.    Notwithstanding the preceding paragraph, in connection with any offering
      involving an underwriting of shares of the Corporation's Common Stock, the
      Corporation shall not be required to include any of Kennedy's shares in
      such underwriting unless Kennedy accepts the terms of the underwriting as
      agreed upon between the Corporation and the underwriters selected by the
      Corporation (or by other persons entitled to select the underwriters), and
      then only in such quantity as the underwriters determine in their sole
      discretion will not jeopardize the success of the offering by the
      Corporation. If the total amount of securities, including the shares of
      Kennedy, requested by stockholders to be included in such offering exceeds
      the amount of securities sold other than by the Corporation that the
      underwriters determine in their sole discretion is compatible with the
      success of the offering, then the Corporation shall be required to include
      in the offering only that number of such securities, including the shares
      requested by Kennedy, which the underwriters determine in their sole
      discretion will not jeopardize the success of the offering (the securities
      so included to be apportioned pro rata among the selling stockholders
      according to the total amount of securities entitled to be included
      therein owned by each selling stockholder or in such other proportions as
      shall mutually be agreed to by such selling stockholders).

                                        3

C.    To the extent permitted by law, the Corporation will indemnify and hold
      harmless Kennedy upon his requesting or joining in a registration, any
      underwriter (as defined in the Act) for it, and each person, if any, who
      controls such underwriter within the meaning of the Act or the Securities
      Exchange Act of 1934 (the "1934 Act") against any losses, claims, damages
      or liabilities, joint or several, to which they may become subject under
      the Act, the 1934 Act or otherwise, insofar as such losses, claims,
      damages or liabilities (or actions in respect thereof) arise out of or are
      based on any untrue or alleged untrue statement of any such material fact
      contained in such registration statement by the Corporation (but not
      Kennedy requesting or joining in the registration), including any
      preliminary prospectus or final prospectus, or any amendments or
      supplements thereto, 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 or
      arise out of any violation by the Corporation of any rule or regulation
      promulgated under the Act or the 1934 Act applicable to the Corporation
      and relating to action or inaction required of the Corporation in
      connection with any such registration; and will reimburse Kennedy, such
      underwriter, or 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 indemnity agreement contained in this paragraph 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
      Corporation (which consent shall not be unreasonably withheld) nor shall
      the Corporation be liable in any such case for any such loss, claim,
      damage, liability or action to the extent that it arises out of or is
      based upon an untrue statement or alleged untrue statement or omission or
      alleged omission made in connection with such registration statement,
      preliminary prospectus, final prospectus, or amendments or supplements
      thereto, in reliance upon and in conformity with written information
      furnished expressly for use in connection with such registration by
      Kennedy or any such underwriter or controlling person.

D.    In order to provide for just and equitable contribution to joint liability
      under the Act in any case in which either (i) Kennedy exercising his
      rights under this Agreement makes a claim for indemnification pursuant to
      this paragraph but it is judicially determined (by the entry of a final
      judgement 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 paragraph provides for indemnification in such case, or
      (ii) contribution under the Act may be required on the part of Kennedy in
      circumstances for which indemnification is provided under this paragraph;
      then, and in each such case, the Corporation and Kennedy will contribute
      to the aggregate losses, claims, damages or liabilities to which they may
      be subject (after contribution from others) in such proportion so Kennedy
      is responsible for the portion represented by the percentage that the
      public offering price of his shares of capital stock of the Corporation
      offered by the registration statement bears to the public offering price
      of

                                       4

      all securities offered by such registration statement, and the Corporation
      is responsible for the remaining portion; provided, however, that, in any
      such case, (A) Kennedy will not be required to contribute any amount in
      excess of the public offering price of all the shares of capital stock of
      the Corporation 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 Act) will be entitled to contribution from
      any person or entity who was not guilty of such fraudulent
      misrepresentation.

E.    Notwithstanding the foregoing, this section 3 shall not apply to any
      registration of the common stock underlying the Series A Convertible
      Preferred Stock issued pursuant to an offering from June 17, 1996 to
      August 15, 1996 (including any extension of such offering for up to 120
      days) or to any registration of a stock option plan or shares utilizing
      Form S-8 or equivalent form.

4.    MISCELLANEOUS PROVISIONS

A.    This Agreement shall be governed by and construed in accordance with the
      internal laws (without giving effect to the conflicts of law principles)
      of the State of Delaware.

B.    The parties hereto agree that the terms and provisions in this Agreement
      are reasonable and shall be binding and enforceable in accordance with the
      terms hereof and, in any event, that the terms and provisions of this
      Agreement shall be enforced to the fullest extent permissible under law.
      In the event that any term or provision of this Agreement shall for any
      reason be adjudged to be unenforceable or invalid, then such unenforceable
      or invalid term or provision shall not affect the enforceability or
      validity of the remaining terms and provisions of this Agreement, and the
      parties hereto hereby agree to replace such unenforceable or invalid term
      or provision with an enforceable and valid arrangement which, in its
      economic effect, shall be as close as possible to the unenforceable or
      invalid term or provision.

C.    All references in this Agreement to the Corporation shall include any and
      all successors in interest to the Corporation whether by merger,
      consolidation, sale of all or substantially all assets or otherwise, and
      this Agreement shall inure to the benefit of the successors and assigns of
      the Corporation and, subject to the terms herein set forth, shall be
      binding upon the Purchaser, its successors and permitted assigns.

D.    This Agreement may be executed in two counterparts, each of which shall be
      deemed an original, but which together shall constitute one and the same
      instrument.

E.    No modification, amendment or waiver of any provision of this Agreement
      shall be effective against the Corporation unless the same shall be in a
      written instrument signed by an officer of the Corporation on its behalf
      and such instrument is approved by its Board of Directors. The failure at
      any time to enforce any of the provisions of

                                        5

      this Agreement shall in no way be construed as a waiver of such provisions
      and shall not affect the right of either party thereafter to enforce each
      and every provision hereof in accordance with its terms.

F.    The parties agree to execute such further instruments and to take such
      further action as may reasonably be necessary to carry out the intent of
      this Agreement.

G.    This Agreement constitutes the entire agreement of the parties with
      respect to the subject matter hereof.

H.    The headings of the Sections and paragraphs of this Agreement have been
      inserted for convenience of reference only and do not constitute a part of
      this Agreement.

I.    All notices and other communications which are required or permitted to be
      given pursuant to the terms of this Agreement shall be in writing and
      shall be sufficiently given (i) if personally delivered, (ii) if sent by
      telex or facsimile, provided that "answer-back" confirmation is received
      by the sender or (iii) upon receipt, if sent by registered or certified
      mail, postage paid return receipt requested in any case addressed as
      follows:

                  (i)   If to the Corporation, to

                        Triad Pharmaceuticals, Inc.
                        375 Park Avenue
                        Suite 1501
                        New York, New York 10152
                        Attn: Steve H. Kanzer, Esq.

                  (ii)  If to Kennedy, to

                        Thomas Kennedy, M.D.
                        213 Grand Drive
                        Richmond, VA 23229

                  (iii) If to RAQ at the address set forth in the first
      paragraph of this Agreement.

      The address of a party, for the purposes of this Section, may be changed
      by giving written notice to the other party of such change in the manner
      provided herein for giving notice. Unless and until such written notice is
      received, the addresses as provided herein shall be deemed to continue in
      effect for all purposes hereunder.

                                        6

IN WITNESS WHEREOF, the parties have hereto have set their respective hands and
seals all on the day and year first above set forth.

RAQ, LLC.:

/s/ Lindsay A. Rosenwald, M.D.
- ---------------------------------
By:    Lindsay A. Rosenwald, M.D.
       Chief Executive

TRIAD PHARMACEUTICALS, INC.

/s/ Steve H. Kanzer 
- ---------------------------------
By:    Steve H. Kanzer 
       President

THOMAS KENNEDY, M.D.:

/s/ Thomas Kennedy, M.D.
- ---------------------------------
By:    Thomas Kennedy, M.D.

                                        7

                    PARTICIPATION AND REGISTRATION AGREEMENT

This Participation and Co-Registration Agreement, dated March 20, 1996,
effective as of March 20, 1996, by and among RAQ, LLC., having a place of
business at 375 Park Avenue, Suite 1501, New York, New York 10152 ("RAQ"), Triad
Pharmaceuticals, Inc., having a place of business at 375 Park Avenue, Suite
1501, New York, New York 10152 and Dr. John Hoidal, a resident of the State of
Utah ("Hoidal").

                              W I T N E S S E T H:

WHEREAS, Triad Pharmaceuticals, Inc., a Delaware corporation ("Corporation"),
has entered into a Stock Purchase Agreement dated as of March 20, 1996 with
Hoidal contemporaneous herewith (the "Agreement");

WHEREAS, RAQ is a shareholder of the Corporation; and

WHEREAS, Hoidal, as a condition precedent to entering into the Agreement, Hoidal
is requiring that the Corporation and RAQ execute and deliver this Participation
and Co-Registration Agreement in favor of Hoidal.

NOW, THEREFORE in consideration of the foregoing, the parties agree as follows:

1.    PARTICIPATION RIGHTS RAQ 
      agrees that:

A.    If RAQ is seeking to transfer a number of shares of capital stock of the
      Corporation (the "Transferring Shareholder") other than through a
      registered broker-dealer in a public market transaction, for which there
      is an effective registration under the Securities Act of 1933 or pursuant
      to rule 144, Hoidal may elect to include shares of his stock in the sale
      to the proposed transferee, at such price and upon such terms as have been
      given to the Transferring Shareholder by the transferee. The number of
      shares of Hoidal's stock that Hoidal shall be entitled to have included in
      such sale will be equal to the number of such shares of Common Stock times
      a ratio, the numerator of which is the number of shares of Common Stock
      being transferred by the Transferring Shareholder on a Fully Diluted Basis
      and the denominator of which is the total number of shares of Common Stock
      owned by the Transferring Stockholder as of the date of the Transfer
      Notice on a Fully Diluted Basis. Hoidal must make this election within ten
      (10) days of receiving the notice from the Transferring Shareholder of the
      Transferring Shareholder's intent to transfer by giving written notice,
      such notice stating the number of shares being transferred, the purchase
      price and other material terms of the transfer to the Transferring
      Stockholder of such election to participate in the sale, stating in such
      notice the number of shares desired to be sold. If no such notice is given
      within such ten (10) day period, Hoidal shall be deemed to

                                        1

      have chosen not to participate. This provision shall immediately and
      permanently terminate upon Hoidal's ability to sell his shares either
      pursuant to Rule 144 of the Securities Act of 1933 or pursuant to an
      effective registration statement under the Securities Act of 1933.

2.    REDEMPTION RIGHTS

      The Corporation agrees that:

A.    If at any time the Corporation elects to transfer all or substantially all
      of the assets of the Corporation, (other than (i) in a reorganization
      qualifying under Section 368 of the Internal Revenue Code of 1986, as
      amended in which the shareholders of the Corporation immediately preceding
      the reorganization continue to own 50% or more of voting power of the
      surviving entity and or (ii) in a transaction in which the Corporation
      plans to distrubute all of the consideration or proceeds to the
      shareholders of the Corporation) then unless the the Corporation shall
      notify Hoidal in writing at least twenty (20) days before the consummation
      of such transfer. Upon receipt of such notice, Hoidal shall have the right
      to require the Corporation to redeem all, but not less than all, of
      Hoidal's shares of stock of the Corporation by giving written notice
      thereof (the "Redemption Notice") to the Corporation within fifteen (15)
      days of his receipt of the Corporation's notice of its intent to transfer
      such assets. Immediately following its receipt of the Redemption Notice,
      the Corporation shall redeem all of Hoidal's shares at a price equal to an
      amount determined by an appraisal of the value of the Corporation by an
      appraiser to be mutually agreed upon. If the Corporation or Hoidal are
      unable to agree on an appraiser, then the Corporation and Hoidal shall
      within 10 days each choose an appraiser and the value of the Corporation
      shall be the arithmetic mean of the values determined by each appraiser.
      If the parties agree on an appraiser, the cost of appraisal shall be
      divided between them equally. If two appraisers are chosen, the
      Corporation and Hoidal shall pay the costs of the appraiser each has
      chosen. The running of all time periods provided herein shall be tolled
      until such appraisal is completed and delivered to the Corporation and
      Hoidal. This provision shall immediately and permanently terminate after
      the Corporation is a reporting company under the Securities Exchange Act
      of 1934.

B.    Should Hoidal elect to have the Corporation redeem his shares pursuant to
      this section, Hoidal shall, on or before the date of such share
      redemption, deliver to the Corporation during regular business hours, at
      the principal office of the Corporation, the certificate or certificates
      for the number of shares of stock to be redeemed, duly endorsed or
      assigned in blank or to the Corporation (if required by it). On the date
      of such redemption, the Corporation shall deliver to Hoidal a certified or
      cashier's check in respect of the aggregate price for the number of shares
      so redeemed or at the Corporation's option publicly traded securities of
      equivalent fair market value.

                                        2

3.    REGISTRATION RIGHTS

      The Corporation agrees that:

A.    If at any time or from time to time the Corporation proposes to register
      any of its equity securities under the Securities Act of 1933 (the "Act")
      in connection with a primary or secondary public offering of such
      securities solely for cash on a form that would also permit the
      registration of the shares of capital stock of the Corporation purchased
      by Hoidal pursuant to a certain Stock Subscription Agreement between
      Hoidal and the Corporation dated March 20, 1996 (including, without
      limitation, any shares of capital stock of the Corporation which Hoidal
      may purchase pursuant to the anti-dilution provisions thereof and any
      securities of the Corporation issued as a dividend or other distribution
      with respect to, or in exchange or in replacement of any shares of the
      Corporation held by Hoidal), the Corporation shall, each such time,
      promptly give Hoidal written notice of such determination. Upon the
      written request of Hoidal given within fifteen (15) days after mailing of
      any such notice by the Corporation, the Corporation shall use its best
      efforts to cause to be registered under the Act all shares of capital
      stock of the Corporation held by Hoidal that Hoidal has requested be
      registered. This right shall terminate upon Hoidal's ability to resell in
      whole or in part his shares under Rule 144 of the Securities Act of 1933,
      as amended. The Corporation shall bear all registration and qualification
      fees and expenses (excluding underwriters' discounts and commissions),
      including any additional costs and disbursements of counsel for the
      Corporation that result from the inclusion of securities held by Hoidal in
      such registration.

B.    Notwithstanding the preceding paragraph, in connection with any offering
      involving an underwriting of shares of the Corporation's Common Stock, the
      Corporation shall not be required to include any of Hoidal's shares in
      such underwriting unless Hoidal accepts the terms of the underwriting as
      agreed upon between the Corporation and the underwriters selected by the
      Corporation (or by other persons entitled to select the underwriters), and
      then only in such quantity as the underwriters determine in their sole
      discretion will not jeopardize the success of the offering by the
      Corporation. If the total amount of securities, including the shares of
      Hoidal, requested by stockholders to be included in such offering exceeds
      the amount of securities sold other than by the Corporation that the
      underwriters determine in their sole discretion is compatible with the
      success of the offering, then the Corporation shall be required to include
      in the offering only that number of such securities, including the shares
      requested by Hoidal, which the underwriters determine in their sole
      discretion will not jeopardize the success of the offering (the securities
      so included to be apportioned pro rata among the selling stockholders
      according to the total amount of securities entitled to be included
      therein owned by each selling stockholder or in such other proportions as
      shall mutually be agreed to by such selling stockholders).

                                        3

C.    To the extent permitted by law, the Corporation will indemnify and hold
      harmless Hoidal upon his requesting or joining in a registration, any
      underwriter (as defined in the Act) for it, and each person, if any, who
      controls such underwriter within the meaning of the Act or the Securities
      Exchange Act of 1934 (the "1934 Act") against any losses, claims, damages
      or liabilities, joint or several, to which they may become subject under
      the Act, the 1934 Act or otherwise, insofar as such losses, claims,
      damages or liabilities (or actions in respect thereof) arise out of or are
      based on any untrue or alleged untrue statement of any such material fact
      contained in such registration statement by the Corporation (but not
      Hoidal requesting or joining in the registration), including any
      preliminary prospectus or final prospectus, or any amendments or
      supplements thereto, 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 or
      arise out of any violation by the Corporation of any rule or regulation
      promulgated under the Act or the 1934 Act applicable to the Corporation
      and relating to action or inaction required of the Corporation in
      connection with any such registration; and will reimburse Hoidal, such
      underwriter, or 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 indemnity agreement contained in this paragraph 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
      Corporation (which consent shall not be unreasonably withheld) nor shall
      the Corporation be liable in any such case for any such loss, claim,
      damage, liability or action to the extent that it arises out of or is
      based upon an untrue statement or alleged untrue statement or omission or
      alleged omission made in connection with such registration statement,
      preliminary prospectus, final prospectus, or amendments or supplements
      thereto, in reliance upon and in conformity with written information
      furnished expressly for use in connection with such registration by Hoidal
      or any such underwriter or controlling person.

D.    In order to provide for just and equitable contribution to joint liability
      under the Act in any case in which either (i) Hoidal exercising his rights
      under this Agreement makes a claim for indemnification pursuant to this
      paragraph but it is judicially determined (by the entry of a final
      judgement 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 paragraph provides for indemnification in such case, or
      (ii) contribution under the Act may be required on the part of Hoidal in
      circumstances for which indemnification is provided under this paragraph;
      then, and in each such case, the Corporation and Hoidal will contribute to
      the aggregate losses, claims, damages or liabilities to which they may be
      subject (after contribution from others) in such proportion so Hoidal is
      responsible for the portion represented by the percentage that the public
      offering price of his shares of capital stock of the Corporation offered
      by the registration statement bears to the public offering price of all
      securities offered by

                                        4

      such registration statement, and the Corporation is responsible for the
      remaining portion; provided, however, that, in any such case, (A) Hoidal
      will not be required to contribute any amount in excess of the public
      offering price of all the shares of capital stock of the Corporation
      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 Act) will be entitled to contribution from any person
      or entity who was not guilty of such fraudulent misrepresentation.

E.    Notwithstanding the foregoing, this section 3 shall not apply to any
      registration of the common stock underlying the Series A Convertible
      Preferred Stock issued pursuant to an offering from June 17, 1996 to
      August 15, 1996 (including any extension of such offering for up to 120
      days) or to any registration of a stock option plan or shares utilizing
      Form S-8 or equivalent form.

4.    MISCELLANEOUS PROVISIONS

A.    This Agreement shall be governed by and construed in accordance with the
      internal laws (without giving effect to the conflicts of law principles)
      of the State of Delaware.

B.    The parties hereto agree that the terms and provisions in this Agreement
      are reasonable and shall be binding and enforceable in accordance with the
      terms hereof and, in any event, that the terms and provisions of this
      Agreement shall be enforced to the fullest extent permissible under law.
      In the event that any term or provision of this Agreement shall for any
      reason be adjudged to be unenforceable or invalid, then such unenforceable
      or invalid term or provision shall not affect the enforceability or
      validity of the remaining terms and provisions of this Agreement, and the
      parties hereto hereby agree to replace such unenforceable or invalid term
      or provision with an enforceable and valid arrangement which, in its
      economic effect, shall be as close as possible to the unenforceable or
      invalid term or provision.

C.    All references in this Agreement to the Corporation shall include any and
      all successors in interest to the Corporation whether by merger,
      consolidation, sale of all or substantially all assets or otherwise, and
      this Agreement shall inure to the benefit of the successors and assigns of
      the Corporation and, subject to the terms herein set forth, shall be
      binding upon the Purchaser, its successors and permitted assigns.

D.    This Agreement may be executed in two counterparts, each of which shall be
      deemed an original, but which together shall constitute one and the same
      instrument.

E.    No modification, amendment or waiver of any provision of this Agreement
      shall be effective against the Corporation unless the same shall be in a
      written instrument signed by an officer of the Corporation on its behalf
      and such instrument is approved by its Board of Directors. The failure at
      any time to enforce any of the provisions of this Agreement shall in no
      way be construed as a waiver of such provisions and shall

                                        5

      not affect the right of either party thereafter to enforce each and every
      provision hereof in accordance with its terms.

F.    The parties agree to execute such further instruments and to take such
      further action as may reasonably be necessary to carry out the intent of
      this Agreement.

G.    This Agreement constitutes the entire agreement of the parties with
      respect to the subject matter hereof.

H.    The headings of the Sections and paragraphs of this Agreement have been
      inserted for convenience of reference only and do not constitute a part of
      this Agreement.

I.    All notices and other communications which are required or permitted to be
      given pursuant to the terms of this Agreement shall be in writing and
      shall be sufficiently given (i) if personally delivered, (ii) if sent by
      telex or facsimile, provided that "answer-back" confirmation is received
      by the sender or (iii) upon receipt, if sent by registered or certified
      mail, postage paid return receipt requested in any case addressed as
      follows:

                  (i)   If to the Corporation, to

                        Triad Pharmaceuticals, Inc.
                        375 Park Avenue
                        Suite 1501
                        New York, New York 10152
                        Attn: Steve H. Kanzer, Esq.

                  (ii)  If to Hoidal, to

                        John Hoidal, M.D.
                        4534 Zarahemla Drive
                        Salt Lake City, Utah 84124

                  (iii) If to RAQ at the address set forth in the first
      paragraph of this Agreement.

      The address of a party, for the purposes of this Section, may be changed
      by giving written notice to the other party of such change in the manner
      provided herein for giving notice. Unless and until such written notice is
      received, the addresses as provided herein shall be deemed to continue in
      effect for all purposes hereunder.

                                        6

IN WITNESS WHEREOF, the parties have hereto have set their respective hands and
seals all on the day and year first above set forth.

RAQ, LLC.:

/s/ Lindsay A. Rosenwald
- -------------------------------------------
By: Lindsay A. Rosenwald, M.D.
    Chief Executive

TRIAD PHARMACEUTICALS, INC.

/s/ Steve H. Kanzer
- -------------------------------------------
By: Steve H. Kanzer
    President

JOHN HOIDAL, M.D.:

/s/ John Hoidal
- -------------------------------------------
By: John Hoidal, M.D.

                                        7

                          STOCK SUBSCRIPTION AGREEMENT

            THIS STOCK SUBSCRIPTION AGREEMENT ("Agreement") is entered into as
of March 20, 1996, by and between the undersigned (the "Purchaser") and Triad
Pharmaceuticals, Inc., a Delaware corporation with a place of business at 375
Park Avenue, Suite 1501, New York, New York 10152 (the "Corporation").

                                    RECITALS

            A. WHEREAS, the Corporation desires to sell shares of common stock,
par value $.001 per share, of the Corporation (which class of shares is referred
to herein as "Common Stock") to Purchaser, and Purchaser desires to purchase
these shares, upon the terms and conditions herein specified; and

            B. WHEREAS, Purchaser is willing to subject the Stock (as defined
herein) to the restrictions contained herein.

                                   AGREEMENT

            NOW, THEREFORE, in consideration of the foregoing recitals and of
the mutual promises herein contained, the parties hereby agree as follows:

            1. Issuance and Acquisition of Stock.

                  (a) Immediately after the execution of this Agreement by the
parties, the Corporation shall issue to the Purchaser, and the Purchaser shall
acquire from the Corporation, the number of shares of Common Stock listed beside
the Purchaser's name on the signature hereto (the "Stock") for the total
purchase price listed below the Purchaser's name on the signature page hereto
(the "Purchase Price").

                  (b) Upon the execution of this Agreement, the Purchaser shall
make payment for the Stock by delivering to the Corporation a check payable to
the Corporation in the amount of the Purchase Price. Within ninety days after
the execution of this Agreement by the parties and receipt by the Corporation of
the Purchase Price, the Corporation shall deliver to the Purchaser a certificate
or certificates evidencing the Stock, registered in the name of the Purchaser
and concurrently therewith.

            2. Violation Of Transfer Provisions, The Corporation shall not be
required (i) to transfer on its books any shares of Stock which shall have been
sold, transferred, assigned or pledged in violation of any of the provisions of
this Agreement or (ii) to treat as owner of such shares or to accord the right
to vote as such owner or to pay dividends to any transferee to whom such shares
shall have been so sold, transferred, assigned or pledged.

            3. Rights as Shareholder. Except as otherwise provided herein, the
Purchaser shall, during the term of this Agreement, exercise all rights and
privileges of a shareholder of the Corporation with respect to the Stock.

            4. Securities Laws. The Purchaser represents and warrants to and
covenants with the Corporation as follows:

                  (a) The Stock will be acquired by the Purchaser with the
Purchaser's own funds for investment purposes and for the Purchaser's own
account, not as a nominee or agent for any other person, firm or corporation,
and not with a view to the sale or distribution of all or any part thereof, and
the Purchaser has no present intention of selling, granting any participation
in, or otherwise distributing, any or all of the Stock. The Purchaser does not
have any contract, undertaking, agreement or arrangement with any person, firm
or corporation to sell, transfer or grant any participation to any person, firm
or corporation with respect to any or all of the Stock.

                  (b) The Purchaser understands that the Stock will not be
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and that the Stock is being issued and sold to the Purchaser based upon an
exemption from registration predicated in part on the accuracy and completeness
of the Purchaser's representations and warranties appearing herein.

                  (c) The Purchaser agrees that in no event will the Purchaser
sell, transfer, assign or pledge all or any part of the Stock or any interest
therein, unless and until (i) the Purchaser shall have notified the Corporation
of the proposed disposition and shall have furnished the Corporation with a
statement of the circumstances surrounding the proposed disposition, and (ii)
the Purchaser shall have furnished the Corporation with an opinion of counsel
satisfactory in form and content to the Corporation to the effect that (A) such
disposition will not require registration of the Stock under the Securities Act
or compliance with applicable state securities laws, or (B) appropriate action
necessary for compliance with the Securities Act and applicable state securities
laws has been taken, or (iii) the Corporation shall have waived, expressly and
in writing, its right under clauses (i) and (ii) of this subsection, and (iv)
the proposed transferee of the Stock shall have provided the Corporation with a
written agreement or undertaking by which such transferee agrees to be bound by
all terms, conditions

                                       -2-

and limitations of this Agreement applicable to such transferee's transferor as
if such transferee were a party hereto. The requirement of subparagraph (iv)
shall not apply to any transfer (A) pursuant to an offering registered under the
Securities Act, (B) pursuant to Rule 144 under the Securities Act or (C)
effected in a market transaction otherwise exempt from registration under the
Securities Act.

                  (d) The Purchaser is able to fend for itself in connection
with the transactions contemplated by this Agreement, has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of its investment in the Corporation, as the ability to bear
the economic risks of its investment for an indefinite period of time and can
afford a complete loss of its investment, has had the opportunity prior to the
Purchaser's purchase of the Stock to ask questions of and receive answers from
representatives of the Corporation concerning the finances, operations and
business of the Corporation. The Purchaser is not relying upon any statement,
promise or assurance of any investor in the Corporation (or any representative
of any such investor) in arriving at the Purchaser's decision to purchase the
Stock, and has not otherwise been induced to purchase the Stock by any such
investor (or any representative of any such investor), and the Purchaser has
decided to purchase the Stock based upon the Purchaser's own analysis of the
merits and risks of investing in the Corporation without the intervention or
assistance of any other person, firm or corporation.

                  (e) The Purchaser understands and acknowledges that the
Purchaser will not be permitted to sell, transfer, assign or pledge the Stock
until it is registered under the Securities Act or an exemption from the
registration and prospectus delivery requirements of the Securities Act is
available to the Purchaser, and that there is no assurance that such an
exemption from registration will ever be available or that the Purchaser will
ever be able to sell any of the Stock.

                  (f) All certificates representing the Stock and, until such
time as the Stock is sold in an offering which is registered under the
Securities Act or the Corporation shall have received an opinion of counsel
satisfactory in form and content to the Corporation that such registration is
not required in connection with a resale (or subsequent resale) of the Stock,
all certificates issued in transfer thereof or substitution therefor, shall,
where applicable, have endorsed thereon the following (or substantially
equivalent) legends:

            (i)   THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
                  OFFERED FOR SALE, TRANSFERRED, SOLD, ASSIGNED, PLEDGED,
                  HYPOTHECATED OR OTHERWISE ENCUMBERED OR DISPOSED OF (A "TRANS-

                                      -3-

                  FER") UNLESS SUCH TRANSFER COMPLIES WITH THE PROVISIONS OF A
                  SUBSCRIPTION AGREEMENT BETWEEN THE REGISTERED HOLDER AND THE
                  CORPORATION (THE "AGREEMENT") (A COPY OF WHICH IS ON FILE WITH
                  THE SECRETARY OF THE CORPORATION AND WHICH WILL BE FURNISHED
                  BY THE CORPORATION TO THE HOLDER HEREOF UPON WRITTEN REQUEST
                  AND WITHOUT CHARGE). THE SECURITIES REPRESENTED BY THIS
                  CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
                  OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES
                  OR "BLUE SKY" LAWS. ACCORDINGLY, NO TRANSFER OF THE SECURITIES
                  REPRESENTED BY THIS CERTIFICATE MAY BE MADE EXCEPT IN
                  ACCORDANCE WITH THE AGREEMENT AND (A) PURSUANT TO AN EFFECTIVE
                  REGISTRATION STATEMENT OR AMENDMENT THERETO UNDER THE ACT OR
                  (B) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT
                  AND UNDER ANY APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.

            (ii)  Any legend required to be placed thereon by any applicable
                  state securities law.

            (iii) A legend to the effect that such shares of stock are subject
                  to a Stock Subscription Agreement between the Purchaser and
                  the Corporation that limits the transferability of the shares
                  under certain conditions and applies to any transferee of such
                  shares.

                  (g) The Corporation shall not be obligated to transfer any of
the Stock if counsel for the Corporation determines that any applicable
registration requirement under the Securities Act or any other applicable
requirement of federal or state law has not been met.

                                      -4-

            5. General Provisions.

                  (a) No Assignments. The Purchaser shall not transfer, assign
or encumber any of its rights, privileges, duties or obligations under this
Agreement without the prior written consent of the Corporation, and any attempt
to so transfer, assign or encumber shall be void.

                  (b) Notices. All notices and other communications which are
required or permitted to be given pursuant to the terms of this Agreement shall
be in writing and shall be sufficiently given (i) if personally delivered, (ii)
if sent by telex or facsimile, provided that "answer-back" confirmation is
received by the sender or (iii) upon receipt, if sent by registered or certified
mail, postage paid return receipt requested in any case addressed as follows:

                  (i) If to the Corporation, to

                        MicroBio Inc.
                        375 Park Avenue
                        Suite 1501
                        New York, New York 10152
                        Attn: Steve H. Kanzer, Esq.

                  (ii) If to the Purchaser, to the address set forth on the
signature page of this Agreement.

The address of a party, for the purposes of this Section 6(b)(ii), may be
changed by giving written notice to the other party of such change in the manner
provided herein for giving notice. Unless and until such written notice is
received, the addresses as provided herein shall be deemed to continue in effect
for all purposes hereunder.

                  (c) Standoff Agreement. The Purchaser agrees that, in
connection with each underwritten public offering registered under the
Securities Act of shares of Common Stock or other equity securities of the
Corporation by or on behalf of the Corporation, the Purchaser shall not sell or
transfer, or offer to sell or transfer, any shares of Common Stock or other
equity securities of the Corporation for such period as the managing underwriter
of such offering determines is necessary to effect the underwritten public
offering.

                  (d) Choice of Law: Consent to Jurisdiction. This Agreement
shall be governed by and construed in accordance with the internal laws (without
giving effect to the conflicts of law principles) of the State of Delaware.

                                      -5-

                  (e) Severability. The parties hereto agree that the terms and
provisions in this Agreement are reasonable and shall be binding and enforceable
in accordance with the terms hereof and, in any event, that the terms and
provisions of this Agreement shall be enforced to the fullest extent permissible
under law. In the event that any term or provision of this Agreement shall for
any reason be adjudged to be unenforceable or invalid, then such unenforceable
or invalid term or provision shall not affect the enforceability or validity of
the remaining terms and provisions of this Agreement, and the parties hereto
hereby agree to replace such unenforceable or invalid term or provision with an
enforceable and valid arrangement which, in its economic effect, shall be as
close as possible to the unenforceable or invalid term or provision.

                  (f) Successors. All references in this Agreement to the
Corporation shall include any and all successors in interest to the Corporation
whether by merger, consolidation, sale of all or substantially all assets or
otherwise, and this Agreement shall inure to the benefit of the successors and
assigns of the Corporation and, subject to the terms herein set forth, shall be
binding upon the Purchaser, its successors and permitted assigns.

                  (g) Counterparts. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same instrument.

                  (h) Modification, Amendment and Waiver. No modification,
amendment or waiver of any provision of this Agreement shall be effective
against the Corporation unless the same shall be in a written instrument signed
by an officer of the Corporation on its behalf and such instrument is approved
by its Board of Directors. The failure at any time to enforce any of the
provisions of this Agreement shall in no way be construed as a waiver of such
provisions and shall not affect the right of either party thereafter to enforce
each and every provision hereof in accordance with its terms.

                  (i) Further Assurances. The parties agree to execute such
further instruments and to take such further action as may reasonably be
necessary to carry out the intent of this Agreement.

                  (j) Integration. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof.

                  (k) Headings. The headings of the Sections and paragraphs of
this Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.

                                      -6-

                  (l) Gender and Number. As used in this Agreement, the
masculine, feminine or neuter gender, and the singular or plural, shall be
deemed to include the others whenever and wherever the context so requires.
Additionally, unless the context requires otherwise, "or" is not exclusive.

                                      -7-

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

                               TRIAD PHARMACEUTICALS, INC.

                               By:    /s/ Steve H. Kanzer
                                      --------------------------------
                               Name:  Steve H. Kanzer
                               Title: President and Chief 
                                      Executive Officer

                               PURCHASER:

                               By:    /s/ Steve H. Kanzer
                                      --------------------------------
                               Name:  Steve H. Kanzer

                               Address: c/o Paramount Capital Investments, LLC
                                        375 Park Avenue, Suite 1501
                                        New York, N.Y. 10152

                               Tax#: _________________________________

                               NUMBER OF SHARES
                               OF COMMON STOCK
                               SUBSCRIBED FOR: 485,000

                               PURCHASE PRICE: $485.00

                                      -8-

                          STOCK SUBSCRIPTION AGREEMENT

            THIS STOCK SUBSCRIPTION AGREEMENT ("Agreement") is entered into as
of August 15, 1995, by and between the undersigned (the "Purchaser") and
MicroBio Inc., a Delaware corporation with a place of business at 375 Park
Avenue, Suite 1501, New York, New York 10152 (the "Corporation").

                                    RECITALS

            A. WHEREAS, the Corporation desires to sell shares of common stock,
par value $.001 per share, of the Corporation (which class of shares is referred
to herein as "Common Stock") to Purchaser, and Purchaser desires to purchase
these shares, upon the terms and conditions herein specified; and

            B. WHEREAS, Purchaser is willing to subject the Stock (as defined
herein) to the restrictions contained herein.

                                   AGREEMENT

            NOW, THEREFORE, in consideration of the foregoing recitals and of
the mutual promises herein contained, the parties hereby agree as follows:

            1. Issuance and Acquisition of Stock.

                  (a) Immediately after the execution of this Agreement by the
parties, the Corporation shall issue to the Purchaser, and the Purchaser shall
acquire from the Corporation, the number of shares of Common Stock listed beside
the Purchaser's name on the signature hereto (the "Stock") for the total
purchase price listed below the Purchaser's name on the signature page hereto
(the "Purchase Price").

                  (b) Upon the execution of this Agreement, the Purchaser shall
make payment for the Stock by delivering to the Corporation a check payable to
the Corporation in the amount of the Purchase Price. Within ninety days after
the execution of this Agreement by the parties and receipt by the Corporation of
the Purchase Price, the Corporation shall deliver to the Purchaser a certificate
or certificates evidencing the Stock, registered in the name of the Purchaser
and concurrently therewith.

            2. Violation Of Transfer Provisions. The Corporation shall not be
required (i) to transfer on its books any shares of Stock which shall have been
sold, transferred, assigned or pledged in violation of any of the provisions of
this Agreement or (ii) to treat as owner of such shares or to accord the right
to vote as such owner or to pay dividends to any transferee to whom such shares
shall have been so sold, transferred, assigned or pledged.

            3. Rights as Shareholder. Except as otherwise provided herein, the
Purchaser shall, during the term of this Agreement, exercise all rights and
privileges of a shareholder of the Corporation with respect to the Stock.

            4. Securities Laws. The Purchaser represents and warrants to and
covenants with the Corporation as follows:

                  (a) The Stock will be acquired by the Purchaser with the
Purchaser's own funds for investment purposes and for the Purchaser's own
account, not as a nominee or agent for any other person, firm or corporation,
and not with a view to the sale or distribution of all or any part thereof, and
the Purchaser has no present intention of selling, granting any participation
in, or otherwise distributing, any or all of the Stock. The Purchaser does not
have any contract, undertaking, agreement or arrangement with any person, firm
or corporation to sell, transfer or grant any participation to any person, firm
or corporation with respect to any or all of the Stock.

                  (b) The Purchaser understands that the Stock will not be
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and that the Stock is being issued and sold to the Purchaser based upon an
exemption from registration predicated in part on the accuracy and completeness
of the Purchaser's representations and warranties appearing herein.

                  (c) The Purchaser agrees that in no event will the Purchaser
sell, transfer, assign or pledge all or any part of the Stock or any interest
therein, unless and until (i) the Purchaser shall have notified the Corporation
of the proposed disposition and shall have furnished the Corporation with a
statement of the circumstances surrounding the proposed disposition, and (ii)
the Purchaser shall have furnished the Corporation with an opinion of counsel
satisfactory in form and content to the Corporation to the effect that (A) such
disposition will not require registration of the Stock under the Securities Act
or compliance with applicable state securities laws, or (B) appropriate action
necessary for compliance with the Securities Act and applicable state securities
laws has been taken, or (iii) the Corporation shall have waived, expressly and
in writing, its right under clauses (i) and (ii) of this subsection, and (iv)
the proposed transferee of the Stock shall have provided the Corporation with a
written agreement or undertaking by which such transferee agrees to be bound by
all terms, conditions

                                       -2-

and limitations of this Agreement applicable to such transferee's transferor as
if such transferee were a party hereto. The requirement of subparagraph (iv)
shall not apply to any transfer (A) pursuant to an offering registered under the
Securities Act, (B) pursuant to Rule 144 under the Securities Act or (C)
effected in a market transaction otherwise exempt from registration under the
Securities Act.

                  (d) The Purchaser is able to fend for itself in connection
with the transactions contemplated by this Agreement, has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of its investment in the Corporation, as the ability to bear
the economic risks of its investment for an indefinite period of time and can
afford a complete loss of its investment, has had the opportunity prior to the
Purchaser's purchase of the Stock to ask questions of and receive answers from
representatives of the Corporation concerning the finances, operations and
business of the Corporation. The Purchaser is not relying upon any statement,
promise or assurance of any investor in the Corporation (or any representative
of any such investor) in arriving at the Purchaser's decision to purchase the
Stock, and has not otherwise been induced to purchase the Stock by any such
investor (or any representative of any such investor), and the Purchaser has
decided to purchase the Stock based upon the Purchaser's own analysis of the
merits and risks of investing in the Corporation without the intervention or
assistance of any other person, firm or corporation.

                  (e) The Purchaser understands and acknowledges that the
Purchaser will not be permitted to sell, transfer, assign or pledge the Stock
until it is registered under the Securities Act or an exemption from the
registration and prospectus delivery requirements of the Securities Act is
available to the Purchaser, and that there is no assurance that such an
exemption from registration will ever be available or that the Purchaser will
ever be able to sell any of the Stock.

                  (f) All certificates representing the Stock and, until such
time as the Stock is sold in an offering which is registered under the
Securities Act or the Corporation shall have received an opinion of counsel
satisfactory in form and content to the Corporation that such registration is
not required in connection with a resale (or subsequent resale) of the Stock,
all certificates issued in transfer thereof or substitution therefor, shall,
where applicable, have endorsed thereon the following (or substantially
equivalent) legends:

            (i)   THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
                  OFFERED FOR SALE, TRANSFERRED, SOLD, ASSIGNED, PLEDGED,
                  HYPOTHECATED OR OTHERWISE ENCUMBERED OR DISPOSED OF (A "TRANS-

                                      -3-

                  FER") UNLESS SUCH TRANSFER COMPLIES WITH THE PROVISIONS OF A
                  SUBSCRIPTION AGREEMENT BETWEEN THE REGISTERED HOLDER AND THE
                  CORPORATION (THE "AGREEMENT") (A COPY OF WHICH IS ON FILE WITH
                  THE SECRETARY OF THE CORPORATION AND WHICH WILL BE FURNISHED
                  BY THE CORPORATION TO THE HOLDER HEREOF UPON WRITTEN REQUEST
                  AND WITHOUT CHARGE). THE SECURITIES REPRESENTED BY THIS
                  CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
                  OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES
                  OR "BLUE SKY" LAWS. ACCORDINGLY, NO TRANSFER OF THE SECURITIES
                  REPRESENTED BY THIS CERTIFICATE MAY BE MADE EXCEPT IN
                  ACCORDANCE WITH THE AGREEMENT AND (A) PURSUANT TO AN EFFECTIVE
                  REGISTRATION STATEMENT OR AMENDMENT THERETO UNDER THE ACT OR
                  (B) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT
                  AND UNDER ANY APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.

            (ii)  Any legend required to be placed thereon by any applicable
                  state securities law.

            (iii) A legend to the effect that such shares of stock are subject
                  to a Stock Subscription Agreement between the Purchaser and
                  the Corporation that limits the transferability of the shares
                  under certain conditions and applies to any transferee of such
                  shares.

                  (g) The Corporation shall not be obligated to transfer any of
the Stock if counsel for the Corporation determines that any applicable
registration requirement under the Securities Act or any other applicable
requirement of federal or state law has not been met.

                                      -4-

            5. General Provisions.

                  (a) No Assignments. The Purchaser shall not transfer, assign
or encumber any of its rights, privileges, duties or obligations under this
Agreement without the prior written consent of the Corporation, and any attempt
to so transfer, assign or encumber shall be void.

                  (b) Notices. All notices and other communications which are
required or permitted to be given pursuant to the terms of this Agreement shall
be in writing and shall be sufficiently given (i) if personally delivered, (ii)
if sent by telex or facsimile, provided that "answer-back" confirmation is
received by the sender or (iii) upon receipt, if sent by registered or certified
mail, postage paid return receipt requested in any case addressed as follows:

                  (i) If to the Corporation, to

                        MicroBio Inc.
                        375 Park Avenue
                        Suite 1501
                        New York, New York 10152
                        Attn: Steve H. Kanzer, Esq.

                  (ii) If to the Purchaser, to the address set forth on the
signature page of this Agreement.

The address of a party, for the purposes of this Section 6(b)(ii), may be
changed by giving written notice to the other party of such change in the manner
provided herein for giving notice. Unless and until such written notice is
received, the addresses as provided herein shall be deemed to continue in effect
for all purposes hereunder.

                  (c) Standoff Agreement. The Purchaser agrees that, in
connection with each underwritten public offering registered under the
Securities Act of shares of Common Stock or other equity securities of the
Corporation by or on behalf of the Corporation, the Purchaser shall not sell or
transfer, or offer to sell or transfer, any shares of Common Stock or other
equity securities of the Corporation for such period as the managing underwriter
of such offering determines is necessary to effect the underwritten public
offering.

                  (d) Choice of Law; Consent to Jurisdiction. This Agreement
shall be governed by and construed in accordance with the internal laws (without
giving effect to the conflicts of law principles) of the State of Delaware.

                                      -5-

                  (e) Severability. The parties hereto agree that the terms and
provisions in this Agreement are reasonable and shall be binding and enforceable
in accordance with the terms hereof and, in any event, that the terms and
provisions of this Agreement shall be enforced to the fullest extent permissible
under law. In the event that any term or provision of this Agreement shall for
any reason be adjudged to be unenforceable or invalid, then such unenforceable
or invalid term or provision shall not affect the enforceability or validity of
the remaining terms and provisions of this Agreement, and the parties hereto
hereby agree to replace such unenforceable or invalid term or provision with an
enforceable and valid arrangement which, in its economic effect, shall be as
close as possible to the unenforceable or invalid term or provision.

                  (f) Successors. All references in this Agreement to the
Corporation shall include any and all successors in interest to the Corporation
whether by merger, consolidation, sale of all or substantially all assets or
otherwise, and this Agreement shall inure to the benefit of the successors and
assigns of the Corporation and, subject to the terms herein set forth, shall be
binding upon the Purchaser, its successors and permitted assigns.

                  (g) Counterparts. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same instrument.

                  (h) Modification, Amendment and Waiver. No modification,
amendment or waiver of any provision of this Agreement shall be effective
against the Corporation unless the same shall be in a written instrument signed
by an officer of the Corporation on its behalf and such instrument is approved
by its Board of Directors. The failure at any time to enforce any of the
provisions of this Agreement shall in no way be construed as a waiver of such
provisions and shall not affect the right of either party thereafter to enforce
each and every provision hereof in accordance with its terms.

                  (i) Further Assurances. The parties agree to execute such
further instruments and to take such further action as may reasonably be
necessary to carry out the intent of this Agreement.

                  (j) Integration. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof.

                  (k) Headings. The headings of the Sections and paragraphs of
this Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.

                                      -6-

                  (l) Gender and Number. As used in this Agreement, the
masculine, feminine or neuter gender, and the singular or plural, shall be
deemed to include the others whenever and wherever the context so requires.
Additionally, unless the context requires otherwise, "or" is not exclusive.

                                      -7-

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

                               MICROBIO INC.

                               By:    /s/ Steve H. Kanzer
                                      --------------------------------
                               Name:  Steve H. Kanzer
                               Title: President and Chief 
                                      Executive Officer

                               PURCHASER:

                               By:    /s/ Steve H. Kanzer
                                      --------------------------------
                               Name:  Steve H. Kanzer

                               Address: 951 Oceanfront
                                        Long Beach, NY  11561

                               Tax#: ###-##-####

                               NUMBER OF SHARES
                               OF COMMON STOCK
                               SUBSCRIBED FOR: 388,500

                               PURCHASE PRICE: $388.50

                                      -8-

                          STOCK SUBSCRIPTION AGREEMENT

            THIS STOCK SUBSCRIPTION AGREEMENT ("Agreement") is entered into as
of March 20, 1996, by and between the undersigned (the "Purchaser") and Triad
Pharmaceuticals, Inc., a Delaware corporation with a place of business at 375
Park Avenue, Suite 1501, New York, New York 10152 (the "Corporation").

                                    RECITALS

            A. WHEREAS, the Corporation desires to sell shares of common stock,
par value $.001 per share, of the Corporation (which class of shares is referred
to herein as "Common Stock") to Purchaser, and Purchaser desires to purchase
these shares, upon the terms and conditions herein specified; and

            B. WHEREAS, Purchaser is willing to subject the Stock (as defined
herein) to the restrictions contained herein.

                                   AGREEMENT

            NOW, THEREFORE, in consideration of the foregoing recitals and of
the mutual promises herein contained, the parties hereby agree as follows:

            1. Issuance and Acquisition of Stock.

                  (a) Immediately after the execution of this Agreement by the
parties, the Corporation shall issue to the Purchaser, and the Purchaser shall
acquire from the Corporation, the number of shares of Common Stock listed beside
the Purchaser's name on the signature hereto (the "Stock") for the total
purchase price listed below the Purchaser's name on the signature page hereto
(the "Purchase Price").

                  (b) Upon the execution of this Agreement, the Purchaser shall
make payment for the Stock by delivering to the Corporation a check payable to
the Corporation in the amount of the Purchase Price. Within ninety days after
the execution of this Agreement by the parties and receipt by the Corporation of
the Purchase Price, the Corporation shall deliver to the Purchaser a certificate
or certificates evidencing the Stock, registered in the name of the Purchaser
and concurrently therewith.

            2. Violation Of Transfer Provisions. The Corporation shall not be
required (i) to transfer on its books any shares of Stock which shall have been
sold, transferred, assigned or pledged in violation of any of the provisions of
this Agreement or (ii) to treat as owner of such shares or to accord the right
to vote as such owner or to pay dividends to any transferee to whom such shares
shall have been so sold, transferred, assigned or pledged.

            3. Rights as Shareholder. Except as otherwise provided herein, the
Purchaser shall, during the term of this Agreement, exercise all rights and
privileges of a shareholder of the Corporation with respect to the Stock.

            4. Securities Laws. The Purchaser represents and warrants to and
covenants with the Corporation as follows:

                  (a) The Stock will be acquired by the Purchaser with the
Purchaser's own funds for investment purposes and for the Purchaser's own
account, not as a nominee or agent for any other person, firm or corporation,
and not with a view to the sale or distribution of all or any part thereof, and
the Purchaser has no present intention of selling, granting any participation
in, or otherwise distributing, any or all of the Stock. The Purchaser does not
have any contract, undertaking, agreement or arrangement with any person, firm
or corporation to sell, transfer or grant any participation to any person, firm
or corporation with respect to any or all of the Stock.

                  (b) The Purchaser understands that the Stock will not be
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and that the Stock is being issued and sold to the Purchaser based upon an
exemption from registration predicated in part on the accuracy and completeness
of the Purchaser's representations and warranties appearing herein.

                  (c) The Purchaser agrees that in no event will the Purchaser
sell, transfer, assign or pledge all or any part of the Stock or any interest
therein, unless and until (i) the Purchaser shall have notified the Corporation
of the proposed disposition and shall have furnished the Corporation with a
statement of the circumstances surrounding the proposed disposition, and (ii)
the Purchaser shall have furnished the Corporation with an opinion of counsel
satisfactory in form and content to the Corporation to the effect that (A) such
disposition will not require registration of the Stock under the Securities Act
or compliance with applicable state securities laws, or (B) appropriate action
necessary for compliance with the Securities Act and applicable state securities
laws has been taken, or (iii) the Corporation shall have waived, expressly and
in writing, its right under clauses (i) and (ii) of this subsection, and (iv)
the proposed transferee of the Stock shall have provided the Corporation with a
written agreement or undertaking by which such transferee agrees to be bound by
all terms, conditions

                                       -2-

and limitations of this Agreement applicable to such transferee's transferor as
if such transferee were a party hereto. The requirement of subparagraph (iv)
shall not apply to any transfer (A) pursuant to an offering registered under the
Securities Act, (B) pursuant to Rule 144 under the Securities Act or (C)
effected in a market transaction otherwise exempt from registration under the
Securities Act.

                  (d) The Purchaser is able to fend for itself in connection
with the transactions contemplated by this Agreement, has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of its investment in the Corporation, as the ability to bear
the economic risks of its investment for an indefinite period of time and can
afford a complete loss of its investment, has had the opportunity prior to the
Purchaser's purchase of the Stock to ask questions of and receive answers from
representatives of the Corporation concerning the finances, operations and
business of the Corporation. The Purchaser is not relying upon any statement,
promise or assurance of any investor in the Corporation (or any representative
of any such investor) in arriving at the Purchaser's decision to purchase the
Stock, and has not otherwise been induced to purchase the Stock by any such
investor (or any representative of any such investor), and the Purchaser has
decided to purchase the Stock based upon the Purchaser's own analysis of the
merits and risks of investing in the Corporation without the intervention or
assistance of any other person, firm or corporation.

                  (e) The Purchaser understands and acknowledges that the
Purchaser will not be permitted to sell, transfer, assign or pledge the Stock
until it is registered under the Securities Act or an exemption from the
registration and prospectus delivery requirements of the Securities Act is
available to the Purchaser, and that there is no assurance that such an
exemption from registration will ever be available or that the Purchaser will
ever be able to sell any of the Stock.

                  (f) All certificates representing the Stock and, until such
time as the Stock is sold in an offering which is registered under the
Securities Act or the Corporation shall have received an opinion of counsel
satisfactory in form and content to the Corporation that such registration is
not required in connection with a resale (or subsequent resale) of the Stock,
all certificates issued in transfer thereof or substitution therefor, shall,
where applicable, have endorsed thereon the following (or substantially
equivalent) legends:

            (i)   THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
                  OFFERED FOR SALE, TRANSFERRED, SOLD, ASSIGNED, PLEDGED,
                  HYPOTHECATED OR OTHERWISE ENCUMBERED OR DISPOSED OF (A "TRANS-

                                      -3-

                  FER") UNLESS SUCH TRANSFER COMPLIES WITH THE PROVISIONS OF A
                  SUBSCRIPTION AGREEMENT BETWEEN THE REGISTERED HOLDER AND THE
                  CORPORATION (THE "AGREEMENT") (A COPY OF WHICH IS ON FILE WITH
                  THE SECRETARY OF THE CORPORATION AND WHICH WILL BE FURNISHED
                  BY THE CORPORATION TO THE HOLDER HEREOF UPON WRITTEN REQUEST
                  AND WITHOUT CHARGE). THE SECURITIES REPRESENTED BY THIS
                  CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
                  OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES
                  OR "BLUE SKY" LAWS. ACCORDINGLY, NO TRANSFER OF THE SECURITIES
                  REPRESENTED BY THIS CERTIFICATE MAY BE MADE EXCEPT IN
                  ACCORDANCE WITH THE AGREEMENT AND (A) PURSUANT TO AN EFFECTIVE
                  REGISTRATION STATEMENT OR AMENDMENT THERETO UNDER THE ACT OR
                  (B) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT
                  AND UNDER ANY APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.

            (ii)  Any legend required to be placed thereon by any applicable
                  state securities law.

            (iii) A legend to the effect that such shares of stock are subject
                  to a Stock Subscription Agreement between the Purchaser and
                  the Corporation that limits the transferability of the shares
                  under certain conditions and applies to any transferee of such
                  shares.

                  (g) The Corporation shall not be obligated to transfer any of
the Stock if counsel for the Corporation determines that any applicable
registration requirement under the Securities Act or any other applicable
requirement of federal or state law has not been met.

                                      -4-

            5. General Provisions.

                  (a) No Assignments. The Purchaser shall not transfer, assign
or encumber any of its rights, privileges, duties or obligations under this
Agreement without the prior written consent of the Corporation, and any attempt
to so transfer, assign or encumber shall be void.

                  (b) Notices. All notices and other communications which are
required or permitted to be given pursuant to the terms of this Agreement shall
be in writing and shall be sufficiently given (i) if personally delivered, (ii)
if sent by telex or facsimile, provided that "answer-back" confirmation is
received by the sender or (iii) upon receipt, if sent by registered or certified
mail, postage paid return receipt requested in any case addressed as follows:

                  (i) If to the Corporation, to

                        MicroBio Inc.
                        375 Park Avenue
                        Suite 1501
                        New York, New York 10152
                        Attn: Steve H. Kanzer, Esq.

                  (ii) If to the Purchaser, to the address set forth on the
signature page of this Agreement.

The address of a party, for the purposes of this Section 6(b)(ii), may be
changed by giving written notice to the other party of such change in the manner
provided herein for giving notice. Unless and until such written notice is
received, the addresses as provided herein shall be deemed to continue in effect
for all purposes hereunder.

                  (c) Standoff Agreement. The Purchaser agrees that, in
connection with each underwritten public offering registered under the
Securities Act of shares of Common Stock or other equity securities of the
Corporation by or on behalf of the Corporation, the Purchaser shall not sell or
transfer, or offer to sell or transfer, any shares of Common Stock or other
equity securities of the Corporation for such period as the managing underwriter
of such offering determines is necessary to effect the underwritten public
offering.

                  (d) Choice of Law; Consent to Jurisdiction. This Agreement
shall be governed by and construed in accordance with the internal laws (without
giving effect to the conflicts of law principles) of the State of Delaware.

                                      -5-

                  (e) Severability. The parties hereto agree that the terms and
provisions in this Agreement are reasonable and shall be binding and enforceable
in accordance with the terms hereof and, in any event, that the terms and
provisions of this Agreement shall be enforced to the fullest extent permissible
under law. In the event that any term or provision of this Agreement shall for
any reason be adjudged to be unenforceable or invalid, then such unenforceable
or invalid term or provision shall not affect the enforceability or validity of
the remaining terms and provisions of this Agreement, and the parties hereto
hereby agree to replace such unenforceable or invalid term or provision with an
enforceable and valid arrangement which, in its economic effect, shall be as
close as possible to the unenforceable or invalid term or provision.

                  (f) Successors. All references in this Agreement to the
Corporation shall include any and all successors in interest to the Corporation
whether by merger, consolidation, sale of all or substantially all assets or
otherwise, and this Agreement shall inure to the benefit of the successors and
assigns of the Corporation and, subject to the terms herein set forth, shall be
binding upon the Purchaser, its successors and permitted assigns.

                  (g) Counterparts. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same instrument.

                  (h) Modification, Amendment and Waiver. No modification,
amendment or waiver of any provision of this Agreement shall be effective
against the Corporation unless the same shall be in a written instrument signed
by an officer of the Corporation on its behalf and such instrument is approved
by its Board of Directors. The failure at any time to enforce any of the
provisions of this Agreement shall in no way be construed as a waiver of such
provisions and shall not affect the right of either party thereafter to enforce
each and every provision hereof in accordance with its terms.

                  (i) Further Assurances. The parties agree to execute such
further instruments and to take such further action as may reasonably be
necessary to carry out the intent of this Agreement.

                  (j) Integration. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof.

                  (k) Headings. The headings of the Sections and paragraphs of
this Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.

                                      -6-

                  (l) Gender and Number. As used in this Agreement, the
masculine, feminine or neuter gender, and the singular or plural, shall be
deemed to include the others whenever and wherever the context so requires.
Additionally, unless the context requires otherwise, "or" is not exclusive.

                                      -7-

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

                               TRIAD PHARMACEUTICALS, INC.

                               By:    /s/ Steve H. Kanzer
                                      --------------------------------
                               Name:  Steve H. Kanzer
                               Title: President and Chief 
                                      Executive Officer

                               PURCHASER:

                               By:    /s/ E. J. Myrianthopoulos
                                      --------------------------------
                               Name:  Evan Myrianthopoulos

                               Address: c/o Paramount Capital Investments, LLC
                                        375 Park Avenue, Suite 1501
                                        New York, N.Y. 10152

                               Tax#: _________________________________

                               NUMBER OF SHARES
                               OF COMMON STOCK
                               SUBSCRIBED FOR: 247,000

                               PURCHASE PRICE: $247.00

                                      -8-

                          STOCK SUBSCRIPTION AGREEMENT

            THIS STOCK SUBSCRIPTION AGREEMENT ("Agreement") is entered into as
of August 15, 1995, by and between the undersigned (the "Purchaser") and
MicroBio Inc., a Delaware corporation with a place of business at 375 Park
Avenue, Suite 1501, New York, New York 10152 (the "Corporation").

                                    RECITALS

            A. WHEREAS, the Corporation desires to sell shares of common stock,
par value $.001 per share, of the Corporation (which class of shares is referred
to herein as "Common Stock") to Purchaser, and Purchaser desires to purchase
these shares, upon the terms and conditions herein specified; and

            B. WHEREAS, Purchaser is willing to subject the Stock (as defined
herein) to the restrictions contained herein.

                                   AGREEMENT

            NOW, THEREFORE, in consideration of the foregoing recitals and of
the mutual promises herein contained, the parties hereby agree as follows:

            1. Issuance and Acquisition of Stock.

                  (a) Immediately after the execution of this Agreement by the
parties, the Corporation shall issue to the Purchaser, and the Purchaser shall
acquire from the Corporation, the number of shares of Common Stock listed beside
the Purchaser's name on the signature hereto (the "Stock") for the total
purchase price listed below the Purchaser's name on the signature page hereto
(the "Purchase Price").

                  (b) Upon the execution of this Agreement, the Purchaser shall
make payment for the Stock by delivering to the Corporation a check payable to
the Corporation in the amount of the Purchase Price. Within ninety days after
the execution of this Agreement by the parties and receipt by the Corporation of
the Purchase Price, the Corporation shall deliver to the Purchaser a certificate
or certificates evidencing the Stock, registered in the name of the Purchaser
and concurrently therewith.

            2. Violation Of Transfer Provisions. The Corporation shall not be
required (i) to transfer on its books any shares of Stock which shall have been
sold, transferred, assigned or pledged in violation of any of the provisions of
this Agreement or (ii) to treat as owner of such shares or to accord the right
to vote as such owner or to pay dividends to any transferee to whom such shares
shall have been so sold, transferred, assigned or pledged.

            3. Rights as Shareholder. Except as otherwise provided herein, the
Purchaser shall, during the term of this Agreement, exercise all rights and
privileges of a shareholder of the Corporation with respect to the Stock.

            4. Securities Laws. The Purchaser represents and warrants to and
covenants with the Corporation as follows:

                  (a) The Stock will be acquired by the Purchaser with the
Purchaser's own funds for investment purposes and for the Purchaser's own
account, not as a nominee or agent for any other person, firm or corporation,
and not with a view to the sale or distribution of all or any part thereof, and
the Purchaser has no present intention of selling, granting any participation
in, or otherwise distributing, any or all of the Stock. The Purchaser does not
have any contract, undertaking, agreement or arrangement with any person, firm
or corporation to sell, transfer or grant any participation to any person, firm
or corporation with respect to any or all of the Stock.

                  (b) The Purchaser understands that the Stock will not be
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and that the Stock is being issued and sold to the Purchaser based upon an
exemption from registration predicated in part on the accuracy and completeness
of the Purchaser's representations and warranties appearing herein.

                  (c) The Purchaser agrees that in no event will the Purchaser
sell, transfer, assign or pledge all or any part of the Stock or any interest
therein, unless and until (i) the Purchaser shall have notified the Corporation
of the proposed disposition and shall have furnished the Corporation with a
statement of the circumstances surrounding the proposed disposition, and (ii)
the Purchaser shall have furnished the Corporation with an opinion of counsel
satisfactory in form and content to the Corporation to the effect that (A) such
disposition will not require registration of the Stock under the Securities Act
or compliance with applicable state securities laws, or (B) appropriate action
necessary for compliance with the Securities Act and applicable state securities
laws has been taken, or (iii) the Corporation shall have waived, expressly and
in writing, its right under clauses (i) and (ii) of this subsection, and (iv)
the proposed transferee of the Stock shall have provided the Corporation with a
written agreement or undertaking by which such transferee agrees to be bound by
all terms, conditions

                                       -2-

and limitations of this Agreement applicable to such transferee's transferor as
if such transferee were a party hereto. The requirement of subparagraph (iv)
shall not apply to any transfer (A) pursuant to an offering registered under the
Securities Act, (B) pursuant to Rule 144 under the Securities Act or (C)
effected in a market transaction otherwise exempt from registration under the
Securities Act.

                  (d) The Purchaser is able to fend for itself in connection
with the transactions contemplated by this Agreement, has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of its investment in the Corporation, as the ability to bear
the economic risks of its investment for an indefinite period of time and can
afford a complete loss of its investment, has had the opportunity prior to the
Purchaser's purchase of the Stock to ask questions of and receive answers from
representatives of the Corporation concerning the finances, operations and
business of the Corporation. The Purchaser is not relying upon any statement,
promise or assurance of any investor in the Corporation (or any representative
of any such investor) in arriving at the Purchaser's decision to purchase the
Stock, and has not otherwise been induced to purchase the Stock by any such
investor (or any representative of any such investor), and the Purchaser has
decided to purchase the Stock based upon the Purchaser's own analysis of the
merits and risks of investing in the Corporation without the intervention or
assistance of any other person, firm or corporation.

                  (e) The Purchaser understands and acknowledges that the
Purchaser will not be permitted to sell, transfer, assign or pledge the Stock
until it is registered under the Securities Act or an exemption from the
registration and prospectus delivery requirements of the Securities Act is
available to the Purchaser, and that there is no assurance that such an
exemption from registration will ever be available or that the Purchaser will
ever be able to sell any of the Stock.

                  (f) All certificates representing the Stock and, until such
time as the Stock is sold in an offering which is registered under the
Securities Act or the Corporation shall have received an opinion of counsel
satisfactory in form and content to the Corporation that such registration is
not required in connection with a resale (or subsequent resale) of the Stock,
all certificates issued in transfer thereof or substitution therefor, shall,
where applicable, have endorsed thereon the following (or substantially
equivalent) legends:

            (i)   THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
                  OFFERED FOR SALE, TRANSFERRED, SOLD, ASSIGNED, PLEDGED,
                  HYPOTHECATED OR OTHERWISE ENCUMBERED OR DISPOSED OF (A "TRANS-

                                      -3-

                  FER") UNLESS SUCH TRANSFER COMPLIES WITH THE PROVISIONS OF A
                  SUBSCRIPTION AGREEMENT BETWEEN THE REGISTERED HOLDER AND THE
                  CORPORATION (THE "AGREEMENT") (A COPY OF WHICH IS ON FILE WITH
                  THE SECRETARY OF THE CORPORATION AND WHICH WILL BE FURNISHED
                  BY THE CORPORATION TO THE HOLDER HEREOF UPON WRITTEN REQUEST
                  AND WITHOUT CHARGE). THE SECURITIES REPRESENTED BY THIS
                  CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
                  OF 1933, AS AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES
                  OR "BLUE SKY" LAWS. ACCORDINGLY, NO TRANSFER OF THE SECURITIES
                  REPRESENTED BY THIS CERTIFICATE MAY BE MADE EXCEPT IN
                  ACCORDANCE WITH THE AGREEMENT AND (A) PURSUANT TO AN EFFECTIVE
                  REGISTRATION STATEMENT OR AMENDMENT THERETO UNDER THE ACT OR
                  (B) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE ACT
                  AND UNDER ANY APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS.

            (ii)  Any legend required to be placed thereon by any applicable
                  state securities law.

            (iii) A legend to the effect that such shares of stock are subject
                  to a Stock Subscription Agreement between the Purchaser and
                  the Corporation that limits the transferability of the shares
                  under certain conditions and applies to any transferee of such
                  shares.

                  (g) The Corporation shall not be obligated to transfer any of
the Stock if counsel for the Corporation determines that any applicable
registration requirement under the Securities Act or any other applicable
requirement of federal or state law has not been met.

                                      -4-

            5. General Provisions.

                  (a) No Assignments. The Purchaser shall not transfer, assign
or encumber any of its rights, privileges, duties or obligations under this
Agreement without the prior written consent of the Corporation, and any attempt
to so transfer, assign or encumber shall be void.

                  (b) Notices. All notices and other communications which are
required or permitted to be given pursuant to the terms of this Agreement shall
be in writing and shall be sufficiently given (i) if personally delivered, (ii)
if sent by telex or facsimile, provided that "answer-back" confirmation is
received by the sender or (iii) upon receipt, if sent by registered or certified
mail, postage paid return receipt requested in any case addressed as follows:

                  (i) If to the Corporation, to

                        MicroBio Inc.
                        375 Park Avenue
                        Suite 1501
                        New York, New York 10152
                        Attn: Steve H. Kanzer, Esq.

                  (ii) If to the Purchaser, to the address set forth on the
signature page of this Agreement.

The address of a party, for the purposes of this Section 6(b)(ii), may be
changed by giving written notice to the other party of such change in the manner
provided herein for giving notice. Unless and until such written notice is
received, the addresses as provided herein shall be deemed to continue in effect
for all purposes hereunder.

                  (c) Standoff Agreement. The Purchaser agrees that, in
connection with each underwritten public offering registered under the
Securities Act of shares of Common Stock or other equity securities of the
Corporation by or on behalf of the Corporation, the Purchaser shall not sell or
transfer, or offer to sell or transfer, any shares of Common Stock or other
equity securities of the Corporation for such period as the managing underwriter
of such offering determines is necessary to effect the underwritten public
offering.

                  (d) Choice of Law; Consent to Jurisdiction. This Agreement
shall be governed by and construed in accordance with the internal laws (without
giving effect to the conflicts of law principles) of the State of Delaware.

                                      -5-

                  (e) Severability. The parties hereto agree that the terms and
provisions in this Agreement are reasonable and shall be binding and enforceable
in accordance with the terms hereof and, in any event, that the terms and
provisions of this Agreement shall be enforced to the fullest extent permissible
under law. In the event that any term or provision of this Agreement shall for
any reason be adjudged to be unenforceable or invalid, then such unenforceable
or invalid term or provision shall not affect the enforceability or validity of
the remaining terms and provisions of this Agreement, and the parties hereto
hereby agree to replace such unenforceable or invalid term or provision with an
enforceable and valid arrangement which, in its economic effect, shall be as
close as possible to the unenforceable or invalid term or provision.

                  (f) Successors. All references in this Agreement to the
Corporation shall include any and all successors in interest to the Corporation
whether by merger, consolidation, sale of all or substantially all assets or
otherwise, and this Agreement shall inure to the benefit of the successors and
assigns of the Corporation and, subject to the terms herein set forth, shall be
binding upon the Purchaser, its successors and permitted assigns.

                  (g) Counterparts. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, but which together
shall constitute one and the same instrument.

                  (h) Modification, Amendment and Waiver. No modification,
amendment or waiver of any provision of this Agreement shall be effective
against the Corporation unless the same shall be in a written instrument signed
by an officer of the Corporation on its behalf and such instrument is approved
by its Board of Directors. The failure at any time to enforce any of the
provisions of this Agreement shall in no way be construed as a waiver of such
provisions and shall not affect the right of either party thereafter to enforce
each and every provision hereof in accordance with its terms.

                  (i) Further Assurances. The parties agree to execute such
further instruments and to take such further action as may reasonably be
necessary to carry out the intent of this Agreement.

                  (j) Integration. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter hereof.

                  (k) Headings. The headings of the Sections and paragraphs of
this Agreement have been inserted for convenience of reference only and do not
constitute a part of this Agreement.

                                      -6-

                  (l) Gender and Number. As used in this Agreement, the
masculine, feminine or neuter gender, and the singular or plural, shall be
deemed to include the others whenever and wherever the context so requires.
Additionally, unless the context requires otherwise, "or" is not exclusive.

                                      -7-

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

                               MICROBIO INC.

                               By:    /s/ Steve H. Kanzer
                                      --------------------------------
                               Name:  Steve H. Kanzer
                               Title: President and Chief 
                                      Executive Officer

                               PURCHASER:

                               By:    /s/ E. J. Myrianthopoulos
                                      --------------------------------
                               Name:  Evan Myrianthopoulos

                               Address: 5 Mill Pond Lane
                                        Lattingtown, NY 11560

                               Tax#: ###-##-####

                               NUMBER OF SHARES
                               OF COMMON STOCK
                               SUBSCRIBED FOR: 3,000

                               PURCHASE PRICE: $3.00

                                      -8-

                                LICENSE AGREEMENT

      This License Agreement (hereinafter referred to as the "License
Agreement"), effective as of the 25th day of November, 1997 is made by and
between Bar-Ilan Research and Development Company Ltd., a company duly organized
and existing under the laws of the State of Israel and having a principal place
of business at Bar-Ilan University, P0 Box 1530, Ramat Gan 52115, Israel
("BAR-ILAN"), and Ansan Pharmaceuticals, Inc., a corporation duly organized and
existing under the laws of the State of Delaware and having a principal place of
business at 400 Oyster Point Boulevard, Suite 435, South San Francisco,
California 94080, USA ("ANSAN").

      WHEREAS, BAR-ILAN is entering this License Agreement on its own behalf,
and as representative and trustee for Bar-Ilan University (the "University") and
MOR-Research Applications Ltd. ("MOR"), and represents that it has been
authorized by the University and MOR to make the representations and
undertakings contained herein; and

      WHEREAS, BAR-ILAN has the right to grant licenses under the Patent Rights
(as later defined) and whereas ANSAN desires to obtain a license upon the terms
and conditions hereinafter set forth; and

      WHEREAS, ANSAN has represented to BAR-ILAN, to induce BAR-ILAN to enter
into this License Agreement, that it shall commit itself to a thorough, vigorous
and diligent program of exploiting the Patent Rights and know-how of BAR-ILAN,
so that public utilization shall result therefrom; and

      WHEREAS, BAR-ILAN and ANSAN have entered into a previous license
agreement, effective as of the 31st day of October, 1992; and

      WHEREAS, BAR-ILAN and ANSAN mutually agree to terminate that previous
license agreement and replace it with this new License Agreement and a parallel
license agreement between BAR-ILAN and Titan Pharmaceuticals, Inc., a
corporation duly organized and existing under the laws of the State of Delaware
and having a principal place of business at 400 Oyster Point Boulevard, Suite
505, South San Francisco, California 94080, USA ("TITAN").

      NOW, THEREFORE, it is agreed as follows:

                             ARTICLE I - DEFINITIONS

      For the purposes of this License Agreement, the following words and
phrases shall have the following meanings:

      1.1. "AFFILIATE" shall mean any company or entity, the voting control of
which is at least fifty percent (50%), directly or indirectly, owned or
controlled by ANSAN or which, directly or indirectly, owns or controls at least
fifty percent (50%) of ANSAN or which is under common control with ANSAN.
"AFFILIATE" shall also mean any entity in fact effectively controlled by or
under common control with ANSAN.

      1.2. "Patent Rights" shall mean:

            1.2.1. Israeli Patent Applications Nos. 83389 and 87072, filed July
30, 1987 and July 11, 1988, respectively; and any applications claiming priority
or benefit directly or indirectly from either or both of them, including any
continuations, continuations-in-part, and divisionals thereof; and any patents
issuing from any of the foregoing, including any reissues, reexaminations, and
extensions thereof; as set forth in Appendix I, Paragraph 1 (the "Basic
Patents"); and

            1.2.2. US Patent Application No. 08/206,690, filed March 7, 1994;
and any applications claiming priority or benefit directly or indirectly
therefrom, including any continuations, continuations-in-part, and divisionals
thereof; and any patents issuing from any of the foregoing; including any
reissues, reexaminations, and extensions thereof; as set forth in Appendix I,
Paragraph 2 (the "Hemoglobinopathies Patents").

      1.3. "Licensed Product(s)" shall mean:

             1.3.1. Any product which is covered in whole or in part by a valid
and unexpired claim contained in the Patent Rights in the country in which the
product is made, used, leased, or sold;

                                        2

            1.3.2. Any product which is manufactured by using a process which is
covered in whole or in part by a valid and unexpired claim contained in the
Patent Rights in the country in which the process is used;

            1.3.3. Any product which is used according to a method which is
covered in whole or in part by a valid and unexpired claim contained in the
Patent Rights in the country in which the method is used.

      1.4. "Licensed Process(es)" shall mean any process or method, which is
covered, in whole or in part, by a valid and unexpired claim contained in the
Patent Rights in the country in which the process or method is used.

      1.5. "ANSAN Field" shall mean: (a) with respect to butylidene dibutyrate
(sometimes referred to as "AN-10"), all indications and routes of
administration except non-topical applications for oncologic disorders; and (b)
with respect to all other products within the Patent Rights, (i) the treatment
of (beta)-hemoglobinopathies ((beta)-globin disorders) and (ii) topical
applications other than oncologic disorders. The term "oncologic disorders"
shall not include chemotherapy- or radiotherapy-induced alopecia.

      1.6. "Net Sales" shall mean ANSAN's or an AFFILIATE's billings for
Licensed Products and Licensed Processes, less the sum of the following:

            (a)   discounts allowed in amounts customary in the trade;

            (b)   sales, tariffs, duties, and/or use taxes directly imposed on
                  and with reference to particular sales;

            (c)   outbound transportation prepaid or allowed;

            (d)   amounts allowed or credited on returns; and

            (e)   bad debt deductions actually written off during the period.

      No deductions shall be made for commissions paid to individuals whether
they be independent sales agencies or regularly employed by ANSAN or an
AFFILIATE and on their

                                       3

payroll. Licensed Products and Licensed Processes shall be considered "sold"
when billed out or invoiced.

                                ARTICLE 2 - GRANT

      2.1. BAR-ILAN hereby grants to ANSAN a worldwide license to practice under
the Patent Rights, and to make, have made, use, lease, and/or sell the Licensed
Products in the ANSAN Field and to practice the Licensed Processes in the ANSAN
Field, said license being perpetual unless sooner terminated as hereinafter
provided and subject to the payment of royalties as hereinafter provided, and
said license to include the right to sublicense in the ANSAN Field and to be
exclusive to ANSAN in the ANSAN Field.

      2.2. ANSAN agrees that any sublicenses granted by it shall provide for the
same obligations as those obligations imposed only by this License Agreement.

      2.3. ANSAN agrees to forward to BAR-ILAN annually a copy of such reports
received from any sublicensee as may be pertinent to an accounting of royalties,
as well as copies of all sublicense agreements entered into by ANSAN in
connection with the Patent Rights.

                            ARTICLE 3 - DUE DILIGENCE

      3.1. ANSAN shall use its reasonable best efforts to bring Licensed
Products or Licensed Processes to market through a thorough, vigorous and
diligent program for exploitation of the Patent Rights and continue active,
diligent marketing efforts for Licensed Products or Licensed Processes
throughout the life of this Agreement.

      3.2. ANSAN shall endeavor to use the Rabin Medical Center in Petach-Tikva,
Israel, as one of the sites to conduct human clinical trials of the Licensed
Products provided that US Food and Drug Administration ("FDA") protocols and
standards can be achieved and the cost per patient is competitive with the
United States.

                                       4

                              ARTICLE 4 - ROYALTIES

      4.1. For the rights, privileges, and license granted hereunder, ANSAN
shall pay to BAR-ILAN, as set forth below, either (i) until the expiration of
the last applicable patent within the Patent Rights on any Licensed Product or
Licensed Process in the country in which such Licensed Process is used or such
Licensed Product is made, used, leased, or sold, after which time ANSAN's
license shall become fully paid-up and perpetual in such country, or (ii) or
until this License Agreement shall be terminated as hereinafter provided:

            4.1.1. In each calendar year, a royalty in an amount equal to [***]
percent [***]% of Net Sales of the Licensed Products or Licensed Processes
leased or sold, by ANSAN or an AFFILIATE.

            4.1.2. In each calendar year, a royalty in an amount equal to [***]%
percent [***]% of the royalties, fees, or any other lump sum received by ANSAN
or an AFFILIATE from its sublicensees for the use, lease, or sale of Licensed
Products and Licensed Processes. ANSAN shall not sell or sublicense the use,
lease, sale, or other disposition of Licensed Products or Licensed Processes to
an AFFILIATE of ANSAN without obtaining the prior written consent of BAR-ILAN,
which consent shall not unreasonably be withheld.

      4.2. No multiple royalties shall be payable because use, lease, or sale of
any Licensed Product or Licensed Process is, or shall be, covered by more than
one valid and unexpired claim contained in the Patent Rights.

      4.3. Royalty payments shall be paid in United States Dollars in New York
or at such other place as BAR-ILAN may reasonably designate consistent with the
laws and regulations controlling in any foreign country. Any withholding taxes
which ANSAN or any sublicensee shall be required by law to withhold on
remittance of the royalty payments shall be deducted from the royalty paid to
BAR-ILAN. ANSAN shall furnish BAR-ILAN the original copies of all official
receipts for such taxes. If a currency conversion shall be required in
connection with the payment of royalties hereunder, such conversion shall be
made using the exchange rate prevailing at

[***] - confidential treatment requested.

                                       5

Citibank, NA in New York on the last business day of the calendar quarterly
reporting period to which such royalty payments relate.

      4.4. In all cases, the price utilized to determine Net Sales employed in
the computation of royalties shall be a genuine and objective selling price
which would otherwise be established in a bona fide arm's length transaction
between unrelated and independent parties which have no affiliation or other
interest which might affect such genuine and objective selling price. ANSAN
covenants not to engage in manipulative transfer pricing, distribution of
Licensed Products which are not commercially reasonable, or any other means to
avoid the intended application of this Article 4. In the event Licensed Products
are used or otherwise disposed of by ANSAN to an AFFILIATE or any other party at
a price which is less than a genuine and objective selling price, as described
herein, the price utilized to determine Net Sales employed in the computation of
royalties shall be the prevailing price of the identical type of Licensed
Products sold or leased by ANSAN to independent and unrelated third parties. In
the event that ANSAN shall not have customarily sold or leased the identical
type of Licensed Products to independent and unrelated third parties then the
price employed in the computation of royalties shall be set at [***]% of the
full cost of production, including all direct costs and full overhead, for such
Licensed Products sold.

      4.5. In addition to any royalties payable under Paragraph 4.1, if ANSAN,
or an AFFILIATE or sublicensee of ANSAN, receives approval from the US FDA to
market a Licensed Product in the ANSAN Field (as those terms are used in this
License Agreement) before TITAN, or an AFFILIATE or sublicensee of TITAN,
receives approval from the US FDA to market a Licensed Product in the TITAN
Field (as those terms are used in the License Agreement between BAR-ILAN and
TITAN), then ANSAN shall pay to BAR-ILAN four additional payments of $[***]%
each: the first within 90 days of receiving the approval, the second within 180
days of receiving the approval, the third within 270 days of receiving the
approval, and the fourth within 360 days of receiving the approval.

[***] - confidential treatment requested.

                                        6

                         ARTICLE 5 - REPORTS AND RECORDS

      5.1. ANSAN shall keep full, true and accurate books of account containing
all particulars that may be necessary to the purpose of showing the amount
payable to BAR-ILAN by way of royalty as aforesaid. Said books of account shall
be kept at ANSAN's principal place of business. Said books and the supporting
data shall be open upon reasonable notice to ANSAN and no more than twice per
calendar year, for five (5) years following the end of the calendar year to
which they pertain, for inspection by the BAR-ILAN Internal Audit Division
and/or by an independent certified public accountant employed by BAR-ILAN, to
which ANSAN has no reasonable objection, for the purpose of verifying ANSAN's
royalty statement or compliance in other respects with this License Agreement.

      5.2. ANSAN, within sixty (60) days after the end each quarter of each
calendar year, shall deliver to BAR-ILAN true and accurate reports, giving such
particulars of the business conducted by ANSAN during the preceding quarter
under this License Agreement as shall be pertinent to a royalty accounting
hereunder. These shall include at least the following:

            (a)   All Licensed Products and Licensed Processes used, leased, or
                  sold by or for ANSAN, its AFFILIATES and sublicensees.

            (b)   Total amounts invoiced for Licensed Products and Licensed
                  Processes used, leased, or sold by or for ANSAN, its
                  AFFILIATES and sublicensees.

            (c)   Deductions applicable in computed "Net Sales" as defined in
                  Paragraph 1.6.

            (d)   Total royalties due based on Net Sales by or for ANSAN, its
                  AFFILIATES and sublicensees.

            (e)   Names and addresses of all AFFILIATES and sublicensees of
                  ANSAN.

            (f)   On an annual basis, ANSAN's Annual Report

      5.3. With each such report submitted, ANSAN shall pay to BAR-ILAN the
royalties due and payable under this License Agreement. If no royalties (other
than any minimum royalty pursuant to Paragraph 14.1) shall be due, ANSAN shall
so report.

                                       7

                         ARTICLE 6 - PATENT PROSECUTION

      6.1. ANSAN, at its own expense and utilizing patent counsel of its choice
selected in consultation with BAR-ILAN, shall have the sole right and obligation
for the filing, prosecution, and maintenance of the Hemoglobinopathies Patents.
ANSAN, or its patent counsel, shall provide BAR-ILAN with copies of all
correspondence and documents filed with, or received from, any patent office or
patent agent. In addition, ANSAN agrees that any and all official or "ribbon"
copies of issued patents shall be forwarded to, and retained by, BAR-ILAN.

      6.2. BAR-ILAN, at its own expense and utilizing patent counsel of its
choice selected in consultation with ANSAN, shall have the sole right and
responsibility for the filing, prosecution, and maintenance of the Basic
Patents. BAR-ILAN may delegate this responsibility to a licensee of the Basic
Patents; and it is contemplated that BAR-ILAN will delegate this responsibility
to TITAN. BAR-ILAN agrees for the benefit of ANSAN that it shall not, nor shall
it permit any licensee to whom it may delegate this responsibility, to take any
action in regard to prosecution of the Basic Patents (including by
reexamination, reissue, or the like) that could result in any diminution of
rights with respect to any claims covering rights within the ANSAN Field, in
particular, to any composition of matter claims relating to butylidene
dibutyrate, except with the consent of ANSAN.

                             ARTICLE 7 - TERMINATION

      7.1. If ANSAN shall become bankrupt or insolvent, shall file a petition in
bankruptcy, or if the business of ANSAN shall be placed in the hands of a
receiver, assignee, or trustee for the benefit of creditors, whether by the
voluntary act of ANSAN or otherwise, this License Agreement shall automatically
terminate.

      7.2. Should ANSAN fail in its payment to BAR-ILAN of royalties due in
accordance with the terms of this License Agreement which are not the subject of
a bona fide dispute between BAR-ILAN and ANSAN, BAR-ILAN shall have the right to
serve notice upon ANSAN, by certified mail to the address designated in Article
13 hereof, of its intention to terminate this License Agreement within sixty
(60) days after receipt of said notice of termination unless

                                       8

ANSAN shall pay to BAR-ILAN, within the sixty (60) day period, all such
royalties due and payable. Upon the expiration of the sixty (60) day period, if
ANSAN shall not have paid all such royalties due and payable, the rights,
privileges and license granted hereunder shall thereupon immediately terminate.

      7.3. Upon any material breach or default of this License Agreement
(including without limitation, the failure to submit annual reports as provided
under Paragraph 5.2) by ANSAN, other than those occurrences set out in
Paragraphs 7.1 and 7.2 hereinabove, which shall always take precedence in that
order over any material breach or default referred to in this Paragraph 7.3,
BAR-ILAN shall have the right to terminate this License Agreement and the
rights, privileges and license granted hereunder by ninety (90) days' notice to
ANSAN by certified mail to the address designated in Article 13 hereof. Such
termination shall become effective unless ANSAN shall have cured any such breach
or default capable of being cured prior to the expiration of the ninety (90) day
per from receipt of the notice of termination.

      7.4. ANSAN shall have the right to terminate this License Agreement at any
time on nine (9) months notice by certified mail to BAR-ILAN.

      7.5. Upon termination of this License Agreement for any reason, nothing
herein shall be construed to release either party from any obligation that
matured prior to the effective date of such termination. ANSAN and/or any
sublicensee thereof may, however, after the effective date of such termination,
sell all Licensed Products, and complete Licensed Products in the process of
manufacture at the time of such termination, and sell the same, provided that
ANSAN shall pay to BAR-ILAN the royalties therein as required by Article 4 of
this License Agreement and shall submit the reports required by Article 5 hereof
on the sales of Licensed Products.

      7.6. Upon the termination of this License Agreement, ANSAN shall (except
to the extent necessary to complete the manufacture and sale of Products
permitted under Paragraph 7.5 above): (i) return to BAR-ILAN any materials still
in its possession provided to it by BAR-ILAN pursuant to this License Agreement;
(ii) maintain the confidentiality of all proprietary, non-public information
provided to it by BAR-ILAN; and (iii) not use the Licensed Products or other

                                       9

information disclosed pursuant to this License Agreement in any way in
connection with its business.

      7.7. Upon the termination of this License Agreement for whatever reason,
existing sublicense agreements pertaining to Licensed Products entered into by
ANSAN pursuant to this License Agreement shall at BAR-ILAN's option be assigned.
upon such termination, from ANSAN to BAR-ILAN or to BAR-ILAN's designee.

                             ARTICLE 8 - ARBITRATION

      8.1. Except as to issues relating to the validity, enforceability, or
infringement of any patent contained in the Patent Rights licensed hereunder,
any and all claims, disputes, or controversies arising under, out of, or in
connection with this License Agreement, which have not been resolved by good
faith negotiations between the parties, shall be resolved by final and binding
arbitration to be held in Tel Aviv under the rules of the American Arbitration
Association then in effect. The arbitrators shall have no power to add to,
subtract from, or modify any of the terms or conditions of this License
Agreement. Any award rendered in such arbitration may be enforced by either
party in any court having jurisdiction.

      8.2. Any claim, dispute, or controversy concerning the validity,
enforceability, or infringement of any patent contained in the Patent Rights
licensed hereunder shall be. resolved in any court having jurisdiction thereof.
In the event ANSAN institutes a proceeding to contest the validity or
enforceability of the Patent Rights, all royalties owed by ANSAN under Article 4
of this License Agreement shall continue to be paid by ANSAN until such
proceeding is resolved, after appeals if any.

      8.3. In the event that, in any arbitration proceeding, any issue shall
arise concerning the validity, enforceability, or infringement of any patent
contained in the Patent Rights licensed hereunder, the arbitrators shall, to the
extent possible, resolve all issues other than validity, enforceability, and
infringement; in any event, the arbitrators shall not delay the arbitration
proceeding for the purpose of obtaining or permitting either party to obtain
judicial resolution of such issues, unless an order staying the arbitration
proceeding shall be entered by a court of

                                       10

competent jurisdiction. Neither party shall raise any issue concerning the
validity, enforceability, or infringement of any patent contained in the Patent
Rights licensed hereunder in any proceeding to enforce any arbitration award
hereunder, or in any proceeding otherwise arising out of any such arbitration
award.

                   ARTICLE 9 - INFRINGEMENT AND OTHER ACTIONS

      9.1. ANSAN and BAR-ILAN shall promptly provide written notice to the other
party of any alleged infringement by a third party of the Patent Rights within
the ANSAN Field and provide such other party with any available evidence of such
infringement.

      9.2. During the term of this Agreement, ANSAN shall have the right, but
not the obligation, to prosecute and/or defend, at its own expense and utilizing
counsel of its choice, any infringement of and/or challenge to the Patent Rights
within the ANSAN Field. In furtherance of such right, BAR-ILAN hereby agrees
that ANSAN may join BAR-ILAN as a party in any such suit, without expense to
BAR-ILAN. No settlement, consent judgment, or other voluntary final disposition
of any such suit may be entered into without the consent of BAR-ILAN, which
consent shall not unreasonably be withheld. ANSAN shall indemnity BAR-ILAN
against any order for costs that may be made against BAR-ILAN in any such suit.

      9.3. Any recovery of damages by ANSAN in any such suit shall be applied
first in satisfaction of any unreimbursed expenses and legal fees of ANSAN
relating to the suit. The balance remaining from any such recovery shall be
treated as royalties received by ANSAN from sublicensees and shared by BAR-ILAN
and ANSAN in accordance with Paragraph 4.1.2 hereof

      9.4. If within six (6) months after receiving notice of any alleged
infringement within the ANSAN Field, ANSAN shall have been unsuccessful in
persuading the alleged infringer to desist, or shall not have brought and shall
not be diligently prosecuting an infringement action, or if ANSAN shall notify
BAR-ILAN, at any time prior thereto, of its intention not to bring suit against
the alleged infringer, then, and in those events only, BAR-ILAN shall have the
right, but not the obligation, to prosecute, at its own expense and utilizing
counsel of its choice, any infringement of the Patent Rights within the ANSAN
Field, and BAR-ILAN may, for such

                                      11

purposes, join ANSAN as a party plaintiff The total cost of any such
infringement action commenced solely by BAR-ILAN shall be borne by BAR-ILAN and
BAR-ILAN shall keep any recovery or damages for past infringement derived
therefrom.

      9.5. In any suit to enforce and/or defend the Patent Rights pursuant to
this License Agreement, the party not in control of such suit shall, at the
request and expense of the controlling party, cooperate in all respects and, to
the extent possible, have its employees testify when requested and make
available relevant records, papers, information, samples, specimens, and the
like.

      9.6. BAR-ILAN and ANSAN agree for the benefit of TITAN that, before either
of them shall commence or respond to a suit to enforce and/or defend the Patent
Rights, they shall consult with TITAN in good faith to the extent legally
permissible to ensure that no action shall jeopardize the legitimate interests
of TITAN in the Patent Rights. ANSAN further agrees that it will cooperate in
good faith with TITAN to establish an agreement for shared responsibility and/or
cost of enforcement and/or defense to the extent that such enforcement and/or
defense implicates both the TITAN Field and the ANSAN Field.

                         ARTICLE 10 - PRODUCT LIABILITY

      10.1. BAR-ILAN, by this License Agreement, makes no representation as to
the patentability and/or breadth of the inventions contained in the Patent
Rights. BAR-ILAN, by this License Agreement, makes no representation as to
patents now held or which will be held by others in the field of the Licensed
Products for a particular purpose.

      10.2. ANSAN agrees to defend, indemnify, and hold BAR-ILAN, the University
and MOR harmless from and against all liability, demands, damages, expense, or
losses for death, personal injury, illness, or property damage arising (a) out
of the use by ANSAN or its transferees of inventions licensed or information
furnished under this License Agreement, or (b) out of any use, sale, or other
disposition by ANSAN or its transferees of products made by use of such
inventions or information. As used in this clause, BAR-ILAN includes the
Trustees, Officers,

                                      12

Agents, Employees and Students of BAR-ILAN, the University, and MOR, and ANSAN
includes its AFFILIATES, Contractors and Sub-contractors.

                             ARTICLE 11 - ASSIGNMENT

      ANSAN may assign or otherwise transfer this License Agreement and the
license granted hereunder, and the rights acquired by it hereunder so long as
such assignment or transfer shall be accompanied by a sale or other transfer of
ANSAN's entire business or of that part of ANSAN's business to which the
license granted hereunder relates. ANSAN shall give BAR-ILAN thirty (30) days
prior written notice within which to reasonably object to such assignment or
transfer. If within thirty (30) days after the giving of such notice, no written
objection is received by ANSAN, BAR-ILAN shall be deemed to have approved such
assignment or transfer; provided, however, BAR-ILAN shall not be deemed to have
approved such assignment and transfer unless such assignee or transferee shall
have agreed in writing to be bound by the terms and conditions of this License
Agreement. If, within such thirty (30) day period, BAR-ILAN provides written
notice of reasonable objection to such assignment or transfer, then no such
assignment or transfer shall be made and, if made, shall be deemed null and
void. Upon such assignment or transfer and agreement by such assignee or
transferee, the term ANSAN as used herein shall mean such assignee or
transferee. If ANSAN shall sell or otherwise transfer its entire business or
that part of its business to which the license granted hereby relates and the
transferee shall not have agreed in writing to be bound by the terms and
conditions of this License Agreement, or new terms and conditions shall not have
been reasonably agreed upon within sixty (60) days of such sale or transfer,
BAR-ILAN shall have the right to terminate this License Agreement.

                          ARTICLE 12 - NON-USE OF NAMES

      ANSAN shall not use the name of BAR-ILAN or MOR or any adaptation thereof
in any advertising, promotional, or sales literature without prior written
consent obtained from BAR-ILAN, in each case, except that ANSAN may state that
it is licensed by BAR-ILAN under one or more of the patents and/or applications
comprising the Patent Rights.

                                      13

             ARTICLE 13 - PAYMENTS, NOTICES AND OTHER COMMUNICATIONS

      Any payment, notice, or other communication pursuant to this License
Agreement shall be sufficiently made or given on the date of mailing if sent to
such party by certified first class mail, postage prepaid, addressed to it at
its address below or as it shall designate by written notice given to the other
party:

                 In the case of BAR-ILAN:

                       Bar-Ilan Research & Development Company Ltd.
                       Bar-Ilan University
                       P0 Box 1530
                       Ramat Gan 52115
                       Israel

                 In the case of ANSAN:

                       Ansan Pharmaceuticals, Inc.
                       400 Oyster Point Boulevard, Suite 435
                       South San Francisco, California 94080
                       USA

                    ARTICLE 14 - THE TITAN LICENSE AGREEMENT

      14.1. Upon the termination of the License Agreement between BAR-ILAN and
TITAN for any reason, BAR-ILAN shall have the right, in its sole discretion, to
require ANSAN to assume all rights and obligations of TITAN under that License
Agreement, including in particular the obligation to make minimum royalty
payments to BAR-ILAN under Paragraph 4.1.3. and the right and obligation for the
filing, prosecution, and maintenance of the Basic Patents. BAR-ILAN may exercise
that right by notice to ANSAN in accordance with Article 13 of this License
Agreement. If BAR-ILAN does require ANSAN to accept all rights and obligations
of TITAN under the terminated License Agreement between BAR-ILAN and TITAN, then
that License Agreement shall be deemed to have been made between BAR-ILAN and
ANSAN as of the date of such notice.

      14.2. Upon the termination of the License Agreement between BAR-ILAN and
TITAN for any reason, BAR-ILAN may, in its sole discretion, offer to ANSAN the
right and obligation, at its own expense and utilizing patent counsel of its
choice selected in consultation with

                                       14

BAR-ILAN, for the filing, prosecution, and maintenance of the Basic Patents. If
ANSAN accepts, ANSAN, or its patent counsel, shall provide BAR-ILAN with copies
of all correspondence and documents filed with, or received from, any patent
office or patent agent. In addition, ANSAN agrees that any and all official or
"ribbon" copies of issued patents shall be forwarded to, and retained by,
BAR-ILAN. Offer by BAR-ILAN and acceptance by ANSAN of the right to file,
prosecute, and maintain the Basic Patents under this Paragraph 14.2 shall not
constitute any grant or license by BAR-ILAN to ANSAN of any other rights under
the License Agreement between BAR-ILAN and TITAN, including any rights to the
Licensed Products or Licensed Processes which are within the TITAN Field.

                           ARTICLE 15 - EFFECTIVENESS

      This License Agreement shall become effective and binding on the parties
hereto upon the closing of the Agreement and Plan of Reorganization dated July
16, 1997 by and between ANSAN and Discovery Laboratories, Inc.

                      ARTICLE 16 - MISCELLANEOUS PROVISIONS

      16.1. This License Agreement shall be construed, governed, interpreted and
applied in accordance with the laws of the State of Israel, except that
questions affecting the validity, enforceability, or infringement of any patent
contained in the Patent Rights shall be determined by the law of the country in
which the patent was granted.

      16.2. The parties hereto acknowledge that this License Agreement sets
forth the entire agreement and understanding of the parties hereto as to the
subject matter hereof, and shall not be subject to any change or modification
except by the execution of a written instrument subscribed to by the parties
hereto.

      16.3. The provisions of this License Agreement are severable, and in the
event that any provision of this License Agreement shall be determined to be
invalid or unenforceable under any controlling body of law, such invalidity or
unenforceability shall not in any way affect the validity or enforceability of
the remaining provisions hereof

                                      15

      16.4. ANSAN agrees to mark the Licensed Products sold in the United States
with all applicable United States patent numbers. All Licensed Products shipped
to, or sold in, other countries shall be marked in such a manner as to conform
with the patent laws and practice of the country of manufacture or sale.

      16.5. The failure of either party to assert a right hereunder or to insist
upon compliance with any term or condition of this License Agreement shall not
constitute a waiver of that right or excuse a similar subsequent failure to
perform any such term or condition by the other party.

      IN WITNESS WHEREOF, the parties hereto have executed this License
Agreement, in duplicate, by proper persons thereunto duly authorized.

           BAR-ILAN                                 ANSAN

By: /s/ [Illegible]                       By: /s/ V. H. J. Shalson
    -------------------------                 ----------------------------
Name: [Illegible]                         Name: V. H. J. SHALSON
Title: Managing Director                  Title: PRESIDENT AND CEO
Date: 13-11-97                            Date: NOVEMBER 24, 1997

                                      16

                                   APPENDIX I

1. The "Basic Patents"

     Country    Application No.   Filing Date     Patent No.      Issue Date
     -------    ---------------   -----------     ----------      ----------

                                     [***]

[***] - confidential treatment requested.

                                           17

                             APPENDIX I (continued)

2.     The "Hemoglobinopathies Patents"

     Country    Application No.   Filing Date     Patent No.      Issue Date
     -------    ---------------   -----------     ----------      ----------

[***] - confidential treatment requested.

                                      18

                   =======================================
                        STANDARD FORM OF OFFICE LEASE
                   The Real Estate Board of New York, Inc.            3/1/86
                   =======================================

      Agreement of Lease, made as of the 29th day of May 1997, between 509
MADISON AVENUE ASSOCIATES, a California limited partnership having an address
c/o Newmark & Company Real Estate, Inc., 125 Park Avenue, New York, New York
10017 party of the first part, hereinafter referred to as OWNER or landlord, and
DISCOVERY LABORATORIES, INC., a Delaware corporation having an address at 787
Seventh Avenue, New York, New York 10019 party of the second part, hereinafter
referred to as TENANT.

Witnesseth: Owner hereby leases to Tenant and Tenant hereby hires from Owner
space on the fourteenth (14th) floor (as shown on the floor plan annexed hereto
as Exhibit A and made a part hereof and also known as Suite 1406 in the building
know as 509 Madison Avenue in the Borough of Manhattan, City of New York, for
the term of three (3) years and sixteen (16) days (or until such term shall
sooner cease and expire as hereinafter provided) to commence on the fifteenth
(15th) day of June nineteen hundred and ninety-seven, and to end on the
thirtieth (30th) day of June two thousand both dates inclusive, at an annual
rental rate set forth in Article 37 hereof which Tenant agrees to pay in lawful
money of the United States which shall be legal tender in payment of all debts
and dues, public and private, at the time of payment, in equal monthly
installments in advance on the first day of each month during said term, at the
office of Owner or such other place as Owner may designate, without any set off
or deduction whatsoever, except that Tenant shall pay the first _____ monthly
installment(s) on the execution hereof (unless this lease be a renewal).

      In the event that, at the commencement of the term of this lease, or
thereafter, Tenant shall be in default in the payment of rent to Owner pursuant
to the terms of another lease with Owner or with Owner's predecessor in
interest, Owner may at Owner's option and without notice to Tenant add the
amount of such arrears to any monthly installment or rent payable hereunder and
the same shall be payable hereunder and the same shall be payable to Owner as
additional rent.

      The parties hereto, for themselves, their heirs, distributees, executors,
administrators, legal representatives, successors and assigns, hereby covenant
as follows:

Rent

      1. Tenant shall pay the rent as above and as hereinafter provided.

Occupancy

      2. Tenant shall use and occupy demised premises for general and executive
offices and for no other purpose.

Tenant Alterations:

      3. Tenant shall make no changes in or to the demised premises of any
nature without Owner's prior written consent. Subject to the prior written
consent of Owner, and to the provisions of this article, Tenant at Tenant's
expense, may make alterations, installations, additions or improvements which
are non-structural and which do not affect utility services or plumbing and
electrical lines, in or to the interior of the demised premises by using
contractors or mechanics first approved by Owner. Tenant shall, before making
any alterations, additions, installations or improvement, at its expense, obtain
all permits, approvals, and certificates required by any governmental or
quasi-governmental bodies and (upon completion) certificates of final approval
thereof and shall deliver promptly duplicate of all such permits, approvals and
certificates to Owner and Tenant agrees to carry and will cause Tenant's
contractors and subcontractors to carry such workman's compensation, general
liability, personal and property damage insurance as Owner may require. If any
mechanic's lien is filed against the demised premises, or the building of which
the same forms a part, for work claimed to have been done for, or material
furnished to, Tenant whether or not done pursuant to this article, the same
shall be discharged by Tenant within thirty days thereafter, at Tenant's
expense, by filing the bond required by law. All fixtures and all paneling,
partitions, railings and like installations, installed in the premises at any
time, either by Tenant or by Owner in Tenant's behalf, shall, upon installation,
become the property of Owner and shall remain upon and be surrendered with the
demised premises unless Owner, by notice to Tenant no later than twenty days
prior to the date fixed as the termination of this lease, elects to relinquish
Owner's right thereto and to have them removed by the Tenant, in which event the
same shall be removed from the premises by Tenant prior to the expiration of the
lease, at Tenant's expense. Nothing in this Article shall be construed to give
Owner title to or to prevent Tenant's removal of trade fixtures, moveable office
furniture and equipment, but upon removal of any such from the premises or upon
removal of other installations as may be required by Owner, Tenant shall
immediately, and at its expense, repair and restore the premises to the
condition existing prior to installation and repair any damage to the demised
premises or the building due to such removal. All property permitted or required
to be removed, by Tenant at the end of the term remaining in the premises after
Tenant's removal shall be deemed abandoned and may, at the election of Owner,
either be retained as Owner's property or may be removed from the premises by
Owner, at Tenant's expense.

Maintenance and Repairs:

      4. Tenant shall, throughout the term of this lease, take good care of the
demised premises and the fixtures and appurtenances therein. Tenant shall be
responsible for all damage or injury to the demised premises or any other part
of the building and the systems and equipment thereof, whether requiring
structural or non-structural repairs caused by or resulting from carelessness,
omission, neglect or improper conduct of Tenant, Tenant's subtenants, agents,
employees, invitees or licensees, or which arise out of any work, labor, service
or equipment done for or supplied to Tenant or any subtenant or arising out of
the installation, use or operation of the property or equipment of Tenant or any
subtenant. Tenant shall also repair all damage to the building and the demised
premises caused by the moving of Tenant's fixtures, furniture and equipment.
Tenant shall promptly make, at Tenant's expense, all repairs in and to the
demised premises for which Tenant is responsible, using only the contractor for
the trade or trades in question, selected from a list of at least two
contractors per trade submitted by Owner. Any other repairs in or to the
building or the facilities and systems thereof for which Tenant is responsible
shall be performed by Owner at the Tenant's expense. Owner shall maintain in
good working order and repair the exterior and the structural portions of the
building, including the structural portions of its demised premises, and the
public portions of the building interior and the building plumbing, electrical,
heating and ventilating systems (to the extent such systems presently exists)
serving the demised premises. Tenant agrees to give prompt notice of any
defective condition in the premises for which Owner may be responsible
hereunder. There shall be no allowance to Tenant for diminution of rental value
and no liability on the part of Owner by reason of inconvenience, annoyance or
injury to business arising from Owner or others making repairs, alterations,
additions or improvements in or to any portion of the building or the demised
premises or in and to the fixtures, appurtenances or equipment thereof. It is
specifically agreed that Tenant shall not be entitled to any setoff or reduction
of rent by reason of any failure of Owner to comply with the covenants of this
or any other article of this Lease. Tenant agrees that Tenant's sole remedy at
law in such instance will be by way of an action for damages for breach of
contract. The provisions of this Article 4 shall not apply in the case of fire
or other casualty which are dealt with in Article 9 hereof.

Window Cleaning:

      5. Tenant will not clean nor require, permit, suffer or allow any window
in the demised premises to be cleaned from the outside in violation of Section
202 of the Labor Law or any other applicable law or of the Rules of the Board of
Standards and Appeals, or of any other Board or body having or asserting
jurisdiction.

Requirements of Law, Fire Insurance, Floor Loads:

      6. Prior to the commencement of the lease term, if Tenant is then in
possession, and at all times thereafter, Tenant, at Tenant's sole cost and
expense, shall promptly comply with all present and future laws, orders and
regulations of all state, federal, municipal and local governments, departments,
commissions and boards and any direction of any public officer pursuant to law,
and all orders, rules and regulations of the New York Board of Fire
Underwriters, Insurance Services Office, or any similar body which shall impose
any violation, order or duty upon Owner or Tenant with respect to the demised
premises, whether or not arising out of Tenant's use or manner of use thereof,
including Tenant's permitted uses or, with respect to the building if arising
out of Tenant's

                   =======================================
                        STANDARD FORM OF OFFICE LEASE
                   The Real Estate Board of New York, Inc.            3/1/86
                   =======================================

      Agreement of Lease, made as of the 29th day of May 1997, between 509
MADISON AVENUE ASSOCIATES, a California limited partnership having an address
c/o Newmark & Company Real Estate, Inc., 125 Park Avenue, New York, New York
10017 party of the first part, hereinafter referred to as OWNER or landlord, and
DISCOVERY LABORATORIES, INC., a Delaware corporation having an address at 787
Seventh Avenue, New York, New York 10019 party of the second part, hereinafter
referred to as TENANT.

Witnesseth: Owner hereby leases to Tenant and Tenant hereby hires from Owner
space on the fourteenth (14th) floor (as shown on the floor plan annexed hereto
as Exhibit A and made a part hereof and also known as Suite 1406 in the building
know as 509 Madison Avenue in the Borough of Manhattan, City of New York, for
the term of three (3) years and sixteen (16) days (or until such term shall
sooner cease and expire as hereinafter provided) to commence on the fifteenth
(15th) day of June nineteen hundred and ninety-seven, and to end on the
thirtieth (30th) day of June two thousand both dates inclusive, at an annual
rental rate set forth in Article 37 hereof which Tenant agrees to pay in lawful
money of the United States which shall be legal tender in payment of all debts
and dues, public and private, at the time of payment, in equal monthly
installments in advance on the first day of each month during said term, at the
office of Owner or such other place as Owner may designate, without any set off
or deduction whatsoever, except that Tenant shall pay the first _____ monthly
installment(s) on the execution hereof (unless this lease be a renewal).

      In the event that, at the commencement of the term of this lease, or
thereafter, Tenant shall be in default in the payment of rent to Owner pursuant
to the terms of another lease with Owner or with Owner's predecessor in
interest, Owner may at Owner's option and without notice to Tenant add the
amount of such arrears to any monthly installment or rent payable hereunder and
the same shall be payable hereunder and the same shall be payable to Owner as
additional rent.

      The parties hereto, for themselves, their heirs, distributees, executors,
administrators, legal representatives, successors and assigns, hereby covenant
as follows:

Rent

      1. Tenant shall pay the rent as above and as hereinafter provided.

Occupancy

      2. Tenant shall use and occupy demised premises for general and executive
offices and for no other purpose.

Tenant Alterations:

      3. Tenant shall make no changes in or to the demised premises of any
nature without Owner's prior written consent. Subject to the prior written
consent of Owner, and to the provisions of this article, Tenant at Tenant's
expense, may make alterations, installations, additions or improvements which
are non-structural and which do not affect utility services or plumbing and
electrical lines, in or to the interior of the demised premises by using
contractors or mechanics first approved by Owner. Tenant shall, before making
any alterations, additions, installations or improvement, at its expense, obtain
all permits, approvals, and certificates required by any governmental or
quasi-governmental bodies and (upon completion) certificates of final approval
thereof and shall deliver promptly duplicate of all such permits, approvals and
certificates to Owner and Tenant agrees to carry and will cause Tenant's
contractors and subcontractors to carry such workman's compensation, general
liability, personal and property damage insurance as Owner may require. If any
mechanic's lien is filed against the demised premises, or the building of which
the same forms a part, for work claimed to have been done for, or material
furnished to, Tenant whether or not done pursuant to this article, the same
shall be discharged by Tenant within thirty days thereafter, at Tenant's
expense, by filing the bond required by law. All fixtures and all paneling,
partitions, railings and like installations, installed in the premises at any
time, either by Tenant or by Owner in Tenant's behalf, shall, upon installation,
become the property of Owner and shall remain upon and be surrendered with the
demised premises unless Owner, by notice to Tenant no later than twenty days
prior to the date fixed as the termination of this lease, elects to relinquish
Owner's right thereto and to have them removed by the Tenant, in which event the
same shall be removed from the premises by Tenant prior to the expiration of the
lease, at Tenant's expense. Nothing in this Article shall be construed to give
Owner title to or to prevent Tenant's removal of trade fixtures, moveable office
furniture and equipment, but upon removal of any such from the premises or upon
removal of other installations as may be required by Owner, Tenant shall
immediately, and at its expense, repair and restore the premises to the
condition existing prior to installation and repair any damage to the demised
premises or the building due to such removal. All property permitted or required
to be removed, by Tenant at the end of the term remaining in the premises after
Tenant's removal shall be deemed abandoned and may, at the election of Owner,
either be retained as Owner's property or may be removed from the premises by
Owner, at Tenant's expense.

Maintenance and Repairs:

      4. Tenant shall, throughout the term of this lease, take good care of the
demised premises and the fixtures and appurtenances therein. Tenant shall be
responsible for all damage or injury to the demised premises or any other part
of the building and the systems and equipment thereof, whether requiring
structural or non-structural repairs caused by or resulting from carelessness,
omission, neglect or improper conduct of Tenant, Tenant's subtenants, agents,
employees, invitees or licensees, or which arise out of any work, labor, service
or equipment done for or supplied to Tenant or any subtenant or arising out of
the installation, use or operation of the property or equipment of Tenant or any
subtenant. Tenant shall also repair all damage to the building and the demised
premises caused by the moving of Tenant's fixtures, furniture and equipment.
Tenant shall promptly make, at Tenant's expense, all repairs in and to the
demised premises for which Tenant is responsible, using only the contractor for
the trade or trades in question, selected from a list of at least two
contractors per trade submitted by Owner. Any other repairs in or to the
building or the facilities and systems thereof for which Tenant is responsible
shall be performed by Owner at the Tenant's expense. Owner shall maintain in
good working order and repair the exterior and the structural portions of the
building, including the structural portions of its demised premises, and the
public portions of the building interior and the building plumbing, electrical,
heating and ventilating systems (to the extent such systems presently exists)
serving the demised premises. Tenant agrees to give prompt notice of any
defective condition in the premises for which Owner may be responsible
hereunder. There shall be no allowance to Tenant for diminution of rental value
and no liability on the part of Owner by reason of inconvenience, annoyance or
injury to business arising from Owner or others making repairs, alterations,
additions or improvements in or to any portion of the building or the demised
premises or in and to the fixtures, appurtenances or equipment thereof. It is
specifically agreed that Tenant shall not be entitled to any setoff or reduction
of rent by reason of any failure of Owner to comply with the covenants of this
or any other article of this Lease. Tenant agrees that Tenant's sole remedy at
law in such instance will be by way of an action for damages for breach of
contract. The provisions of this Article 4 shall not apply in the case of fire
or other casualty which are dealt with in Article 9 hereof.

Window Cleaning:

      5. Tenant will not clean nor require, permit, suffer or allow any window
in the demised premises to be cleaned from the outside in violation of Section
202 of the Labor Law or any other applicable law or of the Rules of the Board of
Standards and Appeals, or of any other Board or body having or asserting
jurisdiction.

Requirements of Law, Fire Insurance, Floor Loads:

      6. Prior to the commencement of the lease term, if Tenant is then in
possession, and at all times thereafter, Tenant, at Tenant's sole cost and
expense, shall promptly comply with all present and future laws, orders and
regulations of all state, federal, municipal and local governments, departments,
commissions and boards and any direction of any public officer pursuant to law,
and all orders, rules and regulations of the New York Board of Fire
Underwriters, Insurance Services Office, or any similar body which shall impose
any violation, order or duty upon Owner or Tenant with respect to the demised
premises, whether or not arising out of Tenant's use or manner of use thereof,
including Tenant's permitted uses or, with respect to the building if arising
out of Tenant's

                   =======================================
                        STANDARD FORM OF OFFICE LEASE
                   The Real Estate Board of New York, Inc.            3/1/86
                   =======================================

      Agreement of Lease, made as of the 29th day of May 1997, between 509
MADISON AVENUE ASSOCIATES, a California limited partnership having an address
c/o Newmark & Company Real Estate, Inc., 125 Park Avenue, New York, New York
10017 party of the first part, hereinafter referred to as OWNER or landlord, and
DISCOVERY LABORATORIES, INC., a Delaware corporation having an address at 787
Seventh Avenue, New York, New York 10019 party of the second part, hereinafter
referred to as TENANT.

Witnesseth: Owner hereby leases to Tenant and Tenant hereby hires from Owner
space on the fourteenth (14th) floor (as shown on the floor plan annexed hereto
as Exhibit A and made a part hereof and also known as Suite 1406 in the building
know as 509 Madison Avenue in the Borough of Manhattan, City of New York, for
the term of three (3) years and sixteen (16) days (or until such term shall
sooner cease and expire as hereinafter provided) to commence on the fifteenth
(15th) day of June nineteen hundred and ninety-seven, and to end on the
thirtieth (30th) day of June two thousand both dates inclusive, at an annual
rental rate set forth in Article 37 hereof which Tenant agrees to pay in lawful
money of the United States which shall be legal tender in payment of all debts
and dues, public and private, at the time of payment, in equal monthly
installments in advance on the first day of each month during said term, at the
office of Owner or such other place as Owner may designate, without any set off
or deduction whatsoever, except that Tenant shall pay the first _____ monthly
installment(s) on the execution hereof (unless this lease be a renewal).

      In the event that, at the commencement of the term of this lease, or
thereafter, Tenant shall be in default in the payment of rent to Owner pursuant
to the terms of another lease with Owner or with Owner's predecessor in
interest, Owner may at Owner's option and without notice to Tenant add the
amount of such arrears to any monthly installment or rent payable hereunder and
the same shall be payable hereunder and the same shall be payable to Owner as
additional rent.

      The parties hereto, for themselves, their heirs, distributees, executors,
administrators, legal representatives, successors and assigns, hereby covenant
as follows:

Rent

      1. Tenant shall pay the rent as above and as hereinafter provided.

Occupancy

      2. Tenant shall use and occupy demised premises for general and executive
offices and for no other purpose.

Tenant Alterations:

      3. Tenant shall make no changes in or to the demised premises of any
nature without Owner's prior written consent. Subject to the prior written
consent of Owner, and to the provisions of this article, Tenant at Tenant's
expense, may make alterations, installations, additions or improvements which
are non-structural and which do not affect utility services or plumbing and
electrical lines, in or to the interior of the demised premises by using
contractors or mechanics first approved by Owner. Tenant shall, before making
any alterations, additions, installations or improvement, at its expense, obtain
all permits, approvals, and certificates required by any governmental or
quasi-governmental bodies and (upon completion) certificates of final approval
thereof and shall deliver promptly duplicate of all such permits, approvals and
certificates to Owner and Tenant agrees to carry and will cause Tenant's
contractors and subcontractors to carry such workman's compensation, general
liability, personal and property damage insurance as Owner may require. If any
mechanic's lien is filed against the demised premises, or the building of which
the same forms a part, for work claimed to have been done for, or material
furnished to, Tenant whether or not done pursuant to this article, the same
shall be discharged by Tenant within thirty days thereafter, at Tenant's
expense, by filing the bond required by law. All fixtures and all paneling,
partitions, railings and like installations, installed in the premises at any
time, either by Tenant or by Owner in Tenant's behalf, shall, upon installation,
become the property of Owner and shall remain upon and be surrendered with the
demised premises unless Owner, by notice to Tenant no later than twenty days
prior to the date fixed as the termination of this lease, elects to relinquish
Owner's right thereto and to have them removed by the Tenant, in which event the
same shall be removed from the premises by Tenant prior to the expiration of the
lease, at Tenant's expense. Nothing in this Article shall be construed to give
Owner title to or to prevent Tenant's removal of trade fixtures, moveable office
furniture and equipment, but upon removal of any such from the premises or upon
removal of other installations as may be required by Owner, Tenant shall
immediately, and at its expense, repair and restore the premises to the
condition existing prior to installation and repair any damage to the demised
premises or the building due to such removal. All property permitted or required
to be removed, by Tenant at the end of the term remaining in the premises after
Tenant's removal shall be deemed abandoned and may, at the election of Owner,
either be retained as Owner's property or may be removed from the premises by
Owner, at Tenant's expense.

Maintenance and Repairs:

      4. Tenant shall, throughout the term of this lease, take good care of the
demised premises and the fixtures and appurtenances therein. Tenant shall be
responsible for all damage or injury to the demised premises or any other part
of the building and the systems and equipment thereof, whether requiring
structural or non-structural repairs caused by or resulting from carelessness,
omission, neglect or improper conduct of Tenant, Tenant's subtenants, agents,
employees, invitees or licensees, or which arise out of any work, labor, service
or equipment done for or supplied to Tenant or any subtenant or arising out of
the installation, use or operation of the property or equipment of Tenant or any
subtenant. Tenant shall also repair all damage to the building and the demised
premises caused by the moving of Tenant's fixtures, furniture and equipment.
Tenant shall promptly make, at Tenant's expense, all repairs in and to the
demised premises for which Tenant is responsible, using only the contractor for
the trade or trades in question, selected from a list of at least two
contractors per trade submitted by Owner. Any other repairs in or to the
building or the facilities and systems thereof for which Tenant is responsible
shall be performed by Owner at the Tenant's expense. Owner shall maintain in
good working order and repair the exterior and the structural portions of the
building, including the structural portions of its demised premises, and the
public portions of the building interior and the building plumbing, electrical,
heating and ventilating systems (to the extent such systems presently exists)
serving the demised premises. Tenant agrees to give prompt notice of any
defective condition in the premises for which Owner may be responsible
hereunder. There shall be no allowance to Tenant for diminution of rental value
and no liability on the part of Owner by reason of inconvenience, annoyance or
injury to business arising from Owner or others making repairs, alterations,
additions or improvements in or to any portion of the building or the demised
premises or in and to the fixtures, appurtenances or equipment thereof. It is
specifically agreed that Tenant shall not be entitled to any setoff or reduction
of rent by reason of any failure of Owner to comply with the covenants of this
or any other article of this Lease. Tenant agrees that Tenant's sole remedy at
law in such instance will be by way of an action for damages for breach of
contract. The provisions of this Article 4 shall not apply in the case of fire
or other casualty which are dealt with in Article 9 hereof.

Window Cleaning:

      5. Tenant will not clean nor require, permit, suffer or allow any window
in the demised premises to be cleaned from the outside in violation of Section
202 of the Labor Law or any other applicable law or of the Rules of the Board of
Standards and Appeals, or of any other Board or body having or asserting
jurisdiction.

Requirements of Law, Fire Insurance, Floor Loads:

      6. Prior to the commencement of the lease term, if Tenant is then in
possession, and at all times thereafter, Tenant, at Tenant's sole cost and
expense, shall promptly comply with all present and future laws, orders and
regulations of all state, federal, municipal and local governments, departments,
commissions and boards and any direction of any public officer pursuant to law,
and all orders, rules and regulations of the New York Board of Fire
Underwriters, Insurance Services Office, or any similar body which shall impose
any violation, order or duty upon Owner or Tenant with respect to the demised
premises, whether or not arising out of Tenant's use or manner of use thereof,
including Tenant's permitted uses or, with respect to the building if arising
out of Tenant's

use or manner of use of the premises or the building (including the use
permitted under the lease). Nothing herein shall require Tenant to make
structural repairs or alterations unless Tenant has, by its manner of use of the
demised premises or method of operation therein, violated any such laws,
ordinances, orders, rules, regulations or requirements with respect thereto.
Tenant may, after securing Owner to Owner's satisfaction against all damages,
interest, penalties and expenses, including, but not limited to, reasonable
attorney's fees, by cash deposit or by surety bond in an amount and in a company
satisfactory to Owner, contest and appeal any such laws, ordinances, orders,
rules, regulations or requirements provided same is done with all reasonable
promptness and provided such appeal shall not subject Owner to prosecution for a
criminal offense or constitute a default under the lease or mortgage under which
Owner may be obligated, or cause the demised premises or any part thereof to be
condemned or vacated. Tenant shall not do or permit any act or thing to be done
in or to the demised premises which is contrary to law, or which will invalidate
or be in conflict with public liability, fire or other policies of insurance at
any time carried by or for the benefit of Owner with respect to the demised
premises or the building of which the demised premises form a part, or which
shall or might subject Owner to any liability or responsibility to any person or
for property damage. Tenant shall not keep anything in the demised premises
except as now or hereafter permitted by the Fire Department, Board of Fire
Underwriters, Fire Insurance Rating Organization or other authority having
jurisdiction, and then only in such manner and such quantity so as not to
increase the rate for fire insurance applicable to the building, nor use the
premises in a manner which will increase the insurance rate for the building or
any property located therein over that in effect prior to the commencement of
Tenant's occupancy. Tenant shall pay all costs, expenses, fees, penalties, or
damages, which may be imposed upon Owner by reason of Tenant's failure to comply
with the provisions of this article and if by reason of such failure the fire
insurance rate shall, at the beginning of this lease or at any time thereafter,
be higher than it otherwise would be, then Tenant shall reimburse Owner, as
additional rent hereunder, for that portion of all fire insurance premiums
thereafter paid by Owner which shall have been charged because of such failure
by Tenant. In any action or proceeding wherein Owner and Tenant are parties, a
schedule or "make-up" of rate for the building or demised premises issued by the
New York Fire Insurance Exchange, or other body making fire insurance rates
applicable to said premises shall be conclusive evidence of the facts therein
stated and of the several items and charges in the fire insurance rates then
applicable to said premises. Tenant shall not place a load upon any floor of the
demised premises exceeding the floor load per square foot area which it was
designed to carry and which is allowed by law. Owner reserves the right to
prescribe the weight and position of all safes, business machines and mechanical
equipment. Such installations shall be placed and maintained by Tenant, at
Tenant's expense, in settings sufficient, in Owner's judgment, to absorb and
prevent vibration, noise and annoyance.

Subordination:

      7. This lease is subject and subordinate to all ground or underlying
leases and to all mortgages which may now or hereafter affect such leases or the
real property of which demised premises are a part and to all renewals,
modifications, consolidations, replacements and extensions of any such
underlying leases and mortgages. This clause shall be self-operative and no
further instrument of subordination shall be required by any ground or
underlying lessor or by any mortgagee, affecting any lease or the real property
of which the demised premises are a part. In confirmation of such subordination,
Tenant shall execute promptly any certificate that Owner may request.

Property--Loss, Damage, Reimbursement, Indemnity:

      8. Owner or its agent shall not be liable for any damage to any property
of Tenant or of others entrusted to employees of the building, nor for loss of
or damage to any property of Tenant by theft or otherwise, nor for any injury or
damage to persons or property resulting from any cause of whatsoever nature,
unless caused by or due to the negligence of Owner, its agents, servants or
employees. Owner or its agents will not be liable for any such damage caused by
other tenants or persons in, upon or about said building or caused by operations
in construction of any private, public or quasi public work. If at any time any
windows of the demised premises are temporarily closed, darkened or bricked up
(or permanently closed, darkened or bricked up, if required by law) for any
reason whatsoever including, but not limited to Owner's own acts, Owner shall
not be liable for any damage Tenant may sustain thereby and Tenant shall not be
entitled to any compensation therefore nor abatement or diminution of rent nor
shall the same release Tenant from its obligations hereunder nor constitute an
eviction. Tenant shall indemnify and save harmless Owner against and from all
liabilities, obligations, damages, penalties, claims, costs and expenses for
which Owner shall not be reimbursed by insurance, including reasonable attorneys
fees, paid, suffered or incurred as a result of any breach by Tenant, Tenant's
agents, contractors, employees, invitees or licensees, of any covenant or
condition of this lease, or the carelessness, negligence or improper conduct of
the Tenant, Tenant's agents, contractors, employees, invitees or licensees.
Tenant's liability under this lease extends to the acts and omissions of any
sub-tenant and any agent, contractor, employee, invitee or licensee of any
sub-tenant. In case any action or proceeding is brought against Owner by reason
of any such claim, Tenant, upon written notice from Owner, will, at Tenant's
expense, resist or defend such action or proceeding by counsel approved by Owner
in writing, such approval not to be unreasonably withheld.

Destruction, Fire and Other Casualty:

      9. (a) If the demised premises or any part thereof shall be damaged by
fire or other casualty, Tenant shall gave immediate notice thereof to Owner and
this lease shall continue in full force and effect except as hereinafter set
forth. (b) If the demised premises are partially damaged or rendered partially
unusable by fire or other casualty, the damages thereto shall be repaired by and
at the expense of Owner and the rent, until such repair shall be substantially
completed, shall be apportioned from the day following the casualty according to
the part of the premises which is usable. (c) If the demised premises are
totally damaged or rendered wholly unusable by fire or other casualty, then the
rent shall be proportionately paid up to the time of the casualty and
thenceforth shall cease until the date when the premises shall have been
repaired and restored by Owner, subject to Owner's right to elect not to restore
the same as hereinafter provided. (d) If the demised premises are rendered
wholly unusable or (whether or not the demised premises are damaged in whole or
in part) if the building shall be so damaged that Owner shall decide to demolish
it or to rebuild it, then, in any of such events, Owner may elect to terminate
this lease by written notice to Tenant, given within 90 days after such fire or
casualty, specifying a date for the expiration of the lease, which date shall
not be more than 60 days after the giving of such notice, and upon the date
specified in such notice the term of this lease shall expire as fully and
completely as if such date were the date set forth above for the termination of
this lease and Tenant shall forthwith quit, surrender and vacate the premises
without prejudice however, to Landlord's rights and remedies against Tenant
under the lease provisions in effect prior to such termination, and any rent
owing shall be paid up to such date and any payments of rent made by Tenant
which were on account of any period subsequent to such date shall be returned to
Tenant. Unless Owner shall serve a termination notice as provided for herein,
Owner shall make the repairs and restorations under the conditions of (b) and
(c) hereof, with all reasonable expedition, subject to delays due to adjustment
of insurance claims, labor troubles and causes beyond Owner's control. After any
such casualty, Tenant shall cooperate with Owner's restoration by removing from
the premises as promptly as reasonably possible, all of Tenant' salvageable
inventory and movable equipment, furniture, and other property. Tenant's
liability for rent shall resume five (5) days after written notice from Owner
that the premises are substantially ready for Tenant's occupancy. (e) Nothing
contained hereinabove shall relieve Tenant from liability that may exist as a
result of damage from fire or other casualty. Notwithstanding the foregoing,
each party shall look first to any insurance in its favor before making any
claim against the other party for recovery for loss or damage resulting from
fire or other casualty, and to the extent that such insurance is in force and
collectible and to the extent permitted by Law, Owner and Tenant each hereby
releases and waives all right of recovery against the other or any one claiming
through or under each of them by way of subrogation or otherwise. The foregoing
release and waiver shall be in force only if both releasor's insurance policies
contain a clause providing that such a release or waiver shall not invalidate
the insurance. If, and to the extent, that such waiver can be obtained only by
the payment of additional premiums, then the party benefitting from the waiver
shall pay such premium within ten days after written demand or shall be deemed
to have agreed that the party obtaining insurance coverage shall be free of any
further obligation under the provisions hereof with respect to waiver of
subrogation. Tenant acknowledges that Owner will not carry insurance on Tenant's
furniture and/or furnishings or any fixtures or equipment, improvements, or
appurtenances removable by Tenant and agrees that Owner will not be obligated to
repair any damage thereto or replace the same. (f) Tenant hereby waives the
provisions of Section 227 of the Real Property Law and agrees that the
provisions of this article shall govern and control in lieu thereof.

Eminent Domain:

      10. If the whole or any part of the demised premises shall be acquired or
condemned by Eminent Domain for any public or quasi public use or purpose, then
and in the event, the term of this lease shall cease and terminate from the date
of title vesting in such proceeding and Tenant shall have no claim for the value
of any unexpired term of said lease and assigns to Owner, Tenant's entire
interest in any such award.

Assignment, Mortgage, Etc.:

      11. Tenant, for itself, its heirs, distributees, executors,
administrators, legal representatives, successors and assigns, expressly
covenants that it shall not assign, mortgage or encumber this agreement, nor
underlet, or suffer or permit the demised premises or any part thereof to be
used by others, without the prior written consent of Owner in each instance.
Transfer of the majority of the stock of a corporate Tenant shall be deemed as
assignment. If this lease be assigned, or if the demised premises or any part
thereof be underlet or occupied by anybody other than Tenant, Owner may, after
default by Tenant, collect rent from the assignee, under-tenant or occupant, and
apply the net amount collected to the rent herein reserved, but no such
assignment, underletting, occupancy or collection shall be deemed a waiver of
this covenant, or the acceptance of the assignee, under-tenant or occupant as
tenant, or a release of Tenant from the further performance by Tenant of
covenants on the part of Tenant herein contained. The consent by Owner to an
assignment or underletting shall not in any wise be construed to relieve Tenant
from obtaining the express consent in writing of Owner to any further assignment
or underletting.

Electric Current:

      12. Rates and conditions in respect to submetering or rent inclusion, as
the case may be, to be added in RIDER* attached hereto. Tenant covenants and
agrees that at all times its use of electric current shall not exceed the
capacity of existing feeders to the building or the risers or wiring
installations and Tenant may not use any electrical equipment which, in Owner's
opinion, reasonably exercised, will overload such installations or interfere
with the use thereof by other tenants of the building. The change at any time of
the character of electric service shall in no way make Owner liable or
responsible to Tenant, for any loss, damages or expenses which Tenant may
sustain.

Access to Premises:

      13. Owner or Owner's agents shall have the right (but shall not be
obligated) to enter the demised premises in any emergency at any time and at
other reasonable times, to examine the same and to make such repairs,
replacements and improvements as Owner may deem necessary and reasonably
desirable to the demised premises or to any other portion of the building or
which Owner may elect to perform. Tenant shall permit Owner to use and maintain
and replace pipes and conduits in and through the demised premises and to erect
new pipes and conduits therein provided they are concealed within the walls,
floor, or ceiling. Owner may, during the progress of any work in the demised
premises, take all necessary materials and equipment into said premises without
the same constituting an eviction nor shall the Tenant be entitled to any
abatement of rent while such work is in progress nor to any damages by reason of
loss or interruption of business or other wise. Throughout the term hereof Owner
shall have the right to enter the demised premises at reasonable hours for the
purpose of showing the

- ----------
* Rider to be added if necessary

same to prospective purchasers or mortgagees of the building, and during the
last six months of the term for the purpose of showing the same to prospective
tenants. If Tenant is not present to open and permit an entry into the premises,
Owner or Owner's agents may enter the same whenever such entry may be necessary
or permissible by master key or forcibly and provided reasonable care is
exercised to safeguard Tenant's property, such entry shall not render Owner or
its agents liable therefor, nor in any event shall the obligations of Tenant
hereunder be affected. If during the last month of the term Tenant shall have
removed all or substantially all of Tenant's property therefrom. Owner may
immediately enter, alter, renovate or redecorate the demised premises without
limitation or abatement of rent, or incurring liability to Tenant for any
compensation and such act shall have no effect on this lease or Tenant's
obligations hereunder.

Vault, Vault Space, Area:

      14. No Vaults, vault space or area, whether or not enclosed or covered,
not within the property line of the building is leased hereunder, anything
contained in or indicated on any sketch, blue print or plan, or anything
contained elsewhere in this lease to the contrary notwithstanding. Owner makes
no representation as to the location of the property line of the building. All
vaults and vault space and all such areas not within the property line of the
building, which Tenant may be permitted to use and/or occupy, is to be used
and/or occupied under a revocable license, and if any such license be revoked,
or if the amount of such space or area be diminished or required by any federal,
state or municipal authority or public utility, Owner shall not be subject to
any liability nor shall Tenant be entitled to any compensation or diminution or
abatement of rent, nor shall such revocation, diminution or requisition be
deemed constructive or actual eviction. Any tax, fee or charge of municipal
authorities for such vault or area shall be paid by Tenant.

Occupancy:

      15. Tenant will not at any time use or occupy the demised premises in
violation of the certificate of occupancy issued for the building of which the
demised premises are a part. Tenant has inspected the premises and accepts them
as is, subject to the riders annexed hereto with respect to Owner's work, if
any. In any event, Owner makes no representation as to the condition of the
premises and Tenant agrees to accept the same subject to violations, whether or
not of record.

Bankruptcy:

      16. (a) Anything elsewhere in this lease to the contrary notwithstanding,
this lease may be cancelled by Owner by the sending of a written notice to
Tenant within a reasonable time after the happening of any one or more of the
following events: (1) the commencement of a case in bankruptcy or under the laws
of any state naming Tenant as the debtor; or (2) the making by Tenant of an
assignment or any other arrangement for the benefit of creditors under any state
statute. Neither Tenant nor any person claiming through or under Tenant, or by
reason of any statute or order of court, shall thereafter be entitled to
possession of the premises demised but shall forthwith quit and surrender the
premises. If this lease shall be assigned in accordance with its terms, the
provisions of this Article 16 shall be applicable only to the party then owning
Tenant's interest in this lease.

(b) it is stipulated and agreed that in the event of the termination of this
lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any other
provisions of this lease to the contrary, be entitled to recover from Tenant as
and for liquidated damages an amount equal to the difference between the rent
reserved hereunder for the unexpired portion of the term demised and the fair
and reasonable rental value of the demised premises for the same period. In the
computation of such damages the difference between any installment of rent
becoming due hereunder after the date of termination and the fair and reasonable
rental value of the demised premises for the period for which such installment
was payable shall be discounted to the date of termination at the rate of four
percent (4%) per annum. If such premises or any part thereof be re-let by the
Owner for the unexpired term of said lease,or any part thereof, before
presentation of proof of such liquidated damages to any court, commission or
tribunal, the amount of rent reserved upon such reletting shall be deemed to be
the fair and reasonable rental value for the part or the whole of the premises
so re-let during the term of the reletting. Nothing herein contained shall limit
or prejudice the right of the Owner to prove for and obtain as liquidated
damages by reason of such termination, an amount equal to the maximum allowed by
any statute or rule of law in effect at the time when, and governing the
proceedings in which, such damages are to be proved, whether or not such amount
be greater, equal to, or less than the amount of the difference referred to
above.

Default:

      17. (1) If Tenant defaults in fulfilling any of the covenants of this
lease other than the covenants for the payment of rent or additional rent; or if
the demised premises becomes vacant or deserted; or if any execution or
attachment shall be issued against Tenant or any of Tenant's property whereupon
the demised premises shall be taken or occupied by someone other than Tenant; or
if this lease be rejected under ss. 235 of Title 11 of the U.S. Code (bankruptcy
code); or if Tenant shall fail to move into or take possession of the premises
within fifteen (15) days after the commencement of the term of this lease, then,
in any one or more of such events, upon Owner serving a written five (5) days
notice upon Tenant specifying the nature of said default and upon the expiration
of said five (5) days, if Tenant shall have failed to comply with or remedy such
default, or if the said default or omission complained of shall be of a nature
that the same cannot be completed, cured or remedied within the said five (5)
day period, and if Tenant shall not have diligently commenced curing such
default within such five (5) day period, and shall not thereafter with
reasonable diligence and in good faith, proceed to remedy or cure such default,
then Owner may serve a written three (3) days' notice of cancellation of this
lease upon Tenant, and upon the expiration of said three (3) days this lease and
the term thereunder shall end and expire as fully and completely as if the
expiration of such three (3) day period were the day herein definitely fixed for
the end and expiration of this lease and the term thereof and Tenant shall then
quit and surrender the demised premises to Owner but Tenant shall remain liable
as hereinafter provided.

      2. If the notice provided for in (1) hereof shall have been given, and the
term shall expire as aforesaid; or if Tenant shall make default in the payment
of the rent reserved herein or any item of additional rent herein mentioned or
any part of either or in making any other payment herein required; then and in
any of such events Owner may without notice, re-enter the demised premises
either by force or otherwise, and disposess Tenant by summary proceedings or
otherwise, and the legal representative of Tenant or other occupant of demised
premises and remove their effects and hold the premises as if this lease had not
been made, and Tenant hereby waives the service of notice of intention to
re-enter or to institute legal proceedings to that end. If Tenant shall make
default hereunder prior to the date fixed as the commencement of any renewal or
extension of this lease, Owner may cancel and terminate such renewal or
extension agreement by written notice.

Remedies of Owner and Waiver of Redemption:

      18. In case of any such default, re-entry, expiration and/or dispossess by
summary proceedings or otherwise, (a) the rent shall become due thereupon and be
paid up to the time of such re-entry, dispossess and/or expiration, (b) Owner
may re-let the premises or any part or parts thereof, either in the name of
Owner or otherwise, for a term or terms, which may at Owners's option be less
than or exceed the period which would otherwise have constituted the balance of
the term of this lease and may grant concessions or free rent or charge a higher
rental than that in this lease, and/or (c) Tenant or the legal representatives
of Tenant shall also pay Owner as liquidated damages for the failure of Tenant
to observe and perform said Tenant's covenants herein contained, any deficiency
between the rent hereby reserved and/or convenanted to be paid and the net
amount, if any, of the rents collected on account of the lease or leases of the
demised premises for each month of the period which would otherwise have
constituted the balance of the term of this lease. The failure of Owner to
re-let the premises or any part or parts thereof shall not release or affect
Tenant's liability for damages. In computing such liquidated damages there shall
be added to the said deficiency such expenses as Owner may incur in connection
with re-letting, such as legal expenses, attorneys' fees, brokerage, advertising
and for keeping the demised premises in good order or for preparing the same for
re-letting. Any such liquidated damages shall be paid in monthly installments by
Tenant on the rent day specified in this lease and any suit brought to collect
the amount of the deficiency for any month shall not prejudice in any way the
rights of Owner to collect the deficiency for any month shall not prejudice in
any way the rights of Owner to collect the deficiency of any subsequent month by
a similar proceeding. Owner, in putting the demised premises in good order or
preparing the same for re-rental may, at Owner's option, make such alterations,
repairs, replacements, and/or decorations in the demised premises as Owner, in
Owner's sole judgment, considers advisable and necessary for the purpose of
re-letting the demised premises, and the making of such alterations, repairs,
replacements, and/or decorations shall not operate or be construed to release
Tenant from liability hereunder as aforesaid. Owner shall in no event be liable
in any way whatsoever for failure to re-let the demised premises, or in the
event that the demised premises are re-let, for failure to collect the rent
thereof under such re-letting, and in no event shall Tenant be entitled to
receive any excess, if any, of such net rents collected over the sums payable by
Tenant to Owner hereunder. In the event of a breach or threatened breach by
Tenant of any of the covenants or provisions hereof, Owner shall have the right
of injunction and the right to invoke any remedy allowed at law or in equity as
if re-entry, summary proceedings and other remedies were not herein provided
for. Mention in this lease of any particular remedy, shall not preclude Owner
from any other remedy, in law or in equity. Tenant hereby expressly waives any
and all rights of redemption granted by or under any present or future laws in
the event of Tenant being evicted or dispossessed for any cause, or in the event
of Owner obtaining possession of demised premises, by reason of the violation by
Tenant of any of the covenants and conditions of this lease, or otherwise.

Fees and Expenses:

      19. If Tenant shall default in the observance or performance of any term
or covenant on Tenant's part to be observed or performed under or by virtue of
any of the terms or provisions in any article of this lease, then, unless
otherwise provided elsewhere in this lease, Owner may immediately or at any time
thereafter and without notice perform the obligation of Tenant thereunder. If
Owner, in connection with the foregoing or in connection with any default by
Tenant in the covenant to pay rent hereunder, makes any expenditures or incurs
any obligations for the payment of money, including but not limited to
attorney's fees, in instituting, prosecuting or defending any action or
proceeding, then Tenant will reimburse Owner for such sums so paid or
obligations incurred with interest and costs. The foregoing expenses incurred by
reason of Tenant's default shall be deemed to be additional rent hereunder and
shall be paid by Tenant to Owner within five (5) days of rendition of any bill
or statement to Tenant therefor. If Tenant's lease term shall have expired at
the time of making of such expenditures or incurring of such obligations, such
sums shall be recoverable by Owner as damages.

Building Alterations and Management:

      20. Owner shall have the right at any time without the same constituting
an eviction and without incurring liability to Tenant therefor to change the
arrangement and/or location of public entrances, passageways, doors, doorways,
corridors, elevators, stairs, toilets or other public parts of the building and
to change the name, number or designation by which the building may be known.
There shall be no allowance to Tenant for diminution of rental value and no
liability on the part of Owner by reason of inconvenience, annoyance or injury
to business arising from Owner or other Tenants making any repairs in the
building or any such alterations, additions and improvements. Furthermore,
Tenant shall not have any claim against Owner by reason of Owner's imposition of
such controls of the manner of access to the building by Tenant's social or
business visitors as the Owner may deem necessary for the security of the
building and its occupants.

No Representations by Owner:

      21. Neither Owner nor Owner's agents have made any representations or
promises with respect to the physical condition of the building, the land upon
which

it is erected or the demised premises, the rents, leases, expense of operation
or any other matter or thing affecting or related to the premises except as
herein expressly set forth and no rights, easements or licenses are acquired by
Tenant by implication or otherwise except as expressly set forth in the
provisions of this lease. Tenant has inspected the building and the demised
premises and is thoroughly acquainted with their condition and agrees to take
the same "as is" and acknowledges that the taking of possession of the demised
premises by Tenant shall be conclusive evidence that the said premises and the
building of which the same form a part were in good and satisfactory condition
at the time such possession was to taken, except as to latent defects. All
understandings and agreements heretofore made between the parties hereto are
merged in this contract, which alone fully and completely expresses the
agreement between Owner and Tenant and any executory agreement hereafter made
shall be ineffective to change, modify, discharge or effect an abandonment of it
in which or in part, unless such executory agreement is in writing and signed by
the party against whom enforcement of the change, modification, discharge or
abandonment is ought.

End of Term:

      22. Upon the expiration or other termination of the term of this lease,
Tenant shall quit and surrender to Owner the demised premises, broom clean, in
good order and condition, ordinary wear and damages which Tenant is not required
to repair and as provided elsewhere in this lease excepted, and Tenant shall
remove all its property. Tenant's obligation to observe or perform this covenant
shall survive the expiration or other termination of this lease. If the last day
of the term of this lease or any renewal thereof, falls on Sunday, this lease
shall expire at noon on the preceding Saturday unless it be a legal holiday in
which case it shall expire at noon on the preceding business day.

Quiet Enjoyment:

      23. Owner covenants and agrees with Tenant that upon Tenant paying the
rent and additional rent and observing and performing all the terms, covenants
and conditions, on Tenant's part to be observed and performed, Tenant may
peaceably and quietly enjoy the premises hereby demised, subject, nevertheless,
to the terms and conditions of this lease including, but not limited to, Article
31 hereof and to the ground leases, underlying leases and mortgages hereinbefore
mentioned.

Failure to Give Possession:

      24. If Owner is unable to give possession of the demised premises on the
date of the commencement of the term hereof, because of the holding-over or
retention of possession of any tenant, undertenant or occupants or if the
demised premises are located in a building being constructed, because such
building has not been sufficiently completed to make the premises ready for
occupancy or because of the fact that a certificate of occupancy has not been
procured or for any other reason, Owner shall not be subject to any liability
for failure to give possession on said date and the validity of the lease shall
not be impaired under such circumstances, nor shall the same be construed in any
wise to extend the term of this lease, but the rent payable hereunder shall be
abated (provided Tenant is not responsible for Owner's inability to obtain
possession) until the Owner shall have given Tenant written notice that the
premises are substantially ready for Tenant's occupancy. If permission is given
to Tenant to enter into the possession of the demised premises or to occupy
premises other than the demised premises prior to the date specified as the
commencement of the term of this lease, Tenant covenants and agrees that such
occupancy shall be deemed to be under all the terms, covenants, conditions and
provisions of this lease, except as to the covenant to pay rent. The provisions
of this article are intended to constitute "an express provision to the
contrary" within the meaning of Section 223-a of the New York Real Property Law.

No Waiver:

      25. The failure of Owner to seek redress for violation of, or to insist
upon the strict performance of any covenant or condition of this lease or of any
of the Rules or Regulations, set forth or hereafter adopted by Owner, shall not
prevent a subsequent act which would have originally constituted a violation
from having all the force and effect of an original violation. The receipt by
Owner of rent with knowledge of the breach of any covenant of this lease shall
not be deemed a waiver of such breach and no provision of this lease shall be
deemed to have been waived by Owner unless such waiver be in writing signed by
Owner. No payment by Tenant or receipt by Owner of a lesser amount than the
monthly rent herein stipulated shall be deemed to be other than on account of
the earlier stipulated rent, nor shall any endorsement or statement of any check
or any letter accompanying any check or payment as rent be deemed as accord and
satisfaction, and Owner may accept such check or payment without prejudice to
Owner's right to recover the balance of such rent or pursue any other remedy in
this lease provided. No act or thing done by Owner or Owner's agents during the
term hereby demised shall be deemed as acceptance of a surrender of said
premises, and no agreement to accept such surrender shall be valid unless in
writing signed by Owner. No employee of Owner or Owner's agent shall have any
power to accept the keys of said premises prior to the termination of the lease
and the delivery of keys to any such agent or employee shall not operate as a
termination of the lease or a surrender of the premises.

Waiver of Trial by Jury:

      26. It is mutually agreed by and between Owner and Tenant that the
respective parties hereto shall and they hereby do waive trial by jury in any
action, proceeding or counterclaim brought by either of the parties hereto
against the other (except for personal injury or property damage) on any matters
whatsoever arising out of or in any way connected with this lease, the
relationship of Owner and Tenant, Tenant's use of or occupancy of said premises,
and any emergency statutory or any other statutory remedy. It is further
mutually agreed that in the event Owner commences any summary proceeding for
possession of the premises, Tenant will not interpose any counterclaim of
whatever nature or description in any such proceeding including a counterclaim
under Article 4.

Inability to Perform:

      27. This Lease and the obligation of Tenant is pay rent hereunder and
perform all of the other covenants and agreements hereunder on part of Tenant to
be performed shall in no wise be affected, impaired or excused because Owner is
unable to fulfill any of its obligations under this lease or to supply or is
delayed in supplying any service expressly or impliedly to be supplied or is
unable to make, or is delayed in making any repair, additions, alterations or
decorations or is unable to supply or is delayed in supplying any equipment or
fixtures if Owner is prevented or delayed from so doing by reason of strike or
labor troubles or any cause whatsoever including, but not limited to, government
preemption in connection with a National Emergency or by reason of any rule,
order or regulation of any department or subdivision thereof of any government
agency or by reason of the conditions of supply and demand which have been or
are affected by war or other emergency.

Bills and Notices:

      28. Except as otherwise in this lease provided, a bill, statement, notice
or communication which Owner may desire or be required to give to Tenant, shall
be deemed sufficiently given or rendered if, in writing, delivered to Tenant
personally or sent by registered or certified mail addressed to Tenant at the
building of which the demised premises form a part or at the last known
residence address or business address of Tenant or left at any of the aforesaid
premises addressed to Tenant, and the time of the rendition of such bill or
statement and of the giving of such notice or communication shall be deemed to
be the time when the same is delivered to Tenant, mailed, or left at the
premises as herein provided. Any notice by Tenant to Owner must be served by
registered or certified mail addressed to Owner at the address first hereinabove
given or at such other address as Owner shall designate by written notice.

Services Provided by Owners

      29. As long as Tenant is not in default under any of the covenants of this
lease, Owners shall provide: (a) necessary elevator facilities on business days
from 8 a.m. to 6 p.m. and on Saturdays from 8 a.m. to 1 p.m. and have one
elevator subject to call at all other times; (b) heat to the demised premises
when and as required by law, on business days from 8 a.m. to 6 p.m., and on
Saturdays from 8 a.m. to 1 p.m.; (c) water for ordinary lavatory purposes, but
if Tenant uses or consumes water for any other purposes or in unusual quantities
(of which fact Owner shall be the sole judge), Owner may install a water meter
at Tenant's expense which Tenant shall thereafter maintain at Tenant's expense
in good working order and repair to register such water consumption and Tenant
shall pay for water consumed as shown on said meter as additional rent as and
when bills are rendered; (d) cleaning service for the demised premises on
business days at Owner's expense provided that the same are kept in order by
Tenant. If, however, said premises are to be kept clean by Tenant, it shall be
done at Tenant's sole expense, in a manner satisfactory to Owner and no one
other than persons approved by Owner shall be permitted to enter said premises
or the building of which they are a part for such purpose. Tenant shall pay
Owner the cost of removal of any of Tenant's refuse and rubbish from the
building; (e) if the demised premises is serviced by Owner's air
conditioning/cooling and ventilating system, air conditioning/cooling will be
furnished to Tenant from May 15th through September 30th on business days
(Mondays through Fridays, holidays excepted) from 8:00 a.m. to 6:00 p.m., and
ventilation will be furnished on business days during the aforesaid hours except
when air conditioning/cooling is being furnished as aforesaid. If Tenant
requires air conditioning/cooling or ventilation for more extended hours or on
Saturdays, Sundays, or on holidays, as defined under Owner's contract with
Operating Engineers Local 94-94A, Owner will furnish the same at Tenant's
expense. RIDER to be added in respect to rates and conditions for such
additional service*; (f) Owner reserves the right to stop services of the
heating, elevators, plumbing, air-conditioning, power systems or cleaning or
other services, if any, when necessary by reason of accident or for repairs,
alterations, replacements or improvements necessary or desirable in the judgment
of Owner for as long as may be reasonably required by reason thereof. If the
building of which the demised premises are a part supplies manually-operated
elevator service, Owner at any time may substitute automatic-control elevator
services and upon ten days' written notice to Tenant, proceed with alterations
necessary therefor without in any wise affecting this lease or the obligation of
Tenant hereunder. The same shall be done with a minimum of inconvenience to
Tenant and Owner shall pursue the alteration with due diligence.

Captions:

      30. The Captions are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope of this lease nor
the intent of any provisions thereof.

Definitions: 

      31. The term "office," or "offices," wherever used in this lease, shall
not be construed to mean premises used as a store or stores, for the sale or
display, at any time, of goods, wares or merchandise, of any kind, or as a
restaurant, shop, booth, bootblack or other stand, barber shop, or for other
similar purposes or for manufacturing. The term "Owner" means a landlord or
lessor, and as used in this lease means only the owner, or the mortgagee in
possession, for the time being of the land and building (or the owner of a lease
of the building or of the land and building) of which the demised premises form
a part, so that in the event of any sale or sales of said land and building or
of said lease, or in the event of a lease of said building, or of the land and
building, the said Owner shall be and hereby is entirely freed and relieved of
all covenants and obligations of Owner hereunder, and it shall be deemed and
construed without further agreement, between the parties or their successors in
interest, or between the parties and the purchaser, at any such sale, or the
said lessee of the building or of the land and building, that the purchaser or
the lessee of the building has assumed and agreed to carry out any and all
covenants and obligations of Owner, hereunder. The words "re-enter" and
"re-entry" as used in this lease are not restricted to their technical legal
meaning. The term "business days" as used in this lease shall exclude Saturdays
(except such portion thereof as is covered by specific hours in Article 29
hereof), Sundays and all days observed by the State or Federal Government as
legal holidays and those designated as holidays by the applicable building
service union employees service contract or by the applicable Operating
Engineers contract with respect to HVAC service.

- ----------
* Rider to be added if necessary

Adjacent Excavation--Blasting:

      32. If an excavation shall be made upon land adjacent to the demised
premises, or shall be authorized to be made, Tenant shall afford to the person
causing or authorized to cause such excavation, license to enter upon the
demised premises for the purpose of doing such work as said person shall deem
necessary to preserve the wall or the building of which demised premises form a
part from injury or damage and to support the same by proper foundations without
any claim for damages or indemnity against Owner, or diminution or abatement of
rent.

Rules and Regulations:

      33. Tenant and Tenant's servants, employees, agents, visitors, and
licensees shall observe faithfully, and comply strictly with, the Rules and
Regulations and such other and further reasonable Rules and Regulations as Owner
or Owner's agents may from time to time adopt. Notice of any additional rules or
regulations shall be given in such manner as Owner may elect. In case Tenant
disputes the reasonableness of any additional Rule or Regulation hereafter made
or adopted by Owner or Owner's agents, the parties hereto agree to submit the
question of the reasonableness of such Rule or Regulation for decision to the
New York office of the American Arbitration Association, whose determination
shall be final and conclusive upon the parties hereto. The right to dispute the
reasonableness of any additional Rule or Regulation upon Tenant's part shall be
deemed waived unless the same shall be asserted by service of a notice, in
writing upon Owner within ten (10) days after the giving of notice thereof.
Nothing in this lease contained shall be construed to impose upon Owner any duty
or obligation to enforce the Rules and Regulations or terms, covenants or
conditions in any other lease, as against any other tenant and Owner shall not
be liable to Tenant for violations of the same by any other tenant, its
servants, employees, agents, visitors or licensees.

Security:

      34. Tenant has deposited with Owner the sum of $14,916.00* as security for
the faithful performance and observance by Tenant of the terms, provisions and
conditions of this lease; it is agreed that in the event Tenant defaults in
respect of any of the terms, provisions and conditions of this lease, including,
but not limited to, the payment of rent and additional rent, Owner may use,
apply or retain the whole or any part of the security so deposited to the extent
required for the payment of any rent and additional rent or any other sum as to
which Tenant is in default or for any sum which Owner may expend or may be
required to expand by reason of Tenant's default in respect of any of the terms,
covenants and conditions of this lease, including but not limited to, any
damages or deficiency in the re-letting of the premises, whether such damages or
deficiency occurred before or after summary proceedings or after re-entry by
Owner. In the event that Tenant shall fully and faithfully comply with all of
the terms, provisions, covenants and conditions of this lease, the security
shall be returned to Tenant after the date fixed as the end of the Lease and
after delivery of entire possession of the demised premises to Owner. In the
event of a sale of the land and building or leasing of the building, of which
the demised premises form a part, Owner shall have the right to transfer the
security to the vendor or lessee and Owner shall thereupon be released by Tenant
from all liability for the return of such security; and Tenant agrees to look to
the new Owner solely for the return of said security, and it is agreed that the
provisions hereof shall apply to every transfer or assignment made of the
security to a new Owner. Tenant further covenants that it will not assign or
encumber or attempt to assign or encumber the monies deposited herein as
security and that neither Owner nor its successors or assigns shall be bound by
any such assignment, encumbrance, attempted assignment or attempted encumbrance.

Estoppel Certificate

      35. Tenant, at any time, and from time to time, upon at least 10 days'
prior notice by Owner, shall execute, acknowledge and deliver to Owner, and/or
to any other person, firm or corporation specified by Owner, a statement
certifying that this Lease is unmodified and in full force and effect (or, if
there have been modifications, that the same is in full force and effect as
modified and stating the modifications), stating the dates to which the rent and
additional rent have been paid, and stating whether or not there exists any
default by Owner under this Lease, and, if so, specifying each such default.

Executors and Assigns

      36. The covenants, conditions and agreements contained in this lease shall
bind and insure to the benefit of Owner and Tenant and their respective heirs,
distributors, executors, administrators, successors, and except as otherwise
provided in this lease, their assigns.

- ----------
* Space to be filled in or deleted.

See Rider and Exhibit A attached hereto and made a part hereof.

In Witness Whereof, Owner and Tenant have respectively signed and sealed this
lease as of the day and year first above written.

                        Landlord:
                        509 MADISON AVENUE ASSOCIATES
                        By: Kensico Management, Inc.
                            Managing General Partner
Witness for Owner:
                        By: /s/ Alan Zimmerman
- ---------------------       -------------------------------------------
                            Name:

                        Tenant:
                        DISCOVERY LABORATORIES, INC.
Witness for Tenant:
                        By: /s/ James S. Kuo, M.D.
- ---------------------       -------------------------------------------
                                James S. Kuo, M.D., President and Chief
                                Executive Officer

                                 ACKNOWLEDGMENTS

CORPORATE OWNER 
STATE OF NEW YORK, ss.:
County of 

      On this    day of    , 19   , before me personally came                   
to me known, who being by me duly sworn, did depose and say that he resides     
                                                                                
in                                                                             ;
that he is the                of                                                
the corporation described in and which executed the foregoing instrument, as
OWNER; that he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by order of the
Board of Directors of said corporation, and that he signed his name thereto by
like order.

INDIVIDUAL OWNER
STATE OF NEW YORK, ss.:
County of 

      On this    day of          , 19  , before me personally came             ,
to me known and known to me to be the individual                                
described in and who, as OWNER, executed the foregoing instrument and
acknowledged to me that                    he executed the same.

CORPORATE TENANT
STATE OF NEW YORK, ss.:
County of 

      On this    day of          , 19  , before me personally came             ,
to me known, who being by me duly sworn, did depose and say that he resides     
                                                                                
in                                                                             ;
that he is the                of                                               
the corporation described in and which executed the foregoing instrument, as
TENANT; that he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by order of the
Board of Directors of said corporation, and that he signed his name thereto by
like order.

INDIVIDUAL TENANT
STATE OF NEW YORK, ss.:
County of 

      On this    day of          , 19  , before me personally came             ,
to me known and known to me to be the individual                                
described in and who, as TENANT, executed the foregoing instrument and
acknowledged to me that                    he executed the same.

      RIDER ANNEXED TO AND FORMING A PART OF LEASE DATED AS OF THE 29 DAY OF
      MAY, 1997, BETWEEN 509 MADISON AVENUE ASSOCIATES, AS LANDLORD, AND
      DISCOVERY LABORATORIES, INC., AS TENANT, AFFECTING SPACE ON THE FOURTEENTH
      (14TH) FLOOR AT 509 MADISON AVENUE, NEW YORK. NEW YORK
      ------------------------------------------------------------
     
      37. Base Rent, The annual base rent, payable in equal monthly
installments, shall be as follows: Eighty Nine Thousand Four Hundred Ninety Six
and 00/100 ($89,496.00) Dollars for the period commencing on the Rent
Commencement Date (as hereinafter defined) and ending twelve (12) months
following the Rent Commencement Date; Ninety One Thousand Nine Hundred Thirty
Six and 80/100 ($91,936.80) Dollars for the period commencing thirteen (13)
months following the Rent Commencement Date and ending twenty four (24) months
following the Rent Commencement Date; and Ninety Four Thousand Four Hundred
Fifty and 82/100 ($94,450.82) Dollars for the period commencing twenty five (25)
months following the Rent Commencement Date and ending thirty six (36) months
following the Rent Commencement Date (herein sometimes called "Base Rent").

      38. Rent Commencement Date. Tenant's obligation to pay Base Rent shall
commence on June 15, 1997 (the "Rent Commencement Date")

      The initial installment of Base Rent paid upon the execution hereof shall
be applied as in this Article provided. If the Rent Commencement Date is not the
first day of a calendar month, the next monthly installment of Base Rent due
hereunder shall be prorated to the end of the calendar month next following the
month in which said Rent Commencement Date occurred, so that subsequent monthly
installments of Base Rent will be due on the first days of calendar months
throughout the term of this lease, except that the last monthly installment will
be similarly prorated.

      Within ten (10) days of request by either party after the Rent
Commencement Date has been determined, Landlord and Tenant shall mutually
execute and deliver a supplemental agreement confirming and setting forth the
Rent Commencement Date.

      39. Condition of Demised Premises. Tenant acknowledges and represents to
Landlord that it has thoroughly inspected and examined, or caused to be
thoroughly inspected and examined, the demised premises and that it is fully
familiar with the physical condition and state of repair thereof, and Tenant
does hereby agree to accept same in its existing condition and state of repair,
subject to any and all defects therein, latent or otherwise, "AS IS", and
Landlord shall have no obligation to do any work or make any installation,
repair or alteration of any kind to or in respect thereof, other than as
expressly set forth in this lease.

      40. Maintenance of Demised Premises. Unless expressly provided in this
lease to the contrary, Landlord shall not be responsible for the upkeep or
maintenance of the demised premises or any installation therein. In no event
shall Landlord be responsible for any installation made by Tenant.

      Should Landlord hereafter agree, in writing or otherwise, at the request
of Tenant or otherwise, to do any work in or in respect of the demised premises,
the same shall be paid for by Tenant not later than ten (10) days after being
billed therefor, at a rate and sum equal to the cost to Landlord of any such
work plus 15% of such cost. Any sum or charge (except Base Rent) required to be
paid by Tenant under this or any Article of this lease is and shall be deemed to
be additional rent under this lease, and, if same is not paid as in this lease
provided

Landlord shall have the same rights, remedies and privileges in respect of such
non-payment as if Base Rent were not paid.

      41. Assignment-Sublet. Article 11 hereof is hereby amended to add the
following:

      "Provided this lease is then in full force and effect and Tenant is not in
default thereunder:

      "If Tenant desires to assign or sublet all or any portion of the demised
premises, Tenant shall promptly notify Landlord and its leasing or managing
agent for the Building of its desire to assign this lease or sublet the demised
premises. Upon obtaining a proposed assignee or sublessee upon terms
satisfactory to Tenant, Tenant shall submit to Landlord in writing (a) the name
of the proposed assignee or subtenant; (b) the terms and conditions of the
proposed assignment or subletting; and (c) the nature and character of the
business of the proposed assignee or subtenant and any other information
reasonably requested by Landlord.

      "Landlord shall have the following options which may be exercised within
sixty (60) days from any notice or submission by Tenant to Landlord pursuant to
the last sentence of the preceding paragraph.

      (a) If Tenant desires to sublet all or substantially all of the demised
      premises or to assign this lease, then within sixty (60) days after
      receipt of the aforesaid notice Landlord may notify Tenant that Landlord
      elects (i) to cancel this lease, in which event such cancellation shall
      become effective on the date proposed by Tenant for such subletting or
      assignment and this lease shall thereupon terminate on said date with the
      same force and effect as if said date were the expiration date of this
      lease, or (ii) require Tenant to assign this lease to Landlord effective
      on the date proposed by Tenant for such subletting or assignment.

      (b) If Tenant desires to sublet less than all of the demised premises,
      then within sixty (60) days after receipt of the aforesaid notice Landlord
      may notify Tenant that Landlord elects (i) to cancel this lease only as to
      the portion of the demised premises Tenant proposes to sublet, to take
      effect as of the proposed effective date of such subletting or (ii) to
      require Tenant to sublease to Landlord as subtenant of Tenant, the portion
      of the demised premises that Tenant proposes to sublet for the term, and
      from the commencement date of the proposed subletting. The annual rent and
      additional rent which Landlord shall pay to Tenant pursuant to such
      sublease to Landlord shall be a pro rata apportionment of the annual and
      additional rent payable hereunder and it is hereby expressly agreed that
      such sublease to Landlord shall be upon all the covenants, agreements,
      terms, provisions and conditions contained in this lease except for such
      thereof which are inapplicable and such sublease shall give Landlord the
      unqualified and unrestricted right without Tenant's permission to assign
      such sublease or any interest therein and/or to sublet the space covered
      by such sublease or any part or parts of such space and to make or cause
      to have made or permit to be made any and all changes, alterations,
      decorations, additions, and improvements in the space covered by such
      sublease, and that such may be removed, in whole or part, at Landlord's
      option, prior to or upon the expiration or other termination of such
      sublease provided that any damage or injury caused by such removal shall
      be repaired. Such sublease to Landlord shall also provide that the parties
      to such sublease expressly negate any intention that any estate

                                     - 2 -

      created under such sublease be merged with any other estate held by either
      of said parties.

      "In the event of the exercise of said option under subparagraph (b) of
this Article, the Base Rent and all other charges payable hereunder shall be
apportioned on a pro rata basis. In the event that Landlord fails to exercise
its options under subparagraphs (a) or (b) of this Article within said sixty
(60) day period, Landlord will not unreasonably withhold its consent to the
proposed assignment or subletting which was under consideration during such
sixty (60) day period, except that Landlord shall not be required to consent to
and no assignment or subletting shall be proposed by Tenant with any person,
firm or entity that shall, at the time of such proposal, or within six (6)
months prior thereto, be or have been a tenant, subtenant or occupant of space
at the Building or be or have been negotiating with Landlord or its agent to
become a tenant, subtenant or occupant of space thereat, nor that shall be in a
business not in keeping with the standards and character of the Building, nor
that in the reasonable judgment of Landlord is not financially responsible, nor
that shall be a government or governmental agency, department or affiliate
thereof, nor that shall in any way be dependent upon government or donation
financing for support.

      "As further conditions precedent to granting consent to any proposed
assignment or subletting, Landlord may require that: Tenant first agree, in a
written agreement satisfactory to Landlord's counsel (which agreement shall be
secured by a collateral assignment of any such sublease, if applicable and/or
such other security as Landlord may require) to pay monthly to Landlord, as
additional rent hereunder, an amount equal to all rent and/or other
consideration payable by any such assignee or sublessee to Tenant to the extent
that such rent and/or other consideration exceeds, on a pro rata basis, a sum,
amount or rate in excess of the Base Rent (and additional rent) at the time
payable hereunder by Tenant per square rentable foot so affected by any such
assignment or sublease; and the proposed assignment or sublease and the
documentation therefor shall be otherwise reasonably acceptable to Landlord. (In
calculating additional rent that may be due Landlord under the preceding
sentence, (i) Tenant shall be credited with actual reasonable costs paid by it
in connection with culminating such assignment or subletting, averaged over the
remaining term in respect of such assignment or subletting, and (ii) rent or
consideration payable by any assignee or sublessee to Tenant shall include,
without limitation, sums payable to Tenant for the sale or rental of Tenant's
fixtures, leasehold improvements, equipment, furniture or other personal
property, less, in the case of the sale thereof, the then fair market value
thereof.) In connection with any such proposed assignment or subletting, Tenant
and such proposed assignee or sublessee shall also provide Landlord with such
other information as it may reasonably request, including (but not limited to) a
certification in affidavit form of all rental and other consideration proposed
to be paid in connection with the proposed assignment or subletting. If Tenant
shall at any time claim that Landlord unreasonably withheld its consent to a
proposed assignment or subletting, that question shall be submitted to
arbitration and if Tenant prevails Landlord's sole obligation or liability shall
be to so consent thereto. Any and all costs related to separating the demised
premises to accommodate a subletting or a partial termination of this lease
resulting from Tenant's seeking to enter into a partial subletting, including
all construction costs related to modifying the demised premises, shall be borne
and paid for solely by Tenant. If Tenant is a corporation, a sale, transfer,
pledge or encumbrance of a majority of the stock of Tenant or, if Tenant is a
partnership, any sale, assignment, transfer, pledge or other disposition of a
controlling interest in such partnership, shall,

                                     - 3 -

subject to the provisions of this Article and Article 11 hereof; provided,
however, that no sale, transfer, pledge or encumbrance of a majority of the
Tenant's stock shall be deemed an assignment if in a merger or consolidation of
the Tenant, the surviving corporation, partnership, buyer, assignee or
transferee (the "Surviving Company") will have immediately thereafter a net
worth equal to or greater than the net worth of the Tenant immediately prior to
such consolidation, merger, sale, lease, assignment, transfer or other
disposition and the Surviving Company shall have executed and delivered to the
Landlord an agreement, in form and substance reasonably satisfactory to the
Landlord, containing an assumption by the Surviving Company of the due and
punctual performance and observance of each covenant and condition of the lease.

      "If Landlord shall grant its consent to the proposed assignment of this
lease or subletting of the demised premises, such consent and the effectiveness
of any such assignment or subletting shall nevertheless be conditioned upon
Tenant complying with the following conditions:

      (a) An executed duplicate original in form satisfactory to Landlord for
      review by Landlord's counsel of such subleasing or assignment agreement
      shall be delivered to Landlord at least five (5) business days prior to
      the effective date thereof.

      (b) In the event of any assignment, Tenant will deliver to Landlord at
      least five (5) business days prior to the effective date thereof an
      assumption agreement wherein the assignee (except Landlord) agrees to
      assume all of the terms, covenants and conditions of this lease to be
      performed by Tenant hereunder and which provides that Tenant named herein
      and such assignee shall after the effective date of such assignment be
      jointly and severally liable for the performance of all of the terms,
      covenants and conditions of this lease.

      (c) Each sublease of the demised premises shall contain or shall be deemed
      to contain, whether or not specifically included therein, the following
      provisions:

           (i) 'In the event of a default under any underlying lease of all or
           any portion of the premises demised hereby which results in the
           termination of such lease, or if the lessor under any such underlying
           lease shall exercise any right to cancel or terminate such underlying
           lease, the subtenant hereunder shall, at the option of the lessor
           under any such lease, attorn to and recognize such lessor as Landlord
           hereunder and shall, promptly upon such lessor's request, execute and
           deliver all instruments necessary or appropriate to confirm such
           attornment and recognition. The subtenant hereunder hereby waives all
           rights under present or future law to elect, by reason of the
           termination of such underlying lease, to terminate such sublease or
           surrender possession of the premises demised hereby. If the lessor
           under such underlying lease does not exercise the aforesaid option,
           the term of this sublease shall terminate simultaneously with the
           term of the underlying lease and subtenant hereby agrees to vacate
           the premises subleased on or before the effective date of termination
           of the underlying lease.'

           (ii) 'This sublease may not be assigned or the sublet premises
           further sublet, in whole or in part, without the prior written
           consent of the lessor under any underlying lease of all or any
           portion of the premises demised hereby.'

                                     - 4 -

      "If this lease is assigned and Landlord consents to such assignment,
Tenant covenants and agrees that the terms, covenants and conditions of this
lease may be changed, altered or modified in any manner whatsoever by Landlord
and the assignee without the prior written consent of Tenant and that no such
change, alteration or modification shall release Tenant from the performance by
it of any of the terms, covenants and conditions on its part to be performed
under this lease. Any such change, alteration or modification which would have
the effect of increasing or enlarging Tenant's obligations or liabilities under
this lease shall not, to the extent only of such increases or enlargement, be
binding upon Tenant.

      "Tenant covenants that notwithstanding any subletting or assignment to
Landlord or to any other subtenant or assignee and/or acceptance of rent or
additional rent by Landlord from any subtenant or assignee, Tenant shall and
will remain fully liable for the payment of the annual rent and additional rent
due and to become due hereunder and for the performance of all the covenants,
agreements, terms, provisions and conditions contained in this lease on the part
of the Tenant to be performed.

      "The consent by Landlord to any assignment, subletting, or occupancy shall
not in any wise be construed to relieve Tenant from obtaining the express
consent, in writing, of Landlord to any further assignment, subletting,
sub-subletting, or occupancy, which consent Landlord shall have the right to
withhold for any reason whatsoever.

      "If Landlord shall decline to grant its consent to the proposed assignment
of this lease or subletting of the demised premises, or if Landlord shall
exercise any of its options under subparagraph (a) or (b) of this Article, or if
Landlord shall grant its consent to the proposed assignment of this lease or
subletting of the demised premises, Tenant shall indemnify and save Landlord
harmless of, from and against any and all claims (and all expenses and fees,
including attorneys' fees, related thereto) for commissions or compensation made
by any broker or entity, arising out of or relating to the proposed assignment
or subletting.

      "In any event, Tenant agrees not to advertise or in any manner to list the
demised premises, or any part thereof, for rent or assignment or subletting
without Landlord's prior written consent in each instance, which consent shall
not be unreasonably withheld in the case of a proposed advertisement which does
not identify the exact Building address. Any consent granted by Landlord
pursuant hereto shall not, in any event, otherwise alter or modify the other
provisions of this lease related to assignments or sublettings by Tenant."

      Except as specifically set forth in this Article, nothing in this Article
is intended to modify the provisions of Article 11 of this lease.

      42. Rent Escalations.

      (A) For the purposes of this Article, the following quoted words, terms or
phrases shall have the meaning in this subdivision (A) ascribed to them:

            (1) "Lease Year" shall mean the period of twelve (12) months or less
commencing with the commencement date of the term of this lease and ending on
the following December 31st, and each successive period of twelve (12) months
thereafter during the term, and the final period of twelve (12) months or less
commencing with January 1st immediately preceding the expiration of the term;

                                     - 5 -

            (2) "Base Tax Year" shall mean the fiscal year ending June 30, 1998;

            (3) "Building" shall mean the building in which the demised premises
are located and the land upon which such building is situated;

            (4) "Tenant's Percentage" shall mean 1.95%.

      (B) (1) In the event that the real estate taxes payable with respect to
the Building for any fiscal tax year (July 1 through June 30), or any portion
thereof, subsequent to the Base Tax Year (the "Tax Escalation Year") shall be
greater than the amount of such taxes due and payable during the Base Tax Year,
whether by reason of an increase in either the tax rate or the assessed
valuation, or both, or by reason of the levy, assessment or imposition of any
tax on real estate as such, ordinary or extraordinary, not now levied, assessed
or imposed, or for any other reason, Tenant shall pay and does covenant to pay
to Landlord, within ten (10) days of Landlord's rendering to Tenant a statement
therefor, as additional rent for the Tax Escalation Year in which such date
occurs, an amount equal to Tenant's Percentage of the increase in the amount of
such tax or installment over the corresponding tax or installment for the Base
Tax Year. Tenant shall also pay and does covenant to pay to Landlord, within ten
(10) days of Landlord's rendering to Tenant a statement therefor, as additional
rent for the Tax Escalation Year in which such date occurs, an amount equal to
Tenant's Percentage of any assessment or installment thereof for public
betterments or improvements which may be levied upon or in respect of the
Building. Landlord may take the benefit of the provisions of any statute or
ordinance permitting any such assessment to be paid over a period of time and in
such event Tenant shall be obligated to pay only Tenant's Percentage of the
installments of any such assessments which shall become due and payable during
the term of this lease. Upon request, Landlord shall furnish Tenant with a copy
of the real estate tax bill for any Tax Escalation Year in which Tenant is
hereunder required to pay additional rent. If at any time during the term of
this lease the method(s) of taxation prevailing at the date of execution hereof
shall be altered so that in lieu of or as an addition to or as a substitution
for the whole or any part of the taxes, assessments, levies or impositions or
charges now levied, assessed or imposed on real estate and the improvements
thereon, there shall be levied, assessed or imposed an alternative, additional
or new tax or fee, same shall be considered "real estate taxes" for the purposes
hereof and if in excess of the real estate taxes due and payable during the Base
Tax Year, Tenant shall pay Tenant's Percentage of such excess as herein
provided. For the purposes of this subdivision (1), at Landlord's election,
vault taxes or charges shall be considered real estate taxes.

            (2) Notwithstanding anything in this subdivision (B) to the
contrary, it is understood and agreed that if Landlord shall receive a refund of
any portion of real estate taxes in respect of which Tenant shall have paid
additional rental under this subdivision (B), then and under such circumstances
and if this lease shall then be in full force and effect without default on the
part of Tenant, Tenant shall be entitled to a credit against future payments of
additional rental under this subdivision (B) in an amount equal to Tenant's
Percentage of such refund, after first deducting from such total refund all
fees, costs and expenses incurred by Landlord in collecting same. If at the
expiration of the term of this lease any credit to which Tenant might be
entitled pursuant to the preceding sentence shall not have been used as a credit
as in such sentence provided, then and under such circumstances and subsequent
to Tenant properly vacating the demised premises as herein provided and so long
as Tenant is not and has not been otherwise in default hereunder,

                                     - 6 -

Tenant shall be entitled to a payment equal to the amount of any such remaining
credit. If the taxes for the Base Tax Year shall be reduced by certiorari
proceedings or otherwise, Landlord shall be entitled to recalculate the
additional rent in respect of any fiscal tax year after the Base Tax Year that
would have been payable by Tenant hereunder in accordance with (1) of this
subdivision (B) had such reduction occurred or been known at or prior to the
time additional rent for any such fiscal tax year was being originally
calculated, and Tenant agrees to pay any additional rent resulting from such
recalculation.

      (C) If the first or final Lease Year or a Tax Escalation Year shall
contain less than twelve months, the additional rent payable under this Article
for such Lease Years or a Tax Escalation Year shall be prorated (and in
determining whether any additional rent is payable therefor, the Base Tax Year
shall also be considered on a pro rata basis). Tenant's obligation hereunder to
pay additional rent for any Lease Year or a Tax Escalation Year shall survive
the expiration or termination of the term of this lease. In the event that the
additional rent to be paid by Tenant under this Article for the final Lease Year
has not then as yet been determined, Tenant covenants to pay to Landlord on the
first day of the month next preceding the expiration of the term hereof, as
additional rent and on account of the additional rent required to be paid
pursuant to this Article for the final Lease Year, a sum equal to the additional
rent paid or required to be paid by Tenant hereunder for the Lease Year next
preceding the final Lease Year prorated to the extent that the final Lease Year
is less than a full calendar year. Upon a determination being made by Landlord
of the precise amount of additional rent required to be paid by Tenant pursuant
to this Article for such final Lease Year, there shall be an adjustment of said
additional rent for said Lease Year to the extent that Tenant shall be required
to pay to Landlord promptly the sum by which said determination exceeds the
prorated sum previously paid, or Landlord shall promptly refund to Tenant the
sum by which said determination is less than the prorated sum previously paid.
For the non-payment of any additional rent Landlord shall have the same
remedies, rights and privileges that Landlord has for the non-payment of any
Base Rent hereinbefore provided for. Receipt and acceptance by Landlord of any
installment of Base Rent provided for under this lease or any of the additional
rent that may be required to be paid by Tenant under this lease, shall not be or
be deemed to be a waiver of any other additional rent or Base Rent then due and
no delay in determining or billing the amount of any additional rent due
pursuant to this Article shall be or be deemed to be a waiver of Landlord's
rights thereto.

      (D) (l) Commencing with the second Lease Year, it is agreed that Landlord
shall be entitled to charge, receive and collect from Tenant and Tenant agrees
to pay to Landlord on the first day of each month during each such Lease Year
and each Lease Year thereafter an amount equal to 1/12th of 110% of the
additional rent hereunder required to be paid by Tenant to Landlord for the
preceding Lease Year (such preceding Lease Year's additional rent to be
annualized for the purposes hereof, if such Lease Year was a period of less than
twelve (12) months), it being further understood and agreed that if the precise
amount of additional rent required to be paid by Tenant for such Lease Year
shall ultimately be determined to be in excess of such amount theretofore paid
by Tenant hereunder, Tenant shall forthwith pay to Landlord the amount of such
excess, and if such determination shall be that Tenant paid more than the
precise amount of additional rent required to be paid by Tenant for such Lease
Year, the amount of such excess shall be credited to future payments of
additional rent required to be paid by Tenant hereunder.

                                     - 7 -

            (2) Additionally, any time during any Lease Year that it becomes
evident to Landlord that monthly payments under this subdivision (D) will be
insufficient to satisfy Tenant's additional rental obligation under this Article
for such Lease Year, Landlord, on notice to Tenant, may appropriately increase
the monthly payments hereunder and Tenant agrees to pay same.

      (E) In no event shall anything contained in this Article be deemed or
construed to reduce the Base Rent or additional rent provided to be paid under
any of the other terms and provisions of this lease.

      43. Brokerage. Tenant represents, warrants and confirms to Landlord that
Newmark & Company Real Estate, Inc. and Koll Real Estate Services Company
(collectively, the "Brokers") are the sole and only brokers with whom it has
dealt with respect to this lease or the demised premises. Tenant agrees to
indemnify and save Landlord and the Brokers harmless of, from and against any
and all claims (and all expenses and fees, including attorneys' fees, related
thereto) for commissions or compensation made by any broker or entity (other
than the Brokers), arising out of or relating to this lease, the demised
premises, the Building and/or the acts of Tenant, its employees or agents. As,
if and when this lease shall be mutually executed and delivered by Landlord and
Tenant, Landlord agrees to pay the commission that may be due the Brokers in
connection with this lease in accordance with separate agreements between
Landlord and the Brokers.

      44. Maintenance of Air-Conditioning Equipment. Notwithstanding anything
contained herein to the contrary, Landlord agrees, at its sole expense, to
maintain and keep in good order, condition and repair all air-conditioning
equipment currently placed within or serving the demised premises. Anything
contained in Article 29 hereof to the contrary notwithstanding, Tenant agrees to
keep and cause to be kept closed (during any periods when air-conditioning is in
use) all windows in the demised premises and at all times to cooperate fully
with Landlord and otherwise to abide by all reasonable regulations and
requirements which Landlord may prescribe to permit the proper functioning and
protection of the heating and air-conditioning systems (if any) of the Building.

      45. Electricity.

            (1) As long as Tenant is not in default in the payment of any rent
      or the performance or observance of any covenants or provisions of this
      lease on Tenant's part to be observed or performed, but subject in any
      event to the other provisions of this Article, Landlord shall furnish the
      electric energy that Tenant shall reasonably require for ordinary
      reasonable use in the demised premises on a rent inclusion basis. That is,
      there shall be no charge to Tenant for such electric energy by way of
      measuring the same on any meter, such electric energy being included in
      Landlord's services which are covered by the Base Rent reserved hereunder.
      Landlord shall not be liable in any way to Tenant for any failure or
      defect in the supply or character of electric energy furnished to the
      demised premises by reason of any requirement, act or omission of the
      public utility serving the Building with electricity or for any other
      reason whatsoever. Throughout the term of this lease, Landlord reserves
      the right to approve the electrical equipment which Tenant may desire to
      utilize in the demised premises and any additions, supplements or
      replacements thereof. Tenant shall furnish and maintain and install all
      lighting tubes, lamps, starters, bulbs and ballasts required in the
      demised premises, at Tenant's expense or, at Landlord's election, shall
      purchase the same from Landlord and shall pay Landlord's charges therefor
      on demand.

                                     - 8 -

            (2) Tenant's use of and/or demand for electric energy in the demised
      premises shall not at any time exceed the capacity of any of the
      electrical conductors and equipment in or otherwise serving the demised
      premises. In order to insure that such capacity is not exceeded and to
      avoid possible adverse effect upon the electrical service of the Building,
      Tenant shall not, without Landlord's prior written consent in each
      instance, connect any additional fixtures, appliances or equipment (other
      than lamps, typewriters and other usual small business office machines
      having electric current requirements similar to electric typewriters and
      the electrical equipment that may have been initially approved by
      Landlord) to the electric distribution system of the Building or make any
      alteration or addition to the electric system of the demised premises. If
      Landlord grants such consent, all additional risers, feeders, or other
      conductors or equipment required therefor shall be provided by Landlord
      and the cost thereof shall be paid by Tenant upon Landlord's demand. As a
      condition to granting such consent, Landlord may require Tenant to agree
      to an increase in the Base Rent by an amount which will reflect the then
      value to Tenant of the additional service to be furnished by Landlord,
      that is, the potential additional electric energy to be made available to
      Tenant based upon the estimated additional capacity of such additional
      risers, feeders, conductors or other equipment. If Landlord and Tenant
      cannot agree thereon, such amount shall be determined in accordance with
      the procedure set forth in Subdivision (3) of this Article. Pending the
      determination of such increase Landlord, if requested by Tenant, may make
      such additional electrical service available to Tenant provided Tenant
      agrees in writing to pay the increase in accordance with Landlord's
      initial determination while such dispute is being determined. When the
      amount of such increase is so determined, the parties shall execute an
      agreement supplementary to this lease in the form prepared by Landlord to
      reflect such increase in the amount of Base Rent and the amount as
      determined by the procedure set forth in said Subdivision (3), effective
      from the date such additional service is made available to Tenant, but
      such increase shall be effective from such date even if such supplementary
      agreement is not executed. Landlord may withhold its consent until a
      written agreement thereon is reached. Additionally, throughout the term of
      this lease, Landlord shall have the right and privilege, from time to
      time, to survey the plans and specifications for the demised premises and
      the actual installations made or utilized by Tenant therein in order to
      determine the nature of Tenant's equipment and installations and the value
      of the electrical service being or to be furnished to Tenant. It is agreed
      that on the date of execution of this lease there is included in Base Rent
      the sum of EIGHT THOUSAND ONE HUNDRED THIRTY SIX ($8,136.00) DOLLARS in
      respect of electrical service. Such estimate of the value of electrical
      service to Tenant shall be based upon total connected load, as well as the
      electrical service then necessary for the operation of all lighting and
      other electrical equipment in the demised premises. If any such survey
      shall result in a determination that the value to Tenant of the electrical
      service and/or demand being furnished is or should be above that then
      included therefor in the Base Rent hereunder, Landlord shall notify Tenant
      thereof and (unless Tenant objects thereto within ten (10) days of receipt
      of such notice -- in which event the amount of the increase in Base Rent
      shall be determined pursuant to the procedure set forth in Subdivision
      (3)) the Base Rent shall be appropriately increased on an annual basis
      from and as of the date of any such survey, or as of such earlier date as
      it may be determined that Tenant has been receiving such additional value.
      Upon request of Landlord, Tenant shall execute an

                                     - 9 -

      agreement supplementary to this lease confirming any increases in
      Base Rent pursuant hereto, but such increase shall become effective
      regardless of whether any such supplementary agreement is executed.

            (3) Wherever in this Article it is provided that an amount or value
      shall be determined in accordance with the procedure set forth in
      Subdivision (3), it is intended that the following procedure shall be
      followed:

            Landlord shall select a reputable independent electrical engineer or
            utility consultant at the equal expense of Landlord and Tenant to
            determine the amount or value. If Tenant disagrees with the findings
            of Landlord's engineer or utility consultant, Tenant, within ten
            (10) days after Landlord shall have delivered such findings to
            Tenant, shall have the right, at Tenant's expense, to select a
            reputable independent electrical engineer to determine the amount
            and such party shall make such determination within twenty (20) days
            after such selection. If Tenant's engineer disagrees with the
            findings of Landlord's representative, Landlord's representative and
            Tenant's engineer shall select a third reputable independent
            engineer or utility consultant, at Tenant's expense, to determine
            such amount and his determination shall be binding and conclusive
            upon Landlord and Tenant. If Landlord's representative and Tenant's
            engineer cannot agree upon the selection of a third engineer or
            utility consultant, the amount shall be determined by arbitration as
            provided for hereinafter. In all situations, however, pending the
            determination of such dispute, the Base Rent and increases thereof
            shall be payable in accordance with Landlord's initial
            determination.

            (4) If at any time or times after the date of this lease the public
      utility rate schedule for the supply of electric current to the Building
      shall be increased for whatever reason during the term of this lease, or
      any charges, fuel adjustments or taxes are imposed upon Landlord in
      connection therewith or are increased, the Base Rent herein reserved shall
      be appropriately increased by the same percentage as the resulting
      increase in Landlord's cost of furnishing electric service to the demised
      premises. When the amounts of such adjustments are so determined, Landlord
      and Tenant shall execute an agreement supplementary hereto as prepared by
      Landlord to reflect such adjustments in the amount of the Base Rent,
      effective from the effective date of such increase in the public utility
      rate schedule; but such adjustment shall be effective from the effective
      date of the change in rates or imposition of or change in charges or
      taxes, as the case may be, whether or not such a supplementary agreement
      is executed.

            (5) Landlord also reserves the right at any time and for any reason
      to discontinue furnishing electric energy to Tenant in the demised
      premises upon not less than thirty (30) days' notice to Tenant or upon
      such shorter notice as may be required by the public utility serving the
      Building. However, in the event of Tenant's default in payment of any rent
      due under the terms of this lease or otherwise, in addition to Landlord's
      other remedies by reason thereof, Landlord may, without notice,
      discontinue the service of electric energy to the demised premises for the
      duration of such default or the term hereof (as Landlord may elect),
      without releasing Tenant from any liability under this lease and without
      Landlord incurring any liability for any damage or loss sustained by
      Tenant by such discontinuance, this lease shall continue in full force and
      effect and shall be

                                     - 10 -

      unaffected thereby, and the same shall not be deemed to be a lessening or
      diminution of services within the meaning of any law, rule or regulation
      now or hereafter enacted, promulgated or issued, except only that, from
      and after the effective date of such discontinuance, Landlord shall not be
      obligated to furnish electric energy to Tenant and the Base Rent shall be
      reduced to exclude the amount included in the Base Rent in respect of
      electrical service, but in no event shall the Base Rent be reduced by more
      than EIGHT THOUSAND ONE HUNDRED THIRTY SIX ($8,136.00) DOLLARS or the
      amount then included in Base Rent on account of electricity. If Landlord
      so discontinues furnishing electric energy to Tenant, Tenant at Tenant's
      expense shall arrange to obtain electric energy directly from the public
      utility company furnishing electric service to the Building. Except in
      such circumstances where a discontinuance of the furnishing of electric
      energy results from or relates to a default by Tenant, such electric
      energy may be furnished to Tenant by means of the then existing Building
      system feeders, risers and wiring to the extent that the same are
      available, suitable and safe for such purposes. All meters and additional
      panel boards, feeders, risers, wiring and other conductors and equipment
      which may be required to obtain electric energy directly from such public
      utility company shall be installed and maintained by Tenant at its
      expense, provided, however, that Tenant shall make no alterations or
      additions to the electrical equipment and/or appliances without the prior
      written consent of Landlord in each instance. Landlord shall not in any
      wise be liable or responsible to Tenant for any loss or damage or expense
      which Tenant may sustain or incur if either the quantity or character of
      electric energy is changed or is no longer available or suitable for
      Tenant's requirements. Tenant shall be liable for all loss or damage
      sustained in connection with its supply of the electric energy.

            (6) At no time shall Tenant's connected electrical load in the
      demised premises exceed four (4) watts per square foot. Tenant has
      reviewed the electrical capacity available to the demised premises and
      represents that it is satisfied therewith. For the purposes of this
      subdivision (6) only it is agreed that the demised premises contain 2,712
      square feet.

            (7) If any tax is imposed upon Landlord with respect to electrical
      energy furnished as a service to Tenant by any Federal, State or Municipal
      Authority, Tenant, unless prohibited by law or by any governmental
      authority having jurisdiction thereover, shall pay to Landlord, on demand,
      Tenant's pro rata share of such taxes.

            (8) Tenant shall enter into such modifications of this lease as
      Landlord may from time to time request in connection with any requirement
      of any public utility or any requirement of law pertaining to electric
      energy service or charges therefor.

      46. Landlord's Agent. Whenever Landlord is required or desires to send any
notice or other communication to Tenant under or pursuant to this lease, it is
understood and agreed that such notice or communication, if sent by Landlord's
agent (of whose agency Landlord shall have advised Tenant), for all purposes
shall be deemed to have been sent by Landlord. Landlord hereby advises Tenant
that Landlord's current agent is Newmark & Company Real Estate, Inc. of 125 Park
Avenue, New York, New York 10017.

      Tenant agrees that all of the representations, warranties, waivers and
indemnifications made in this lease by Tenant for the benefit of Landlord shall
also be deemed to inure to and be for

                                     - 11 -

the benefit of Landlord's agent, its officers, directors, employees and
independent contractors.

      47. Tenant's Certificate. At any time and from time to time within five
(5) days after written demand therefor, Tenant shall execute, acknowledge and
deliver to Landlord, without charge, a statement addressed to Landlord (and/or
such other persons or parties as Landlord shall require), certifying that to the
best knowledge of Tenant, this lease is in full force and effect and is
unmodified (or, if there have been modifications, specifying same) and setting
forth the dates to which the rentals and other charges payable hereunder have
been paid and stating that Landlord is not in default in the performance of any
of the covenants or agreements on its part to be performed hereunder (or, if
that is not the case, specifying each particular in which the Tenant alleges
that Landlord is in default) and certifying as to such other items in respect of
this lease as Landlord may reasonably require.

      48. Insurance and Indemnity. Landlord and Tenant, respectively, hereby
each releases the other party (which term as used in this Article shall include
such party's employees, agents, partners, officers, shareholders and directors)
from all liability, whether for negligence or otherwise, in connection with loss
covered by any insurance policies which the releasor carries with respect to the
demised premises, or any interest or property therein or thereon (whether or not
such insurance is required to be carried under this lease), but only to the
extent that such loss is collectible under such insurance policies. Such release
is also conditioned upon the inclusion in the applicable policy or policies of a
provision whereby any such release shall not adversely affect said policies, or
prejudice any right of the releasor to recover thereunder. Each party agrees
that its insurance policies aforesaid will include such a provision so long as
the same shall be obtainable without extra cost, or if extra cost shall be
charged therefor, so long as the other party shall be willing to pay such extra
cost. If extra cost shall be chargeable therefor, the holder of the policy shall
advise the other party of the amount of the extra cost, and the other party at
its election may pay the same, but shall not be obligated to do so.

      Additionally, Tenant hereby covenants and agrees forever to indemnify and
hold Landlord harmless from and against any and all claims, actions, judgments,
damages, liabilities, losses or expenses, including attorneys' fees, in
connection with damage to property or injury or death to persons, or any other
matters, arising from or out of the use, alteration or occupation of the demised
premises except on account of Landlord's negligence. In case Landlord shall be
made a party to any litigation commenced against Tenant or others, then Tenant
shall protect and hold Landlord forever harmless and shall pay all costs and
expenses, including attorneys' fees, incurred or paid by Landlord in connection
with such litigation. In furtherance of Tenant's obligations under this Article
and this lease (but not in limitation thereof) Tenant covenants and agrees, at
its sole cost and expense, to carry and maintain in force from and after the
date of this lease and throughout the term hereof (i) workmen's compensation and
other required statutory forms of insurance, in statutory limits, and (ii)
comprehensive general public liability insurance, which shall be written on an
occurrence basis, naming Tenant as the insured and naming Landlord and its agent
and, if requested by Landlord, the lessor under any ground or underlying lease
or others having an interest in the land and/or the Building of which the
demised premises form a part, as additional insureds, in limits of not less than
$3,000,000.00 for bodily and personal injury or death to any one person and not
less than $3,000,000.00 for bodily and personal injury or death in any one
occurrence, and for property damage of not less than $3,000,000.00 per
occurrence, including water damage and

                                     - 12 -

sprinkler leakage legal liability, protecting the aforementioned parties from
all such claims for bodily or personal injury or death or property damage
occurring in or about the demised premises and its appurtenances. All insurance
required to be maintained by Tenant shall be carried with a company or companies
acceptable to Landlord licensed to do business in the State of New York, shall
be written for terms of not less than one year, and Tenant shall furnish
Landlord (and any other parties required to be designated as additional insureds
under any such policies) with certificates evidencing the maintenance of such
insurance and the payment of the premiums therefor, and with renewals thereof
and evidence of the payment of the premiums therefor at least thirty (30) days
prior to the expiration of any such policy or policies. Such policy or policies
shall also provide that it or they shall not be cancelled or materially altered
without giving Landlord at least twenty (20) days' prior written notice thereof,
sent to Landlord by registered mail at Landlord's address to which notices are
required to be sent to Landlord hereunder. Upon Tenant's default in obtaining or
delivering any such policy or policies or failure to pay the premiums therefor,
Landlord (in addition to and not in limitation of its other rights, remedies and
privileges by reason thereof) may (but shall not be obligated to) secure or pay
the premium for any such policy or policies and charge Tenant as additional rent
therefor an amount equal to 110% of Landlord's costs therefor.

      49. Landlord's Liability. Notwithstanding anything herein or any rule of
law or statute to the contrary, it is expressly understood and agreed that to
the extent that Landlord shall at any time have any liability under, pursuant to
or in connection with this lease, neither Tenant nor any officer, director,
partner, associate, employee, agent, guest, licensee or invitee of Tenant (or
any other party claiming through or on behalf of Tenant) shall seek to enforce
any personal or money judgment against Landlord, but shall only pursue any such
rights or remedies against Landlord's interest in the Building. In addition to
and not in limitation of the foregoing provision of this Article it is agreed
that, in no event and under no circumstances, shall Landlord or any partner,
officer, employee, agent or principal (disclosed or undisclosed) of Landlord
have any personal liability or monetary or other obligation of any kind under or
pursuant to this lease. Any attempt by Tenant or any officer, director, partner
of Tenant (or any other party claiming through or on behalf of Tenant) to seek
to enforce any such personal liability or monetary or other obligation shall, in
addition to and not in limitation of Landlord's other rights, powers, privileges
and remedies under the terms and provisions of this lease or otherwise afforded
by law in respect thereof, immediately vest Landlord with the unconditional
right and option to cancel this lease on five (5) days' notice to Tenant.

      50. Additional Re Article "7". Anything contained in Article "7" hereof to
the contrary notwithstanding, Tenant covenants and agrees that, except as herein
otherwise set forth, this lease shall not terminate upon the termination of any
ground lease or underlying lease or mortgage at any time affecting the real
property of which the demised premises forms a part or any such lease. If for
any reason or cause whatsoever any such ground or underlying lease is terminated
by summary dispossess proceedings or otherwise or if such ground or underlying
lease is terminated through foreclosure proceedings brought by the holder of any
mortgage to which such ground or underlying lease is subject and/or subordinate
or otherwise, or if Landlord's fee title is foreclosed upon by the holder of any
mortgage thereon, all without Tenant having been made a party in any such
dispossess and/or foreclosure proceeding, Tenant shall attorn to the lessor
under such ground or underlying lease or the purchaser in any such foreclosure
proceeding, as the case may be, and this lease shall not be affected in any way
whatsoever (except as herein otherwise expressly provided) by any such
proceeding or

                                     - 13 -

termination, and this lease shall continue in full force and effect in
accordance with its terms; but if Tenant shall be named in any such dispossess
and/or foreclosure proceeding, this lease and Tenant's estate shall be
terminated thereby.

      If such ground or underlying lease shall terminate or any such mortgage be
foreclosed, and Tenant shall attorn to the lessor under such ground or
underlying lease or the purchaser in any such foreclosure proceeding, such
lessor or purchaser shall not be required to accept attornment by Tenant unless
such attornment shall be pursuant to a written agreement required by such lessor
or purchaser which, among other things, shall contain provisions to the effect
that in no event shall such lessor or purchaser, as landlord, (a) be obligated
to repair, replace or restore the Building or the demised premises in the event
of damage or destruction, beyond such repair, replacement or restoration as can
be reasonably accomplished from the net proceeds of insurance actually received
by or made available to such landlord, (b) be responsible for any previous act
or omission of the landlord or the tenant under such ground or underlying lease
or for the return of any security deposit unless actually received by such
landlord, (c) be subject to any liability or offset accruing to Tenant against
Landlord, (d) be bound by any previous modification or extension of this lease
unless previously consented to, or (e) be bound by any previous prepayment of
more than one month's rent or other charge.

      51. Additional Re Article "22". Article "22" hereof is hereby amended to
add the following:

      "If the demised premises are not surrendered and vacated as and at the
time required by this lease (time being of the essence), Tenant shall be liable
to Landlord for (a) all losses and damages which Landlord may incur or sustain
by reason thereof, including, without limitation, attorneys' fees, and Tenant
shall indemnify Landlord against all claims made by any succeeding tenants
against Landlord or otherwise arising out of or resulting from the failure of
Tenant timely to surrender and vacate the demised premises in accordance with
the provisions of this lease, and (b) per diem use and occupancy in respect of
the demised premises equal to two (2) times the Base Rent and additional rent
payable hereunder for the last year of the term of this lease (which amount
Landlord and Tenant presently agree is the minimum to which Landlord would be
entitled and is presently contemplated by them as being fair and reasonable
under such circumstances and not a penalty). In no event shall any provision
hereof be construed as permitting Tenant to hold over in possession of the
demised premises after expiration or termination of the term hereof, and no
acceptance by Landlord of payments from Tenant after the expiration or
termination of the term hereof shall be deemed to be other than on account of
the amount to be paid by Tenant in accordance with the provisions of this
Article. The provisions of this Article shall survive the expiration or
termination of the term of this lease."

      52. Late Charge. If, during the term of this lease, Tenant shall fail to
pay the Base Rent or additional rent or any other charge at any time due or
payable hereunder within ten (10) days after same is due and payable, Tenant
agrees to pay to Landlord, as and for a late charge by reason thereof, without
further notice or demand by Landlord, a sum equal to $.10 for every dollar
thereof, which sum shall be considered as additional rent. Nothing contained in
this Article is intended to grant Tenant any extension of time in respect of the
due dates for any payments under this lease, nor shall same be construed to be a
limitation of or a substitution for any other rights, remedies and privileges of
Landlord under this lease or otherwise.

      53. Fees and Expenses. Whenever any default, request, action or inaction
by Tenant causes Landlord to engage an

                                     - 14 -

attorney and/or incur any other costs or expenses, Tenant agrees that it shall
pay and/or reimburse Landlord for such costs or expenses within ten (10) days
after being billed therefor as additional rent.

      54. Arbitration. In such cases where this lease expressly provides for the
settlement of a dispute or question by arbitration, and only in such cases, the
same shall be settled by arbitration in the Borough of Manhattan, City and State
of New York, in accordance with the rules then obtaining of the American
Arbitration Association, governing commercial arbitration. In the event that the
American Arbitration Association shall not be then in existence, the party
desiring arbitration shall appoint a disinterested person as arbitrator on its
behalf and give notice thereof to the other party who shall, within fifteen (15)
days thereafter, appoint a second disinterested person as arbitrator on its
behalf and give written notice thereof to the first party. The arbitrators thus
appointed shall appoint a third disinterested person, who shall be an attorney
at law admitted to practice in the State of New York actively engaged in the
practice of his or her profession for not less than ten (10) years. If the
arbitrators thus appointed shall fail to appoint such third disinterested
person, then either party may, by application to the presiding Justice,
Appellate Division of the Supreme Court of the State of New York for the First
Judicial Department seek to appoint such third disinterested person. Upon such
appointment, such person shall be the third arbitrator as if appointed by the
original two arbitrators. The decision of the majority of the arbitrators shall
be conclusive and binding on all parties and judgment upon the award may be
entered in any court having jurisdiction. If a party who shall have the right
pursuant to the foregoing to appoint an arbitrator fails or neglects to do so,
then and in such event the other party shall select the arbitrator not so
selected by the first party, and upon such selection, such arbitrator shall be
deemed to have been selected by the first party. The expenses of arbitration
shall be shared equally by Landlord and Tenant, unless this lease expressly
provides otherwise, but each party shall pay and be separately responsible for
its own counsel and witness fees, unless this lease expressly provides
otherwise. Landlord and Tenant agree to sign all documents and to do all other
things necessary to submit any such matter to arbitration and further agree to,
and hereby do, waive any and all rights they or either of them may at any time
have to revoke their agreement hereunder to submit to arbitration and to abide
by the decision rendered thereunder and agree that a judgment or order may be
entered in any court of competent jurisdiction based on an arbitration award
(including the granting of injunctive relief).

      The arbitrators shall have the right to retain and consult experts and
competent authorities skilled in the matters under arbitration, but any such
consultation shall be made in the presence of both parties, with full right on
their part to cross-examine such experts and authorities. The arbitrators shall
render their decision and award not later than sixty (60) days after the
appointment of the third arbitrator. Their decision and award shall be in
writing and counterpart copies thereof shall be delivered to each of the
parties. In rendering their decision and award, the arbitrators shall have no
power to modify or in any manner alter or reform any of the provisions of this
lease, and the jurisdiction of the arbitrators is limited accordingly.

      55. Default Under Other Lease(s). A default by Tenant under this lease
shall be considered a default under any other lease Tenant may at any time have
in respect of other space in the Building or other space owned or controlled by
Landlord or any of Landlord's principals. Similarly, a default by Tenant under
any such other lease shall be considered a default under this lease.

                                     - 15 -

      56. Additional Re Article "9". Supplementing the provisions of Article "9"
hereof, Landlord shall not be obligated to commence any repairs or restorations
to the demised premises as required thereunder unless and until Landlord has
received the proceeds of all fire insurance policies affecting the building of
which the demised premises forms a part.

      57. Diagram. Tenant acknowledges that it has been informed by Landlord
that any diagram attached to this lease is solely for the purpose of identifying
the premises demised hereunder and Landlord has made no representation and is
unwilling to make any representation and nothing in this lease shall be deemed
or construed to be a representation or covenant as to the dimensions of and/or
the square foot area contained in the demised premises.

      58. No Attornment. All checks tendered to Landlord as and for the rent
and/or additional rent required hereunder shall be deemed payments for the
account of the Tenant. Acceptance by the Landlord of rent and/or additional rent
from anyone other than the Tenant shall not be deemed to operate as an
attornment to the Landlord by the payor of such rent and/or additional rent or
as a consent by the Landlord to an assignment of this lease or subletting by the
Tenant of the demised premises to such payor, or as a modification of any of the
provisions of this lease.

      59. Liens. Tenant shall not create or suffer to be created or to remain,
and shall (within ten (10) days of the filing or imposition thereof) remove or
discharge, by bonding or payment, any lien, encumbrance or charge upon the
demised premises or the real property of which the same forms a part caused by
or in any manner related to any act or alleged act of commission or omission on
the part of Tenant, or any of its agents or contractors. Further, should any
such lien be bonded and should Landlord or its agents be thereafter named as a
party to any action or proceeding in respect of such bond or claim, Tenant
agrees to indemnify and save harmless Landlord and its agents in respect thereof
and to pay all costs and expenses (including legal fees) of Landlord related
thereto. Tenant agrees to surrender the demised premises free and clear of all
liens, charges or encumbrances thereon of every nature and description, and free
and clear of all violations thereon placed by any governmental or
quasi-governmental body resulting from any act of omission or commission on the
part of Tenant or any of its agents or contractors, or otherwise related to
Tenant's use or occupancy of the demised premises. Nothing in this lease
contained shall be construed as constituting the consent or request of Landlord
to any contractor, laborer or materialman for the performance of any labor or
services or the furnishing of any materials for the improvement or repair of the
demised premises.

      60. Notice of Damage. Tenant shall give prompt notice to Landlord of any
fire, accident, loss or damage or dangerous or defective condition materially
affecting the demised premises or any part thereof or the fixtures or other
property of Landlord therein of which Tenant has any knowledge. Such notice
shall not, however, be deemed or construed to impose upon Landlord any
obligation to perform any work to be performed by Tenant under this lease or not
otherwise hereunder undertaken to be performed by Landlord.

      61. Building Renovation. Tenant understands and acknowledges that Landlord
may alter, restore and/or renovate the entrance lobby and/or other portions of
the Building (including, without limitation, the relocation of the entrance to
the Building) and that such alterations, restoration and/or renovation or other
work in the Building may result in certain inconveniences or disturbances to
Tenant and other occupants of the Building; such renovations, however, shall not
result in preventing Tenant's reasonable access to the demised premises.

                                     - 16 -

Tenant agrees that the performance of any such work shall not constitute or be
deemed to be a constructive eviction or be grounds for a termination of this
lease or the terms hereof, nor shall the same in any way affect the obligations
of Tenant under this lease, including, without limitation, the obligation to pay
the rents herein reserved or give Tenant the right to claim damages or any
matter or thing from Landlord or Landlord's agent(s) or contractor(s).

      62. Conditional Limitation. In the event Tenant shall make default in the
payment of the rent reserved herein, or any item of additional rent herein
mentioned, or any part of either, or in making any other payment herein required
for a total of two (2) months, whether or not consecutive, in any twelve (12)
month period, and Landlord shall have served upon Tenant petitions and notices
of petition to dispossess Tenant by summary proceedings in each such instance,
then, notwithstanding that such default may have been cured prior to the entry
of a judgment against Tenant, any further default in the payment of any money
due Landlord hereunder shall be deemed to be deliberate and Landlord may serve a
written three (3) days' notice of cancellation of this lease upon Tenant, and
upon the expiration of said three (3) days, this lease and the term thereunder
shall end and expire as fully and completely as if the expiration of such three
(3) day period were the day herein definitely fixed for the end and expiration
of this lease and the term thereof, and Tenant shall then quit and surrender the
demised premises to Landlord, but Tenant shall remain liable as elsewhere
provided in this lease.

      63. Subsidiaries and Affiliates. So long as Tenant is not in default in
any of the terms, covenants, or conditions of this lease, Tenant may, without
the prior written consent of Landlord, permit all or any portion of the demised
premises to be used by an entity which is a subsidiary or affiliate of Tenant.
The terms "subsidiary" and "affiliate", as used herein, shall include any entity
(i) which holds a majority of the shares of stock of all classes of Tenant; or
(ii) a majority of the shares of stock of all classes of which (if the
subsidiary or affiliate is a corporation), or a majority of the interest in the
entity and control thereof (if the subsidiary or affiliate is not a
corporation), shall be held by Tenant; or (iii) a majority of the shares of
stock of all classes of which (if the subsidiary or affiliate is a corporation),
or a majority of the interest in the entity and control thereof (if the
subsidiary or affiliate is not a corporation), shall be held by the same person,
corporation or entity which holds all of the shares of stock of all classes of
Tenant. If, for any reason whatsoever, such ownership is reduced to less than a
majority of the interest, such reduction shall constitute a prohibited
assignment of this lease or a sublease of all or a portion of the demised
premises, as the case may be, and Tenant shall cause such subsidiary or
affiliate to vacate that portion of the demised premises which it occupies
simultaneously with the occurrence of such reduction. The failure of the
subsidiary or affiliate to vacate that portion of the demised premises which it
occupies shall constitute a substantial default under the terms of this lease
and Landlord shall have all the rights and remedies set forth herein in the
event of a default by Tenant.

      64. Modifications Requested by Mortgagee. If any prospective mortgagee of
the Building, the land thereunder or any leasehold interest in either requires,
as a condition precedent to issuing its loan, the modification of this lease in
such manner as does not materially lessen Tenant's rights or increase its
obligations hereunder, Tenant shall not withhold or delay its consent to such
modification and shall execute and deliver such confirming documents therefor as
such mortgagee requires.

      65. Basement Space. If any basement or sub-basement space is included in
the premises demised hereunder, Tenant agrees

                                     - 17 -

that, notwithstanding anything to the contrary contained in this lease, such
basement or sub-basement space (i) shall not be used for any purpose other than
storage and (ii) shall not be sublet or used by anyone other than Tenant without
the prior written consent of Landlord, which consent Landlord shall have the
right to withhold for any reason whatsoever.

      66. Building Directory. At the written request of Tenant, Landlord shall
list on the building's directory the name of Tenant, any trade name under which
Tenant has the right to operate, any other entity permitted to occupy any
portion of the demised premises under the terms of this lease, and the officers
and employees of each of the foregoing entities, provided the number of names so
listed does not exceed Tenant's Percentage of the capacity of such directory. If
requested by Tenant, Landlord may (but shall not be required to) list the name
of Tenant's subsidiaries and affiliates; however, the listing of any name other
than that of Tenant shall neither grant such party or entity any right or
interest in this lease or in the demised premises nor constitute Landlord's
consent to any assignment or sublease to, or occupancy of the demised premises
by, such party or entity. Except for the name of Tenant, any such listing may be
terminated by Landlord, at any time, without notice.

      67. Miscellaneous.

      (A) If at the commencement of, or at any time or times during the term of
this lease, the rents reserved in this lease shall not be fully collectible by
reason of any Federal, State, County, City or other governmental law,
proclamation, order or regulation, or direction of a public officer or body
pursuant to law, Tenant shall enter into such agreements and take such other
steps as Landlord may request and as may be legally permissible to permit
Landlord to collect the maximum rents which may from time to time during the
continuance of such legal rent restriction be legally permissible (but not in
excess of the amounts reserved therefor under this lease). Upon termination of
such legal rent restriction prior to the expiration of the term of this lease,
(a) the rents shall become and thereafter be payable thereunder in accordance
with the amounts reserved in this lease for the periods following such
termination and (b) Tenant shall pay to Landlord, if legally permissible, an
amount equal to (i) the rents which would have been paid pursuant to this lease
but for such legal rent restriction less (ii) the rents paid by Tenant to
Landlord during the period or periods such legal rent restriction was in effect.

      (B) If at any time Tenant is other than a single, partnership, firm,
corporation, individual or other entity, the act of, or notice, demand, request
or other communication from or to, or any payment or refund from or to, or
signature of, any of the individuals, partnerships, firms, corporations or other
entities then constituting Tenant with respect to Tenant's estate or interest in
the demised premises or this lease shall bind all of them as if all of them so
had acted, or so had given or received such notice, demand, request or other
communication, or so had given or received such payment or refund, or had so
signed, and they shall be jointly and severally liable for the performance of
Tenant's obligations hereunder.

      (C) If any provision of this lease shall be held invalid or unenforceable,
such invalidity or unenforceability shall affect only such provision and shall
not in any manner affect or render invalid or unenforceable any other provision
of this lease, and this lease shall be enforced as if any such invalid or
unenforceable provision were not contained herein.

      (D) Landlord and Tenant hereby agree that this lease shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York without giving reference

                                     - 18 -

to principles of conflict of laws. The state courts of the State of New York
shall have jurisdiction to hear and determine any dispute between Landlord and
Tenant pertaining directly or indirectly to this lease or any matter arising
therefrom, and Tenant hereby expressly consents and submits in advance to such
jurisdiction in any action or proceeding commenced in such courts by either
party hereto.

      (E) It is expressly noted, acknowledged and confirmed by Tenant that a
breach, default or failure to observe, perform or otherwise comply with any
material obligations, covenants, conditions, rules and regulations in this lease
on Tenant's part to be observed, performed or complied with shall be and be
deemed to be a violation by Tenant of a substantial obligation of the tenancy
created by this lease entitling Landlord to pursue any and all rights, remedies
and privileges provided under this lease or at law or in equity, including,
without limitation, the right to terminate said tenancy and recover possession
of the demised premises.

      (F) Supplementing Article 3, Landlord's consent shall not be required for
minor changes to the demised premises such as the installation of furniture,
furnishings, cabinets and shelves which are not affixed to the realty. All other
renovations, decorations, additions, installations, improvements and alterations
of any kind or nature in or to the demised premises whether performed by Tenant
or by Landlord ("Tenant Changes") shall require the prior written consent of
Landlord which, in the case of non-structural interior Tenant Changes, Landlord
agrees not to unreasonably withhold, provided Tenant first complies with all
applicable requirements of this lease including any Workletter attached to this
lease and the building Rules and Regulations Governing Tenant Alterations
("Alterations Rules") In granting its consent to any Tenant Changes, Landlord
may impose such conditions (as to guarantee of completion including, without
limitation, requiring Tenant to post a bond to insure the completion of Tenant
Changes, payment for Tenant Changes and other charges payable under this
Article, restoration or otherwise), as Landlord may reasonably require. In no
event shall Landlord be required to consent to any Tenant Changes which would
affect the structure of the building, the exterior thereof, any part of the
building outside of the demised premises or the mechanical, electrical, heating,
ventilation, air conditioning, sanitary, plumbing or other service systems and
facilities (including elevators) of the building, and such Tenant Changes shall
be performed only by contractors designated or approved by Landlord. Tenant
shall, promptly upon demand, reimburse Landlord's agent for any reasonable
out-of-pocket fees, expenses and other charges incurred by Landlord or its agent
in connection with the review, modification and/or approval of such plans and
specifications by Landlord's agent and other professional consultants of
Landlord and shall pay to Landlord's agent during the course of the work, as a
charge of Landlord's agent for the supervision and coordination by Landlord's
agent of any Tenant Changes for Landlord's benefit and without waiver of any of
the requirements of this lease, the Workletter, if any, or the Alterations
Rules, a fee of five (5%) percent of the cost of such Tenant Changes. Tenant
shall promptly provide such evidence as Landlord or Landlord's agent may request
to substantiate any such costs incurred by Tenant. Tenant shall, at its sole
cost and expense, in making any Tenant Changes, comply with all requirements of
the Alterations Rules.

      (G) Tenant agrees that in connection with any work which may be performed
by Tenant pursuant to this lease, such work shall not be performed in a manner
which would create any work stoppage, picketing, labor disruption or dispute or
violate union contracts affecting the land and/or the Building nor unreasonably
interfere with the business of Landlord or any tenant or occupant of the
Building.

                                     - 19 -

      (H) If there shall be any conflict between any provision contained in this
Rider and the printed provisions of this lease, the provisions of this Rider
shall prevail.

      68. Binding Clause. Neither the submission of this lease form to Tenant
nor the execution of this lease by Tenant shall constitute an offer by Landlord
to Tenant to lease the space herein described as the demised premises or
otherwise. This lease shall not be or become binding upon Landlord to any extent
or for any purpose unless and until it is executed by Landlord and a fully
executed copy thereof is delivered to Tenant or Tenant's counsel.

      69. Substitute Space. At any time and from time to time during the term of
this lease Landlord shall have the right to substitute for the demised premises
(for the purposes of this Article only, the demised premises are hereinafter
called the "Replaced Premises") other space in the Building (such other space
hereinafter called the "Substitute Premises") by written notice (the "Notice")
given to Tenant no later than sixty (60) days prior to the date set forth in
said notice as the effective date (the "Substitution Date") for such
substitution. Landlord's notice shall include a floor plan identifying the
Substitute Premises, which premises shall have a rentable area equal to or
greater than the Replaced Premises and shall be similar thereto in
configuration. Tenant shall vacate the Replaced Premises and surrender the same
to Landlord on or before the Substitution Date. Promptly after Tenant enters
into occupancy of the Substitute Premises and provided Tenant is not then in
default under any of the terms or conditions of this lease, Landlord shall
reimburse Tenant for any reasonable moving expenses, any other reasonable costs
and expenses incurred by Tenant in duplicating the Substitute Premises, the
alterations and additions previously made by Tenant in the Replaced Premises,
and other reasonable expenses incurred by Tenant as a result of the move. From
and after the Substitution Date, the term "demised premises" shall mean the
Substitute Premises for all purposes hereunder.

      70. Security Deposit. Article 34 hereof is hereby amended to add the
following:

      "Said security deposit shall be placed by Landlord in an interest bearing
federally insured account. Interest that may accrue thereon shall belong to
Tenant, except such portion thereof as shall be equal to one (1%) percent of
such interest per annum, which such percentage shall belong to and be the sole
property of Landlord and which Landlord may withdraw from time to time and
retain. Landlord shall, upon Tenant's request, advise Tenant of the name of the
bank where such deposit is held. Landlord shall give Tenant notice of any
transfer of such deposit to a different bank simultaneous with or promptly after
any such transfer. The obligation to pay any taxes, whether income or otherwise,
related to or affecting any interest earned on such security deposit (except as
to that portion thereof which belongs to Landlord) shall be the sole
responsibility of Tenant and Tenant hereby agrees to pay same and to forever
indemnify and save harmless Landlord in respect thereof. Tenant shall, within
fifteen (15) days after demand, furnish Landlord or its agent with a tax
identification number for use in respect of such cash deposit. If Landlord at
any time utilizes any portion of the cash security deposit in respect or by
reason of a default by Tenant, Tenant shall, within ten (10) days after demand,
restore and pay to Landlord the amount so utilized."

      71. Office Door Signage. Notwithstanding anything herein to the contrary,
Tenant shall not place any sign on the exterior door to the demised premises, it
being understood and agreed that Landlord, in an effort to provide uniform
signage in the Building, shall install any such sign with Building Standard

                                     - 20 -

lettering and Tenant shall, upon demand, pay Landlord's reasonable cost
therefor.

      72. Environmental Obligations. Tenant covenants and agrees that it shall
not permit any materials to be used on the demised premises in violation of any
applicable environmental law, and Tenant hereby indemnifies Landlord for any
loss incurred by Landlord as a result of the breach of the foregoing covenant
and agreement. Tenant hereby agrees promptly to notify Landlord in the event
that it becomes aware of any violation of any applicable environmental law
affecting the demised premises.

      73. Condition of Tenant. Tenant represents that (i) it is a corporation
duly formed and validly existing in good standing under the laws of the State of
Delaware, (ii) it is duly qualified as a foreign corporation authorized to
transact business existing in good standing under the laws of the State of New
York, and (iii) the party executing this lease on Tenant's behalf is authorized
to so execute this lease and bind Tenant.

      74. Rent Concession. So long as Tenant shall not then be in default of any
of the terms, covenants, conditions and agreements to be performed by Tenant
under this lease, Tenant shall be entitled to a rent credit in the amount of
$6,780.00 on the first (1st) day of the second (2nd) month of the term of this
lease.

                                     - 21 -

                               [GRAPHIC OMITTED]

      Exhibit A attached hereto and forming a part of lease dated as of the
29th day of May, 1997 between 509 Madison Avenue Associates, as Landlord, and
Discovery Laboratories, Inc., as Tenant, with respect to Suite 1406 at 509
Madison Avenue, New York, New York.

                                    GUARANTY

      FOR VALUE RECEIVED, and in consideration for, and as an inducement to
Owner making the within lease with Tenant, the undersigned guarantees to Owner,
Owner's successors and assigns, the full performance and observance of all the
covenants, conditions and agreements, therein provided to be performed and
observed by Tenant, including the "Rules and Regulations" as therein provided,
without requiring any notice of non-payment, non-performance, or non-observance,
or proof, or notice, or demand, whereby to charge the undersigned therefor, all
of which the undersigned hereby expressly waives and expressly agrees that the
validity of this agreement and the obligations of the guarantor hereunder shall
in no wise be terminated, affected or impaired by reason of the assertion by
Owner against Tenant of any of the rights or remedies reserved to Owner pursuant
to the provisions of the within letter. The undersigned further covenants and
agrees that this guaranty shall remain and continue in full force and effect as
to any renewal, modification or extension of this lease and during any period
when Tenant is occupying the premises as a "statutory tenant." As a further
inducement to Owner to make this lease and in consideration thereof. Owner and
the undersigned covenant and agree that in any action or proceeding brought by
either Owner or the undersigned against the other on any matters whatsoever
arising out of, under, or by virtue of the terms of this lease or of this
guaranty that Owner and the undersigned shall and do hereby waive trial by jury.

      Dated New York City __________________ 19__

WITNESS:

_________________________________________________

STATE OF NEW YORK, ) ss.:
   County of       )

On this ___ day of ________________, 19__, before me personally came ___________
_______________________________________________________________________________,
to me known and known to me to be the individual described in, and who executed
the foregoing Guaranty and acknowledged to me that he executed the same.

                                        ________________________________________
                                                          Notary

Residence ______________________________________________________________________

Business Address _______________________________________________________________

Firm Name ______________________________________________________________________

                            IMPORTANT - PLEASE READ

                     RULES AND REGULATIONS ATTACHED TO AND
                           MADE A PART OF THIS LEASE
                         IN ACCORDANCE WITH ARTICLE 33.

      1. The sidewalks, entrances, driveways, passages, courts, elevators,
vestibules, stairways, corridors or halls shall not be obstructed or encumbered
by any Tenant or used for any purpose other than for ingress or egress from the
demised premises and for delivery of merchandise and equipment in a prompt and
efficient manner using elevators and passageways designated for such delivery by
Owner. There shall not be used in any space, or in the public hall of the
building, either by any Tenant or by jobbers or others in the delivery or
receipt of merchandise, any hand trucks, except those equipped with rubber tires
and sideguards. If said premises are situated on the ground floor of the
building, Tenant thereof shall further, at Tenant's expense, keep the sidewalk
and curb in front of said premises clean and free from ice, snow, dirt and
rubbish.

      2. The water and wash closets and plumbing fixtures shall not be used
for any purposes other than those for which they were designed or constructed
and no sweepings, rubbish, rags, acids or other substances shall be deposited
therein, and the expense of any breakage, stoppage, or drainage resulting from
the violation of this rule shall be borne by the Tenant who, or whose clerks,
agents, employees or visitors, shall have caused it.

      3. No carpet, rug or other article shall be hung or shaken out of any
window of the building; and no Tenant shall sweep or throw or permit to be swept
or thrown from the demised premises any dirt or other substances into any
of the corridors or halls, elevators, or out of the doors or windows or
stairways of the building and Tenant shall not use, keep or permit it to be used
or kept any foul or noxious gas or substance in the demised premises, or permit
or suffer the demised premises to be occupied or used in a manner offensive or
objectionable to Owner or other occupants of the buildings by reason of
noise, odors, and/or vibrations, or interfere in any way with other
Tenants or those having business therein, nor shall any animals or birds be kept
in or about the building. Smoking or carrying lighted cigars or cigarettes in
the elevators of the building is prohibited.

      4. No awnings or other projections shall be attached to the outside walls
of the building without the prior written consent of Owner.

      5. No sign, advertisement, notice or other lettering shall be exhibited,
inscribed, painted or affixed by any Tenant on any part of the outside of the
demised premises or the building or on the inside of the demised premises if the
same is visible from the outside of the premises without the prior written
consent of Owner, except that the name of Tenant may appear on the entrance door
of the premises. In the event of the violation of the foregoing by any Tenant,
Owner may remove same without any liability, and may charge the expense incurred
by such removal to Tenant or Tenants violating this rule. Interior signs on
doors and directory tablet shall be inscribed, painted or affixed for each
Tenant by Owner at the expense of such Tenant, and shall be of a size, color and
style acceptable to Owner.

      6. No Tenant shall mark, paint, drill into, or in any way deface any part
of the demised premises or the building of which they form a part. No boring,
cutting or stringing of wires shall be permitted, except with the prior written
consent of Owner, and as Owner may direct. No Tenant shall lay linoleum, or
other similar floor covering, so that the same shall come in direct contact with
the floor of the demised premises, and, if linoleum or other similar floor
covering is desired to be used an interlining of builder's deadening felt shall
be first affixed to the floor, by a paste or other material, soluble in water,
the use of cement or other similar adhesive material being expressly prohibited.

      7. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by any Tenant, nor shall any changes be made in existing
locks or mechanism thereof. Each Tenant must, upon the termination of his
Tenancy, restore to Owner all keys of stores, offices and toilet rooms, either
furnished to, or otherwise procured by, such Tenant, and in the event of the
loss of any keys, so furnished, such Tenant shall pay to Owner the cost thereof.

      8. Freight, furniture, business equipment, merchandise and bulky matter of
any description shall be delivered to and removed from the premises only on the
freight elevators and through the service entrances and corridors, and only
during hours and in a manner approved by Owner. Owner reserves the right to
inspect all freight to be brought into the building and to exclude from the
building all freight which violates any of these Rules and Regulations of the
lease or which these Rules and Regulations are a part.

      9. Canvassing, soliciting and peddling in the building is prohibited and
each Tenant shall cooperate to prevent the same.

      10. Owner reserves the right to exclude from the building, between the
hours of 6 P.M. and 8 A.M. and at all hours on Sundays, and legal holidays all
persons who do not present a pass to the building signed by Owner. Owner will
furnish passes to persons for whom any Tenant requests same in writing. Each
Tenant shall be responsible for all persons for whom he requests such pass and
shall be liable to Owner for all acts of such persons.

      11. Owner shall have the right to prohibit any advertising by an Tenant
which in Owner's opinion, tends to impair the reputation of the building or its
desirability as a building for offices, and upon written notice from Owner,
Tenant shall refrain from or discontinue such advertising.

      12. Tenant shall not bring or permit to be brought or kept in or on the
demised premises, any inflammable, combustible or explosive fluid, material,
chemical or substance, or cause or permit any odors of cooking or other
processes, or any unusual or other objectionable odors to permeate in or emanate
from the demised premises.

      13. If the building contains central air conditioning and ventilation,
Tenant agrees to keep all windows closed at all times and to abide by all rules
and regulations issued by the Owner with respect to such services. If Tenant
requires air conditioning or ventilation after the usual hours, Tenant shall
give notice in writing to the building superintendent prior to 3:00 P.M. in the
case of services required on week days, and prior to 3:00 P.M. on the day prior
in the case of after hours service required on weekends or on holidays.

      14. Tenant shall not move any safe, heavy machinery, heavy equipment,
bulky matter, or fixtures into or out of the building without Landlord's prior
written consent. If such safe, machinery, equipment, bulky matter or fixtures
requires special handling, all work in connection therewith shall comply with
the Administrative Code of the City of New York and all other laws and
regulations applicable thereto and shall be done during such hours as Owner may
designate.

Address

Premises
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                                       TO

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                                STANDARD FORM OF
[LOGO]                               OFFICE                               [LOGO]
                                     LEASE

                     The Real Estate Board of New York, Inc.
                    (c) Copyright 1983. All rights Reserved.
                  Reproduction in whole or in part prohibited.

================================================================================

Dated _______________________________ 19__.

Rent per Year __________________________________________________________________

Rent per Month _________________________________________________________________

Term ___________________________________________________________________________

From ___________________________________________________________________________

To _____________________________________________________________________________

Drawn by ________________________________ Checked by ___________________________

Entered by ______________________________ Approved by __________________________

================================================================================

                   =======================================
                        STANDARD FORM OF OFFICE LEASE
                   The Real Estate Board of New York, Inc.            3/1/86
                   =======================================

      Agreement of Lease, made as of the 29th day of May 1997, between 509
MADISON AVENUE ASSOCIATES, a California limited partnership having an address
c/o Newmark & Company Real Estate, Inc., 125 Park Avenue, New York, New York
10017 party of the first part, hereinafter referred to as OWNER or landlord, and
DISCOVERY LABORATORIES, INC., a Delaware corporation having an address at 787
Seventh Avenue, New York, New York 10019 party of the second part, hereinafter
referred to as TENANT.

Witnesseth: Owner hereby leases to Tenant and Tenant hereby hires from Owner
space on the fourteenth (14th) floor (as shown on the floor plan annexed hereto
as Exhibit A and made a part hereof and also known as Suite 1406 in the building
know as 509 Madison Avenue in the Borough of Manhattan, City of New York, for
the term of three (3) years and sixteen (16) days (or until such term shall
sooner cease and expire as hereinafter provided) to commence on the fifteenth
(15th) day of June nineteen hundred and ninety-seven, and to end on the
thirtieth (30th) day of June two thousand both dates inclusive, at an annual
rental rate set forth in Article 37 hereof which Tenant agrees to pay in lawful
money of the United States which shall be legal tender in payment of all debts
and dues, public and private, at the time of payment, in equal monthly
installments in advance on the first day of each month during said term, at the
office of Owner or such other place as Owner may designate, without any set off
or deduction whatsoever, except that Tenant shall pay the first _____ monthly
installment(s) on the execution hereof (unless this lease be a renewal).

      In the event that, at the commencement of the term of this lease, or
thereafter, Tenant shall be in default in the payment of rent to Owner pursuant
to the terms of another lease with Owner or with Owner's predecessor in
interest, Owner may at Owner's option and without notice to Tenant add the
amount of such arrears to any monthly installment or rent payable hereunder and
the same shall be payable hereunder and the same shall be payable to Owner as
additional rent.

      The parties hereto, for themselves, their heirs, distributees, executors,
administrators, legal representatives, successors and assigns, hereby covenant
as follows:

Rent

      1. Tenant shall pay the rent as above and as hereinafter provided.

Occupancy

      2. Tenant shall use and occupy demised premises for general and executive
offices and for no other purpose.

Tenant Alterations:

      3. Tenant shall make no changes in or to the demised premises of any
nature without Owner's prior written consent. Subject to the prior written
consent of Owner, and to the provisions of this article, Tenant at Tenant's
expense, may make alterations, installations, additions or improvements which
are non-structural and which do not affect utility services or plumbing and
electrical lines, in or to the interior of the demised premises by using
contractors or mechanics first approved by Owner. Tenant shall, before making
any alterations, additions, installations or improvement, at its expense, obtain
all permits, approvals, and certificates required by any governmental or
quasi-governmental bodies and (upon completion) certificates of final approval
thereof and shall deliver promptly duplicate of all such permits, approvals and
certificates to Owner and Tenant agrees to carry and will cause Tenant's
contractors and subcontractors to carry such workman's compensation, general
liability, personal and property damage insurance as Owner may require. If any
mechanic's lien is filed against the demised premises, or the building of which
the same forms a part, for work claimed to have been done for, or material
furnished to, Tenant whether or not done pursuant to this article, the same
shall be discharged by Tenant within thirty days thereafter, at Tenant's
expense, by filing the bond required by law. All fixtures and all paneling,
partitions, railings and like installations, installed in the premises at any
time, either by Tenant or by Owner in Tenant's behalf, shall, upon installation,
become the property of Owner and shall remain upon and be surrendered with the
demised premises unless Owner, by notice to Tenant no later than twenty days
prior to the date fixed as the termination of this lease, elects to relinquish
Owner's right thereto and to have them removed by the Tenant, in which event the
same shall be removed from the premises by Tenant prior to the expiration of the
lease, at Tenant's expense. Nothing in this Article shall be construed to give
Owner title to or to prevent Tenant's removal of trade fixtures, moveable office
furniture and equipment, but upon removal of any such from the premises or upon
removal of other installations as may be required by Owner, Tenant shall
immediately, and at its expense, repair and restore the premises to the
condition existing prior to installation and repair any damage to the demised
premises or the building due to such removal. All property permitted or required
to be removed, by Tenant at the end of the term remaining in the premises after
Tenant's removal shall be deemed abandoned and may, at the election of Owner,
either be retained as Owner's property or may be removed from the premises by
Owner, at Tenant's expense.

Maintenance and Repairs:

      4. Tenant shall, throughout the term of this lease, take good care of the
demised premises and the fixtures and appurtenances therein. Tenant shall be
responsible for all damage or injury to the demised premises or any other part
of the building and the systems and equipment thereof, whether requiring
structural or non-structural repairs caused by or resulting from carelessness,
omission, neglect or improper conduct of Tenant, Tenant's subtenants, agents,
employees, invitees or licensees, or which arise out of any work, labor, service
or equipment done for or supplied to Tenant or any subtenant or arising out of
the installation, use or operation of the property or equipment of Tenant or any
subtenant. Tenant shall also repair all damage to the building and the demised
premises caused by the moving of Tenant's fixtures, furniture and equipment.
Tenant shall promptly make, at Tenant's expense, all repairs in and to the
demised premises for which Tenant is responsible, using only the contractor for
the trade or trades in question, selected from a list of at least two
contractors per trade submitted by Owner. Any other repairs in or to the
building or the facilities and systems thereof for which Tenant is responsible
shall be performed by Owner at the Tenant's expense. Owner shall maintain in
good working order and repair the exterior and the structural portions of the
building, including the structural portions of its demised premises, and the
public portions of the building interior and the building plumbing, electrical,
heating and ventilating systems (to the extent such systems presently exists)
serving the demised premises. Tenant agrees to give prompt notice of any
defective condition in the premises for which Owner may be responsible
hereunder. There shall be no allowance to Tenant for diminution of rental value
and no liability on the part of Owner by reason of inconvenience, annoyance or
injury to business arising from Owner or others making repairs, alterations,
additions or improvements in or to any portion of the building or the demised
premises or in and to the fixtures, appurtenances or equipment thereof. It is
specifically agreed that Tenant shall not be entitled to any setoff or reduction
of rent by reason of any failure of Owner to comply with the covenants of this
or any other article of this Lease. Tenant agrees that Tenant's sole remedy at
law in such instance will be by way of an action for damages for breach of
contract. The provisions of this Article 4 shall not apply in the case of fire
or other casualty which are dealt with in Article 9 hereof.

Window Cleaning:

      5. Tenant will not clean nor require, permit, suffer or allow any window
in the demised premises to be cleaned from the outside in violation of Section
202 of the Labor Law or any other applicable law or of the Rules of the Board of
Standards and Appeals, or of any other Board or body having or asserting
jurisdiction.

Requirements of Law, Fire Insurance, Floor Loads:

      6. Prior to the commencement of the lease term, if Tenant is then in
possession, and at all times thereafter, Tenant, at Tenant's sole cost and
expense, shall promptly comply with all present and future laws, orders and
regulations of all state, federal, municipal and local governments, departments,
commissions and boards and any direction of any public officer pursuant to law,
and all orders, rules and regulations of the New York Board of Fire
Underwriters, Insurance Services Office, or any similar body which shall impose
any violation, order or duty upon Owner or Tenant with respect to the demised
premises, whether or not arising out of Tenant's use or manner of use thereof,
including Tenant's permitted uses or, with respect to the building if arising
out of Tenant's

use or manner of use of the premises or the building (including the use
permitted under the lease). Nothing herein shall require Tenant to make
structural repairs or alterations unless Tenant has, by its manner of use of the
demised premises or method of operation therein, violated any such laws,
ordinances, orders, rules, regulations or requirements with respect thereto.
Tenant may, after securing Owner to Owner's satisfaction against all damages,
interest, penalties and expenses, including, but not limited to, reasonable
attorney's fees, by cash deposit or by surety bond in an amount and in a company
satisfactory to Owner, contest and appeal any such laws, ordinances, orders,
rules, regulations or requirements provided same is done with all reasonable
promptness and provided such appeal shall not subject Owner to prosecution for a
criminal offense or constitute a default under the lease or mortgage under which
Owner may be obligated, or cause the demised premises or any part thereof to be
condemned or vacated. Tenant shall not do or permit any act or thing to be done
in or to the demised premises which is contrary to law, or which will invalidate
or be in conflict with public liability, fire or other policies of insurance at
any time carried by or for the benefit of Owner with respect to the demised
premises or the building of which the demised premises form a part, or which
shall or might subject Owner to any liability or responsibility to any person or
for property damage. Tenant shall not keep anything in the demised premises
except as now or hereafter permitted by the Fire Department, Board of Fire
Underwriters, Fire Insurance Rating Organization or other authority having
jurisdiction, and then only in such manner and such quantity so as not to
increase the rate for fire insurance applicable to the building, nor use the
premises in a manner which will increase the insurance rate for the building or
any property located therein over that in effect prior to the commencement of
Tenant's occupancy. Tenant shall pay all costs, expenses, fees, penalties, or
damages, which may be imposed upon Owner by reason of Tenant's failure to comply
with the provisions of this article and if by reason of such failure the fire
insurance rate shall, at the beginning of this lease or at any time thereafter,
be higher than it otherwise would be, then Tenant shall reimburse Owner, as
additional rent hereunder, for that portion of all fire insurance premiums
thereafter paid by Owner which shall have been charged because of such failure
by Tenant. In any action or proceeding wherein Owner and Tenant are parties, a
schedule or "make-up" of rate for the building or demised premises issued by the
New York Fire Insurance Exchange, or other body making fire insurance rates
applicable to said premises shall be conclusive evidence of the facts therein
stated and of the several items and charges in the fire insurance rates then
applicable to said premises. Tenant shall not place a load upon any floor of the
demised premises exceeding the floor load per square foot area which it was
designed to carry and which is allowed by law. Owner reserves the right to
prescribe the weight and position of all safes, business machines and mechanical
equipment. Such installations shall be placed and maintained by Tenant, at
Tenant's expense, in settings sufficient, in Owner's judgment, to absorb and
prevent vibration, noise and annoyance.

Subordination:

      7. This lease is subject and subordinate to all ground or underlying
leases and to all mortgages which may now or hereafter affect such leases or the
real property of which demised premises are a part and to all renewals,
modifications, consolidations, replacements and extensions of any such
underlying leases and mortgages. This clause shall be self-operative and no
further instrument of subordination shall be required by any ground or
underlying lessor or by any mortgagee, affecting any lease or the real property
of which the demised premises are a part. In confirmation of such subordination,
Tenant shall execute promptly any certificate that Owner may request.

Property--Loss, Damage, Reimbursement, Indemnity:

      8. Owner or its agent shall not be liable for any damage to any property
of Tenant or of others entrusted to employees of the building, nor for loss of
or damage to any property of Tenant by theft or otherwise, nor for any injury or
damage to persons or property resulting from any cause of whatsoever nature,
unless caused by or due to the negligence of Owner, its agents, servants or
employees. Owner or its agents will not be liable for any such damage caused by
other tenants or persons in, upon or about said building or caused by operations
in construction of any private, public or quasi public work. If at any time any
windows of the demised premises are temporarily closed, darkened or bricked up
(or permanently closed, darkened or bricked up, if required by law) for any
reason whatsoever including, but not limited to Owner's own acts, Owner shall
not be liable for any damage Tenant may sustain thereby and Tenant shall not be
entitled to any compensation therefore nor abatement or diminution of rent nor
shall the same release Tenant from its obligations hereunder nor constitute an
eviction. Tenant shall indemnify and save harmless Owner against and from all
liabilities, obligations, damages, penalties, claims, costs and expenses for
which Owner shall not be reimbursed by insurance, including reasonable attorneys
fees, paid, suffered or incurred as a result of any breach by Tenant, Tenant's
agents, contractors, employees, invitees or licensees, of any covenant or
condition of this lease, or the carelessness, negligence or improper conduct of
the Tenant, Tenant's agents, contractors, employees, invitees or licensees.
Tenant's liability under this lease extends to the acts and omissions of any
sub-tenant and any agent, contractor, employee, invitee or licensee of any
sub-tenant. In case any action or proceeding is brought against Owner by reason
of any such claim, Tenant, upon written notice from Owner, will, at Tenant's
expense, resist or defend such action or proceeding by counsel approved by Owner
in writing, such approval not to be unreasonably withheld.

Destruction, Fire and Other Casualty:

      9. (a) If the demised premises or any part thereof shall be damaged by
fire or other casualty, Tenant shall gave immediate notice thereof to Owner and
this lease shall continue in full force and effect except as hereinafter set
forth. (b) If the demised premises are partially damaged or rendered partially
unusable by fire or other casualty, the damages thereto shall be repaired by and
at the expense of Owner and the rent, until such repair shall be substantially
completed, shall be apportioned from the day following the casualty according to
the part of the premises which is usable. (c) If the demised premises are
totally damaged or rendered wholly unusable by fire or other casualty, then the
rent shall be proportionately paid up to the time of the casualty and
thenceforth shall cease until the date when the premises shall have been
repaired and restored by Owner, subject to Owner's right to elect not to restore
the same as hereinafter provided. (d) If the demised premises are rendered
wholly unusable or (whether or not the demised premises are damaged in whole or
in part) if the building shall be so damaged that Owner shall decide to demolish
it or to rebuild it, then, in any of such events, Owner may elect to terminate
this lease by written notice to Tenant, given within 90 days after such fire or
casualty, specifying a date for the expiration of the lease, which date shall
not be more than 60 days after the giving of such notice, and upon the date
specified in such notice the term of this lease shall expire as fully and
completely as if such date were the date set forth above for the termination of
this lease and Tenant shall forthwith quit, surrender and vacate the premises
without prejudice however, to Landlord's rights and remedies against Tenant
under the lease provisions in effect prior to such termination, and any rent
owing shall be paid up to such date and any payments of rent made by Tenant
which were on account of any period subsequent to such date shall be returned to
Tenant. Unless Owner shall serve a termination notice as provided for herein,
Owner shall make the repairs and restorations under the conditions of (b) and
(c) hereof, with all reasonable expedition, subject to delays due to adjustment
of insurance claims, labor troubles and causes beyond Owner's control. After any
such casualty, Tenant shall cooperate with Owner's restoration by removing from
the premises as promptly as reasonably possible, all of Tenant' salvageable
inventory and movable equipment, furniture, and other property. Tenant's
liability for rent shall resume five (5) days after written notice from Owner
that the premises are substantially ready for Tenant's occupancy. (e) Nothing
contained hereinabove shall relieve Tenant from liability that may exist as a
result of damage from fire or other casualty. Notwithstanding the foregoing,
each party shall look first to any insurance in its favor before making any
claim against the other party for recovery for loss or damage resulting from
fire or other casualty, and to the extent that such insurance is in force and
collectible and to the extent permitted by Law, Owner and Tenant each hereby
releases and waives all right of recovery against the other or any one claiming
through or under each of them by way of subrogation or otherwise. The foregoing
release and waiver shall be in force only if both releasor's insurance policies
contain a clause providing that such a release or waiver shall not invalidate
the insurance. If, and to the extent, that such waiver can be obtained only by
the payment of additional premiums, then the party benefitting from the waiver
shall pay such premium within ten days after written demand or shall be deemed
to have agreed that the party obtaining insurance coverage shall be free of any
further obligation under the provisions hereof with respect to waiver of
subrogation. Tenant acknowledges that Owner will not carry insurance on Tenant's
furniture and/or furnishings or any fixtures or equipment, improvements, or
appurtenances removable by Tenant and agrees that Owner will not be obligated to
repair any damage thereto or replace the same. (f) Tenant hereby waives the
provisions of Section 227 of the Real Property Law and agrees that the
provisions of this article shall govern and control in lieu thereof.

Eminent Domain:

      10. If the whole or any part of the demised premises shall be acquired or
condemned by Eminent Domain for any public or quasi public use or purpose, then
and in the event, the term of this lease shall cease and terminate from the date
of title vesting in such proceeding and Tenant shall have no claim for the value
of any unexpired term of said lease and assigns to Owner, Tenant's entire
interest in any such award.

Assignment, Mortgage, Etc.:

      11. Tenant, for itself, its heirs, distributees, executors,
administrators, legal representatives, successors and assigns, expressly
covenants that it shall not assign, mortgage or encumber this agreement, nor
underlet, or suffer or permit the demised premises or any part thereof to be
used by others, without the prior written consent of Owner in each instance.
Transfer of the majority of the stock of a corporate Tenant shall be deemed as
assignment. If this lease be assigned, or if the demised premises or any part
thereof be underlet or occupied by anybody other than Tenant, Owner may, after
default by Tenant, collect rent from the assignee, under-tenant or occupant, and
apply the net amount collected to the rent herein reserved, but no such
assignment, underletting, occupancy or collection shall be deemed a waiver of
this covenant, or the acceptance of the assignee, under-tenant or occupant as
tenant, or a release of Tenant from the further performance by Tenant of
covenants on the part of Tenant herein contained. The consent by Owner to an
assignment or underletting shall not in any wise be construed to relieve Tenant
from obtaining the express consent in writing of Owner to any further assignment
or underletting.

Electric Current:

      12. Rates and conditions in respect to submetering or rent inclusion, as
the case may be, to be added in RIDER* attached hereto. Tenant covenants and
agrees that at all times its use of electric current shall not exceed the
capacity of existing feeders to the building or the risers or wiring
installations and Tenant may not use any electrical equipment which, in Owner's
opinion, reasonably exercised, will overload such installations or interfere
with the use thereof by other tenants of the building. The change at any time of
the character of electric service shall in no way make Owner liable or
responsible to Tenant, for any loss, damages or expenses which Tenant may
sustain.

Access to Premises:

      13. Owner or Owner's agents shall have the right (but shall not be
obligated) to enter the demised premises in any emergency at any time and at
other reasonable times, to examine the same and to make such repairs,
replacements and improvements as Owner may deem necessary and reasonably
desirable to the demised premises or to any other portion of the building or
which Owner may elect to perform. Tenant shall permit Owner to use and maintain
and replace pipes and conduits in and through the demised premises and to erect
new pipes and conduits therein provided they are concealed within the walls,
floor, or ceiling. Owner may, during the progress of any work in the demised
premises, take all necessary materials and equipment into said premises without
the same constituting an eviction nor shall the Tenant be entitled to any
abatement of rent while such work is in progress nor to any damages by reason of
loss or interruption of business or other wise. Throughout the term hereof Owner
shall have the right to enter the demised premises at reasonable hours for the
purpose of showing the

- ----------
* Rider to be added if necessary

same to prospective purchasers or mortgagees of the building, and during the
last six months of the term for the purpose of showing the same to prospective
tenants. If Tenant is not present to open and permit an entry into the premises,
Owner or Owner's agents may enter the same whenever such entry may be necessary
or permissible by master key or forcibly and provided reasonable care is
exercised to safeguard Tenant's property, such entry shall not render Owner or
its agents liable therefor, nor in any event shall the obligations of Tenant
hereunder be affected. If during the last month of the term Tenant shall have
removed all or substantially all of Tenant's property therefrom. Owner may
immediately enter, alter, renovate or redecorate the demised premises without
limitation or abatement of rent, or incurring liability to Tenant for any
compensation and such act shall have no effect on this lease or Tenant's
obligations hereunder.

Vault, Vault Space, Area:

      14. No Vaults, vault space or area, whether or not enclosed or covered,
not within the property line of the building is leased hereunder, anything
contained in or indicated on any sketch, blue print or plan, or anything
contained elsewhere in this lease to the contrary notwithstanding. Owner makes
no representation as to the location of the property line of the building. All
vaults and vault space and all such areas not within the property line of the
building, which Tenant may be permitted to use and/or occupy, is to be used
and/or occupied under a revocable license, and if any such license be revoked,
or if the amount of such space or area be diminished or required by any federal,
state or municipal authority or public utility, Owner shall not be subject to
any liability nor shall Tenant be entitled to any compensation or diminution or
abatement of rent, nor shall such revocation, diminution or requisition be
deemed constructive or actual eviction. Any tax, fee or charge of municipal
authorities for such vault or area shall be paid by Tenant.

Occupancy:

      15. Tenant will not at any time use or occupy the demised premises in
violation of the certificate of occupancy issued for the building of which the
demised premises are a part. Tenant has inspected the premises and accepts them
as is, subject to the riders annexed hereto with respect to Owner's work, if
any. In any event, Owner makes no representation as to the condition of the
premises and Tenant agrees to accept the same subject to violations, whether or
not of record.

Bankruptcy:

      16. (a) Anything elsewhere in this lease to the contrary notwithstanding,
this lease may be cancelled by Owner by the sending of a written notice to
Tenant within a reasonable time after the happening of any one or more of the
following events: (1) the commencement of a case in bankruptcy or under the laws
of any state naming Tenant as the debtor; or (2) the making by Tenant of an
assignment or any other arrangement for the benefit of creditors under any state
statute. Neither Tenant nor any person claiming through or under Tenant, or by
reason of any statute or order of court, shall thereafter be entitled to
possession of the premises demised but shall forthwith quit and surrender the
premises. If this lease shall be assigned in accordance with its terms, the
provisions of this Article 16 shall be applicable only to the party then owning
Tenant's interest in this lease.

(b) it is stipulated and agreed that in the event of the termination of this
lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any other
provisions of this lease to the contrary, be entitled to recover from Tenant as
and for liquidated damages an amount equal to the difference between the rent
reserved hereunder for the unexpired portion of the term demised and the fair
and reasonable rental value of the demised premises for the same period. In the
computation of such damages the difference between any installment of rent
becoming due hereunder after the date of termination and the fair and reasonable
rental value of the demised premises for the period for which such installment
was payable shall be discounted to the date of termination at the rate of four
percent (4%) per annum. If such premises or any part thereof be re-let by the
Owner for the unexpired term of said lease,or any part thereof, before
presentation of proof of such liquidated damages to any court, commission or
tribunal, the amount of rent reserved upon such reletting shall be deemed to be
the fair and reasonable rental value for the part or the whole of the premises
so re-let during the term of the reletting. Nothing herein contained shall limit
or prejudice the right of the Owner to prove for and obtain as liquidated
damages by reason of such termination, an amount equal to the maximum allowed by
any statute or rule of law in effect at the time when, and governing the
proceedings in which, such damages are to be proved, whether or not such amount
be greater, equal to, or less than the amount of the difference referred to
above.

Default:

      17. (1) If Tenant defaults in fulfilling any of the covenants of this
lease other than the covenants for the payment of rent or additional rent; or if
the demised premises becomes vacant or deserted; or if any execution or
attachment shall be issued against Tenant or any of Tenant's property whereupon
the demised premises shall be taken or occupied by someone other than Tenant; or
if this lease be rejected under ss. 235 of Title 11 of the U.S. Code (bankruptcy
code); or if Tenant shall fail to move into or take possession of the premises
within fifteen (15) days after the commencement of the term of this lease, then,
in any one or more of such events, upon Owner serving a written five (5) days
notice upon Tenant specifying the nature of said default and upon the expiration
of said five (5) days, if Tenant shall have failed to comply with or remedy such
default, or if the said default or omission complained of shall be of a nature
that the same cannot be completed, cured or remedied within the said five (5)
day period, and if Tenant shall not have diligently commenced curing such
default within such five (5) day period, and shall not thereafter with
reasonable diligence and in good faith, proceed to remedy or cure such default,
then Owner may serve a written three (3) days' notice of cancellation of this
lease upon Tenant, and upon the expiration of said three (3) days this lease and
the term thereunder shall end and expire as fully and completely as if the
expiration of such three (3) day period were the day herein definitely fixed for
the end and expiration of this lease and the term thereof and Tenant shall then
quit and surrender the demised premises to Owner but Tenant shall remain liable
as hereinafter provided.

      2. If the notice provided for in (1) hereof shall have been given, and the
term shall expire as aforesaid; or if Tenant shall make default in the payment
of the rent reserved herein or any item of additional rent herein mentioned or
any part of either or in making any other payment herein required; then and in
any of such events Owner may without notice, re-enter the demised premises
either by force or otherwise, and disposess Tenant by summary proceedings or
otherwise, and the legal representative of Tenant or other occupant of demised
premises and remove their effects and hold the premises as if this lease had not
been made, and Tenant hereby waives the service of notice of intention to
re-enter or to institute legal proceedings to that end. If Tenant shall make
default hereunder prior to the date fixed as the commencement of any renewal or
extension of this lease, Owner may cancel and terminate such renewal or
extension agreement by written notice.

Remedies of Owner and Waiver of Redemption:

      18. In case of any such default, re-entry, expiration and/or dispossess by
summary proceedings or otherwise, (a) the rent shall become due thereupon and be
paid up to the time of such re-entry, dispossess and/or expiration, (b) Owner
may re-let the premises or any part or parts thereof, either in the name of
Owner or otherwise, for a term or terms, which may at Owners's option be less
than or exceed the period which would otherwise have constituted the balance of
the term of this lease and may grant concessions or free rent or charge a higher
rental than that in this lease, and/or (c) Tenant or the legal representatives
of Tenant shall also pay Owner as liquidated damages for the failure of Tenant
to observe and perform said Tenant's covenants herein contained, any deficiency
between the rent hereby reserved and/or convenanted to be paid and the net
amount, if any, of the rents collected on account of the lease or leases of the
demised premises for each month of the period which would otherwise have
constituted the balance of the term of this lease. The failure of Owner to
re-let the premises or any part or parts thereof shall not release or affect
Tenant's liability for damages. In computing such liquidated damages there shall
be added to the said deficiency such expenses as Owner may incur in connection
with re-letting, such as legal expenses, attorneys' fees, brokerage, advertising
and for keeping the demised premises in good order or for preparing the same for
re-letting. Any such liquidated damages shall be paid in monthly installments by
Tenant on the rent day specified in this lease and any suit brought to collect
the amount of the deficiency for any month shall not prejudice in any way the
rights of Owner to collect the deficiency for any month shall not prejudice in
any way the rights of Owner to collect the deficiency of any subsequent month by
a similar proceeding. Owner, in putting the demised premises in good order or
preparing the same for re-rental may, at Owner's option, make such alterations,
repairs, replacements, and/or decorations in the demised premises as Owner, in
Owner's sole judgment, considers advisable and necessary for the purpose of
re-letting the demised premises, and the making of such alterations, repairs,
replacements, and/or decorations shall not operate or be construed to release
Tenant from liability hereunder as aforesaid. Owner shall in no event be liable
in any way whatsoever for failure to re-let the demised premises, or in the
event that the demised premises are re-let, for failure to collect the rent
thereof under such re-letting, and in no event shall Tenant be entitled to
receive any excess, if any, of such net rents collected over the sums payable by
Tenant to Owner hereunder. In the event of a breach or threatened breach by
Tenant of any of the covenants or provisions hereof, Owner shall have the right
of injunction and the right to invoke any remedy allowed at law or in equity as
if re-entry, summary proceedings and other remedies were not herein provided
for. Mention in this lease of any particular remedy, shall not preclude Owner
from any other remedy, in law or in equity. Tenant hereby expressly waives any
and all rights of redemption granted by or under any present or future laws in
the event of Tenant being evicted or dispossessed for any cause, or in the event
of Owner obtaining possession of demised premises, by reason of the violation by
Tenant of any of the covenants and conditions of this lease, or otherwise.

Fees and Expenses:

      19. If Tenant shall default in the observance or performance of any term
or covenant on Tenant's part to be observed or performed under or by virtue of
any of the terms or provisions in any article of this lease, then, unless
otherwise provided elsewhere in this lease, Owner may immediately or at any time
thereafter and without notice perform the obligation of Tenant thereunder. If
Owner, in connection with the foregoing or in connection with any default by
Tenant in the covenant to pay rent hereunder, makes any expenditures or incurs
any obligations for the payment of money, including but not limited to
attorney's fees, in instituting, prosecuting or defending any action or
proceeding, then Tenant will reimburse Owner for such sums so paid or
obligations incurred with interest and costs. The foregoing expenses incurred by
reason of Tenant's default shall be deemed to be additional rent hereunder and
shall be paid by Tenant to Owner within five (5) days of rendition of any bill
or statement to Tenant therefor. If Tenant's lease term shall have expired at
the time of making of such expenditures or incurring of such obligations, such
sums shall be recoverable by Owner as damages.

Building Alterations and Management:

      20. Owner shall have the right at any time without the same constituting
an eviction and without incurring liability to Tenant therefor to change the
arrangement and/or location of public entrances, passageways, doors, doorways,
corridors, elevators, stairs, toilets or other public parts of the building and
to change the name, number or designation by which the building may be known.
There shall be no allowance to Tenant for diminution of rental value and no
liability on the part of Owner by reason of inconvenience, annoyance or injury
to business arising from Owner or other Tenants making any repairs in the
building or any such alterations, additions and improvements. Furthermore,
Tenant shall not have any claim against Owner by reason of Owner's imposition of
such controls of the manner of access to the building by Tenant's social or
business visitors as the Owner may deem necessary for the security of the
building and its occupants.

No Representations by Owner:

      21. Neither Owner nor Owner's agents have made any representations or
promises with respect to the physical condition of the building, the land upon
which

it is erected or the demised premises, the rents, leases, expense of operation
or any other matter or thing affecting or related to the premises except as
herein expressly set forth and no rights, easements or licenses are acquired by
Tenant by implication or otherwise except as expressly set forth in the
provisions of this lease. Tenant has inspected the building and the demised
premises and is thoroughly acquainted with their condition and agrees to take
the same "as is" and acknowledges that the taking of possession of the demised
premises by Tenant shall be conclusive evidence that the said premises and the
building of which the same form a part were in good and satisfactory condition
at the time such possession was to taken, except as to latent defects. All
understandings and agreements heretofore made between the parties hereto are
merged in this contract, which alone fully and completely expresses the
agreement between Owner and Tenant and any executory agreement hereafter made
shall be ineffective to change, modify, discharge or effect an abandonment of it
in which or in part, unless such executory agreement is in writing and signed by
the party against whom enforcement of the change, modification, discharge or
abandonment is ought.

End of Term:

      22. Upon the expiration or other termination of the term of this lease,
Tenant shall quit and surrender to Owner the demised premises, broom clean, in
good order and condition, ordinary wear and damages which Tenant is not required
to repair and as provided elsewhere in this lease excepted, and Tenant shall
remove all its property. Tenant's obligation to observe or perform this covenant
shall survive the expiration or other termination of this lease. If the last day
of the term of this lease or any renewal thereof, falls on Sunday, this lease
shall expire at noon on the preceding Saturday unless it be a legal holiday in
which case it shall expire at noon on the preceding business day.

Quiet Enjoyment:

      23. Owner covenants and agrees with Tenant that upon Tenant paying the
rent and additional rent and observing and performing all the terms, covenants
and conditions, on Tenant's part to be observed and performed, Tenant may
peaceably and quietly enjoy the premises hereby demised, subject, nevertheless,
to the terms and conditions of this lease including, but not limited to, Article
31 hereof and to the ground leases, underlying leases and mortgages hereinbefore
mentioned.

Failure to Give Possession:

      24. If Owner is unable to give possession of the demised premises on the
date of the commencement of the term hereof, because of the holding-over or
retention of possession of any tenant, undertenant or occupants or if the
demised premises are located in a building being constructed, because such
building has not been sufficiently completed to make the premises ready for
occupancy or because of the fact that a certificate of occupancy has not been
procured or for any other reason, Owner shall not be subject to any liability
for failure to give possession on said date and the validity of the lease shall
not be impaired under such circumstances, nor shall the same be construed in any
wise to extend the term of this lease, but the rent payable hereunder shall be
abated (provided Tenant is not responsible for Owner's inability to obtain
possession) until the Owner shall have given Tenant written notice that the
premises are substantially ready for Tenant's occupancy. If permission is given
to Tenant to enter into the possession of the demised premises or to occupy
premises other than the demised premises prior to the date specified as the
commencement of the term of this lease, Tenant covenants and agrees that such
occupancy shall be deemed to be under all the terms, covenants, conditions and
provisions of this lease, except as to the covenant to pay rent. The provisions
of this article are intended to constitute "an express provision to the
contrary" within the meaning of Section 223-a of the New York Real Property Law.

No Waiver:

      25. The failure of Owner to seek redress for violation of, or to insist
upon the strict performance of any covenant or condition of this lease or of any
of the Rules or Regulations, set forth or hereafter adopted by Owner, shall not
prevent a subsequent act which would have originally constituted a violation
from having all the force and effect of an original violation. The receipt by
Owner of rent with knowledge of the breach of any covenant of this lease shall
not be deemed a waiver of such breach and no provision of this lease shall be
deemed to have been waived by Owner unless such waiver be in writing signed by
Owner. No payment by Tenant or receipt by Owner of a lesser amount than the
monthly rent herein stipulated shall be deemed to be other than on account of
the earlier stipulated rent, nor shall any endorsement or statement of any check
or any letter accompanying any check or payment as rent be deemed as accord and
satisfaction, and Owner may accept such check or payment without prejudice to
Owner's right to recover the balance of such rent or pursue any other remedy in
this lease provided. No act or thing done by Owner or Owner's agents during the
term hereby demised shall be deemed as acceptance of a surrender of said
premises, and no agreement to accept such surrender shall be valid unless in
writing signed by Owner. No employee of Owner or Owner's agent shall have any
power to accept the keys of said premises prior to the termination of the lease
and the delivery of keys to any such agent or employee shall not operate as a
termination of the lease or a surrender of the premises.

Waiver of Trial by Jury:

      26. It is mutually agreed by and between Owner and Tenant that the
respective parties hereto shall and they hereby do waive trial by jury in any
action, proceeding or counterclaim brought by either of the parties hereto
against the other (except for personal injury or property damage) on any matters
whatsoever arising out of or in any way connected with this lease, the
relationship of Owner and Tenant, Tenant's use of or occupancy of said premises,
and any emergency statutory or any other statutory remedy. It is further
mutually agreed that in the event Owner commences any summary proceeding for
possession of the premises, Tenant will not interpose any counterclaim of
whatever nature or description in any such proceeding including a counterclaim
under Article 4.

Inability to Perform:

      27. This Lease and the obligation of Tenant is pay rent hereunder and
perform all of the other covenants and agreements hereunder on part of Tenant to
be performed shall in no wise be affected, impaired or excused because Owner is
unable to fulfill any of its obligations under this lease or to supply or is
delayed in supplying any service expressly or impliedly to be supplied or is
unable to make, or is delayed in making any repair, additions, alterations or
decorations or is unable to supply or is delayed in supplying any equipment or
fixtures if Owner is prevented or delayed from so doing by reason of strike or
labor troubles or any cause whatsoever including, but not limited to, government
preemption in connection with a National Emergency or by reason of any rule,
order or regulation of any department or subdivision thereof of any government
agency or by reason of the conditions of supply and demand which have been or
are affected by war or other emergency.

Bills and Notices:

      28. Except as otherwise in this lease provided, a bill, statement, notice
or communication which Owner may desire or be required to give to Tenant, shall
be deemed sufficiently given or rendered if, in writing, delivered to Tenant
personally or sent by registered or certified mail addressed to Tenant at the
building of which the demised premises form a part or at the last known
residence address or business address of Tenant or left at any of the aforesaid
premises addressed to Tenant, and the time of the rendition of such bill or
statement and of the giving of such notice or communication shall be deemed to
be the time when the same is delivered to Tenant, mailed, or left at the
premises as herein provided. Any notice by Tenant to Owner must be served by
registered or certified mail addressed to Owner at the address first hereinabove
given or at such other address as Owner shall designate by written notice.

Services Provided by Owners

      29. As long as Tenant is not in default under any of the covenants of this
lease, Owners shall provide: (a) necessary elevator facilities on business days
from 8 a.m. to 6 p.m. and on Saturdays from 8 a.m. to 1 p.m. and have one
elevator subject to call at all other times; (b) heat to the demised premises
when and as required by law, on business days from 8 a.m. to 6 p.m., and on
Saturdays from 8 a.m. to 1 p.m.; (c) water for ordinary lavatory purposes, but
if Tenant uses or consumes water for any other purposes or in unusual quantities
(of which fact Owner shall be the sole judge), Owner may install a water meter
at Tenant's expense which Tenant shall thereafter maintain at Tenant's expense
in good working order and repair to register such water consumption and Tenant
shall pay for water consumed as shown on said meter as additional rent as and
when bills are rendered; (d) cleaning service for the demised premises on
business days at Owner's expense provided that the same are kept in order by
Tenant. If, however, said premises are to be kept clean by Tenant, it shall be
done at Tenant's sole expense, in a manner satisfactory to Owner and no one
other than persons approved by Owner shall be permitted to enter said premises
or the building of which they are a part for such purpose. Tenant shall pay
Owner the cost of removal of any of Tenant's refuse and rubbish from the
building; (e) if the demised premises is serviced by Owner's air
conditioning/cooling and ventilating system, air conditioning/cooling will be
furnished to Tenant from May 15th through September 30th on business days
(Mondays through Fridays, holidays excepted) from 8:00 a.m. to 6:00 p.m., and
ventilation will be furnished on business days during the aforesaid hours except
when air conditioning/cooling is being furnished as aforesaid. If Tenant
requires air conditioning/cooling or ventilation for more extended hours or on
Saturdays, Sundays, or on holidays, as defined under Owner's contract with
Operating Engineers Local 94-94A, Owner will furnish the same at Tenant's
expense. RIDER to be added in respect to rates and conditions for such
additional service*; (f) Owner reserves the right to stop services of the
heating, elevators, plumbing, air-conditioning, power systems or cleaning or
other services, if any, when necessary by reason of accident or for repairs,
alterations, replacements or improvements necessary or desirable in the judgment
of Owner for as long as may be reasonably required by reason thereof. If the
building of which the demised premises are a part supplies manually-operated
elevator service, Owner at any time may substitute automatic-control elevator
services and upon ten days' written notice to Tenant, proceed with alterations
necessary therefor without in any wise affecting this lease or the obligation of
Tenant hereunder. The same shall be done with a minimum of inconvenience to
Tenant and Owner shall pursue the alteration with due diligence.

Captions:

      30. The Captions are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope of this lease nor
the intent of any provisions thereof.

Definitions: 

      31. The term "office," or "offices," wherever used in this lease, shall
not be construed to mean premises used as a store or stores, for the sale or
display, at any time, of goods, wares or merchandise, of any kind, or as a
restaurant, shop, booth, bootblack or other stand, barber shop, or for other
similar purposes or for manufacturing. The term "Owner" means a landlord or
lessor, and as used in this lease means only the owner, or the mortgagee in
possession, for the time being of the land and building (or the owner of a lease
of the building or of the land and building) of which the demised premises form
a part, so that in the event of any sale or sales of said land and building or
of said lease, or in the event of a lease of said building, or of the land and
building, the said Owner shall be and hereby is entirely freed and relieved of
all covenants and obligations of Owner hereunder, and it shall be deemed and
construed without further agreement, between the parties or their successors in
interest, or between the parties and the purchaser, at any such sale, or the
said lessee of the building or of the land and building, that the purchaser or
the lessee of the building has assumed and agreed to carry out any and all
covenants and obligations of Owner, hereunder. The words "re-enter" and
"re-entry" as used in this lease are not restricted to their technical legal
meaning. The term "business days" as used in this lease shall exclude Saturdays
(except such portion thereof as is covered by specific hours in Article 29
hereof), Sundays and all days observed by the State or Federal Government as
legal holidays and those designated as holidays by the applicable building
service union employees service contract or by the applicable Operating
Engineers contract with respect to HVAC service.

- ----------
* Rider to be added if necessary

Adjacent Excavation--Blasting:

      32. If an excavation shall be made upon land adjacent to the demised
premises, or shall be authorized to be made, Tenant shall afford to the person
causing or authorized to cause such excavation, license to enter upon the
demised premises for the purpose of doing such work as said person shall deem
necessary to preserve the wall or the building of which demised premises form a
part from injury or damage and to support the same by proper foundations without
any claim for damages or indemnity against Owner, or diminution or abatement of
rent.

Rules and Regulations:

      33. Tenant and Tenant's servants, employees, agents, visitors, and
licensees shall observe faithfully, and comply strictly with, the Rules and
Regulations and such other and further reasonable Rules and Regulations as Owner
or Owner's agents may from time to time adopt. Notice of any additional rules or
regulations shall be given in such manner as Owner may elect. In case Tenant
disputes the reasonableness of any additional Rule or Regulation hereafter made
or adopted by Owner or Owner's agents, the parties hereto agree to submit the
question of the reasonableness of such Rule or Regulation for decision to the
New York office of the American Arbitration Association, whose determination
shall be final and conclusive upon the parties hereto. The right to dispute the
reasonableness of any additional Rule or Regulation upon Tenant's part shall be
deemed waived unless the same shall be asserted by service of a notice, in
writing upon Owner within ten (10) days after the giving of notice thereof.
Nothing in this lease contained shall be construed to impose upon Owner any duty
or obligation to enforce the Rules and Regulations or terms, covenants or
conditions in any other lease, as against any other tenant and Owner shall not
be liable to Tenant for violations of the same by any other tenant, its
servants, employees, agents, visitors or licensees.

Security:

      34. Tenant has deposited with Owner the sum of $14,916.00* as security for
the faithful performance and observance by Tenant of the terms, provisions and
conditions of this lease; it is agreed that in the event Tenant defaults in
respect of any of the terms, provisions and conditions of this lease, including,
but not limited to, the payment of rent and additional rent, Owner may use,
apply or retain the whole or any part of the security so deposited to the extent
required for the payment of any rent and additional rent or any other sum as to
which Tenant is in default or for any sum which Owner may expend or may be
required to expand by reason of Tenant's default in respect of any of the terms,
covenants and conditions of this lease, including but not limited to, any
damages or deficiency in the re-letting of the premises, whether such damages or
deficiency occurred before or after summary proceedings or after re-entry by
Owner. In the event that Tenant shall fully and faithfully comply with all of
the terms, provisions, covenants and conditions of this lease, the security
shall be returned to Tenant after the date fixed as the end of the Lease and
after delivery of entire possession of the demised premises to Owner. In the
event of a sale of the land and building or leasing of the building, of which
the demised premises form a part, Owner shall have the right to transfer the
security to the vendor or lessee and Owner shall thereupon be released by Tenant
from all liability for the return of such security; and Tenant agrees to look to
the new Owner solely for the return of said security, and it is agreed that the
provisions hereof shall apply to every transfer or assignment made of the
security to a new Owner. Tenant further covenants that it will not assign or
encumber or attempt to assign or encumber the monies deposited herein as
security and that neither Owner nor its successors or assigns shall be bound by
any such assignment, encumbrance, attempted assignment or attempted encumbrance.

Estoppel Certificate

      35. Tenant, at any time, and from time to time, upon at least 10 days'
prior notice by Owner, shall execute, acknowledge and deliver to Owner, and/or
to any other person, firm or corporation specified by Owner, a statement
certifying that this Lease is unmodified and in full force and effect (or, if
there have been modifications, that the same is in full force and effect as
modified and stating the modifications), stating the dates to which the rent and
additional rent have been paid, and stating whether or not there exists any
default by Owner under this Lease, and, if so, specifying each such default.

Executors and Assigns

      36. The covenants, conditions and agreements contained in this lease shall
bind and insure to the benefit of Owner and Tenant and their respective heirs,
distributors, executors, administrators, successors, and except as otherwise
provided in this lease, their assigns.

- ----------
* Space to be filled in or deleted.

See Rider and Exhibit A attached hereto and made a part hereof.

In Witness Whereof, Owner and Tenant have respectively signed and sealed this
lease as of the day and year first above written.

                        Landlord:
                        509 MADISON AVENUE ASSOCIATES
                        By: Kensico Management, Inc.
                            Managing General Partner
Witness for Owner:
                        By: /s/ Alan Zimmerman
- ---------------------       -------------------------------------------
                            Name:

                        Tenant:
                        DISCOVERY LABORATORIES, INC.
Witness for Tenant:
                        By: /s/ James S. Kuo, M.D.
- ---------------------       -------------------------------------------
                                James S. Kuo, M.D., President and Chief
                                Executive Officer

                                 ACKNOWLEDGMENTS

CORPORATE OWNER 
STATE OF NEW YORK, ss.:
County of 

      On this    day of    , 19   , before me personally came                   
to me known, who being by me duly sworn, did depose and say that he resides     
                                                                                
in                                                                             ;
that he is the                of                                                
the corporation described in and which executed the foregoing instrument, as
OWNER; that he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by order of the
Board of Directors of said corporation, and that he signed his name thereto by
like order.

INDIVIDUAL OWNER
STATE OF NEW YORK, ss.:
County of 

      On this    day of          , 19  , before me personally came             ,
to me known and known to me to be the individual                                
described in and who, as OWNER, executed the foregoing instrument and
acknowledged to me that                    he executed the same.

CORPORATE TENANT
STATE OF NEW YORK, ss.:
County of 

      On this    day of          , 19  , before me personally came             ,
to me known, who being by me duly sworn, did depose and say that he resides     
                                                                                
in                                                                             ;
that he is the                of                                               
the corporation described in and which executed the foregoing instrument, as
TENANT; that he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by order of the
Board of Directors of said corporation, and that he signed his name thereto by
like order.

INDIVIDUAL TENANT
STATE OF NEW YORK, ss.:
County of 

      On this    day of          , 19  , before me personally came             ,
to me known and known to me to be the individual                                
described in and who, as TENANT, executed the foregoing instrument and
acknowledged to me that                    he executed the same.

      RIDER ANNEXED TO AND FORMING A PART OF LEASE DATED AS OF THE 29 DAY OF
      MAY, 1997, BETWEEN 509 MADISON AVENUE ASSOCIATES, AS LANDLORD, AND
      DISCOVERY LABORATORIES, INC., AS TENANT, AFFECTING SPACE ON THE FOURTEENTH
      (14TH) FLOOR AT 509 MADISON AVENUE, NEW YORK. NEW YORK
      ------------------------------------------------------------
     
      37. Base Rent, The annual base rent, payable in equal monthly
installments, shall be as follows: Eighty Nine Thousand Four Hundred Ninety Six
and 00/100 ($89,496.00) Dollars for the period commencing on the Rent
Commencement Date (as hereinafter defined) and ending twelve (12) months
following the Rent Commencement Date; Ninety One Thousand Nine Hundred Thirty
Six and 80/100 ($91,936.80) Dollars for the period commencing thirteen (13)
months following the Rent Commencement Date and ending twenty four (24) months
following the Rent Commencement Date; and Ninety Four Thousand Four Hundred
Fifty and 82/100 ($94,450.82) Dollars for the period commencing twenty five (25)
months following the Rent Commencement Date and ending thirty six (36) months
following the Rent Commencement Date (herein sometimes called "Base Rent").

      38. Rent Commencement Date. Tenant's obligation to pay Base Rent shall
commence on June 15, 1997 (the "Rent Commencement Date")

      The initial installment of Base Rent paid upon the execution hereof shall
be applied as in this Article provided. If the Rent Commencement Date is not the
first day of a calendar month, the next monthly installment of Base Rent due
hereunder shall be prorated to the end of the calendar month next following the
month in which said Rent Commencement Date occurred, so that subsequent monthly
installments of Base Rent will be due on the first days of calendar months
throughout the term of this lease, except that the last monthly installment will
be similarly prorated.

      Within ten (10) days of request by either party after the Rent
Commencement Date has been determined, Landlord and Tenant shall mutually
execute and deliver a supplemental agreement confirming and setting forth the
Rent Commencement Date.

      39. Condition of Demised Premises. Tenant acknowledges and represents to
Landlord that it has thoroughly inspected and examined, or caused to be
thoroughly inspected and examined, the demised premises and that it is fully
familiar with the physical condition and state of repair thereof, and Tenant
does hereby agree to accept same in its existing condition and state of repair,
subject to any and all defects therein, latent or otherwise, "AS IS", and
Landlord shall have no obligation to do any work or make any installation,
repair or alteration of any kind to or in respect thereof, other than as
expressly set forth in this lease.

      40. Maintenance of Demised Premises. Unless expressly provided in this
lease to the contrary, Landlord shall not be responsible for the upkeep or
maintenance of the demised premises or any installation therein. In no event
shall Landlord be responsible for any installation made by Tenant.

      Should Landlord hereafter agree, in writing or otherwise, at the request
of Tenant or otherwise, to do any work in or in respect of the demised premises,
the same shall be paid for by Tenant not later than ten (10) days after being
billed therefor, at a rate and sum equal to the cost to Landlord of any such
work plus 15% of such cost. Any sum or charge (except Base Rent) required to be
paid by Tenant under this or any Article of this lease is and shall be deemed to
be additional rent under this lease, and, if same is not paid as in this lease
provided

Landlord shall have the same rights, remedies and privileges in respect of such
non-payment as if Base Rent were not paid.

      41. Assignment-Sublet. Article 11 hereof is hereby amended to add the
following:

      "Provided this lease is then in full force and effect and Tenant is not in
default thereunder:

      "If Tenant desires to assign or sublet all or any portion of the demised
premises, Tenant shall promptly notify Landlord and its leasing or managing
agent for the Building of its desire to assign this lease or sublet the demised
premises. Upon obtaining a proposed assignee or sublessee upon terms
satisfactory to Tenant, Tenant shall submit to Landlord in writing (a) the name
of the proposed assignee or subtenant; (b) the terms and conditions of the
proposed assignment or subletting; and (c) the nature and character of the
business of the proposed assignee or subtenant and any other information
reasonably requested by Landlord.

      "Landlord shall have the following options which may be exercised within
sixty (60) days from any notice or submission by Tenant to Landlord pursuant to
the last sentence of the preceding paragraph.

      (a) If Tenant desires to sublet all or substantially all of the demised
      premises or to assign this lease, then within sixty (60) days after
      receipt of the aforesaid notice Landlord may notify Tenant that Landlord
      elects (i) to cancel this lease, in which event such cancellation shall
      become effective on the date proposed by Tenant for such subletting or
      assignment and this lease shall thereupon terminate on said date with the
      same force and effect as if said date were the expiration date of this
      lease, or (ii) require Tenant to assign this lease to Landlord effective
      on the date proposed by Tenant for such subletting or assignment.

      (b) If Tenant desires to sublet less than all of the demised premises,
      then within sixty (60) days after receipt of the aforesaid notice Landlord
      may notify Tenant that Landlord elects (i) to cancel this lease only as to
      the portion of the demised premises Tenant proposes to sublet, to take
      effect as of the proposed effective date of such subletting or (ii) to
      require Tenant to sublease to Landlord as subtenant of Tenant, the portion
      of the demised premises that Tenant proposes to sublet for the term, and
      from the commencement date of the proposed subletting. The annual rent and
      additional rent which Landlord shall pay to Tenant pursuant to such
      sublease to Landlord shall be a pro rata apportionment of the annual and
      additional rent payable hereunder and it is hereby expressly agreed that
      such sublease to Landlord shall be upon all the covenants, agreements,
      terms, provisions and conditions contained in this lease except for such
      thereof which are inapplicable and such sublease shall give Landlord the
      unqualified and unrestricted right without Tenant's permission to assign
      such sublease or any interest therein and/or to sublet the space covered
      by such sublease or any part or parts of such space and to make or cause
      to have made or permit to be made any and all changes, alterations,
      decorations, additions, and improvements in the space covered by such
      sublease, and that such may be removed, in whole or part, at Landlord's
      option, prior to or upon the expiration or other termination of such
      sublease provided that any damage or injury caused by such removal shall
      be repaired. Such sublease to Landlord shall also provide that the parties
      to such sublease expressly negate any intention that any estate

                                     - 2 -

      created under such sublease be merged with any other estate held by either
      of said parties.

      "In the event of the exercise of said option under subparagraph (b) of
this Article, the Base Rent and all other charges payable hereunder shall be
apportioned on a pro rata basis. In the event that Landlord fails to exercise
its options under subparagraphs (a) or (b) of this Article within said sixty
(60) day period, Landlord will not unreasonably withhold its consent to the
proposed assignment or subletting which was under consideration during such
sixty (60) day period, except that Landlord shall not be required to consent to
and no assignment or subletting shall be proposed by Tenant with any person,
firm or entity that shall, at the time of such proposal, or within six (6)
months prior thereto, be or have been a tenant, subtenant or occupant of space
at the Building or be or have been negotiating with Landlord or its agent to
become a tenant, subtenant or occupant of space thereat, nor that shall be in a
business not in keeping with the standards and character of the Building, nor
that in the reasonable judgment of Landlord is not financially responsible, nor
that shall be a government or governmental agency, department or affiliate
thereof, nor that shall in any way be dependent upon government or donation
financing for support.

      "As further conditions precedent to granting consent to any proposed
assignment or subletting, Landlord may require that: Tenant first agree, in a
written agreement satisfactory to Landlord's counsel (which agreement shall be
secured by a collateral assignment of any such sublease, if applicable and/or
such other security as Landlord may require) to pay monthly to Landlord, as
additional rent hereunder, an amount equal to all rent and/or other
consideration payable by any such assignee or sublessee to Tenant to the extent
that such rent and/or other consideration exceeds, on a pro rata basis, a sum,
amount or rate in excess of the Base Rent (and additional rent) at the time
payable hereunder by Tenant per square rentable foot so affected by any such
assignment or sublease; and the proposed assignment or sublease and the
documentation therefor shall be otherwise reasonably acceptable to Landlord. (In
calculating additional rent that may be due Landlord under the preceding
sentence, (i) Tenant shall be credited with actual reasonable costs paid by it
in connection with culminating such assignment or subletting, averaged over the
remaining term in respect of such assignment or subletting, and (ii) rent or
consideration payable by any assignee or sublessee to Tenant shall include,
without limitation, sums payable to Tenant for the sale or rental of Tenant's
fixtures, leasehold improvements, equipment, furniture or other personal
property, less, in the case of the sale thereof, the then fair market value
thereof.) In connection with any such proposed assignment or subletting, Tenant
and such proposed assignee or sublessee shall also provide Landlord with such
other information as it may reasonably request, including (but not limited to) a
certification in affidavit form of all rental and other consideration proposed
to be paid in connection with the proposed assignment or subletting. If Tenant
shall at any time claim that Landlord unreasonably withheld its consent to a
proposed assignment or subletting, that question shall be submitted to
arbitration and if Tenant prevails Landlord's sole obligation or liability shall
be to so consent thereto. Any and all costs related to separating the demised
premises to accommodate a subletting or a partial termination of this lease
resulting from Tenant's seeking to enter into a partial subletting, including
all construction costs related to modifying the demised premises, shall be borne
and paid for solely by Tenant. If Tenant is a corporation, a sale, transfer,
pledge or encumbrance of a majority of the stock of Tenant or, if Tenant is a
partnership, any sale, assignment, transfer, pledge or other disposition of a
controlling interest in such partnership, shall,

                                     - 3 -

subject to the provisions of this Article and Article 11 hereof; provided,
however, that no sale, transfer, pledge or encumbrance of a majority of the
Tenant's stock shall be deemed an assignment if in a merger or consolidation of
the Tenant, the surviving corporation, partnership, buyer, assignee or
transferee (the "Surviving Company") will have immediately thereafter a net
worth equal to or greater than the net worth of the Tenant immediately prior to
such consolidation, merger, sale, lease, assignment, transfer or other
disposition and the Surviving Company shall have executed and delivered to the
Landlord an agreement, in form and substance reasonably satisfactory to the
Landlord, containing an assumption by the Surviving Company of the due and
punctual performance and observance of each covenant and condition of the lease.

      "If Landlord shall grant its consent to the proposed assignment of this
lease or subletting of the demised premises, such consent and the effectiveness
of any such assignment or subletting shall nevertheless be conditioned upon
Tenant complying with the following conditions:

      (a) An executed duplicate original in form satisfactory to Landlord for
      review by Landlord's counsel of such subleasing or assignment agreement
      shall be delivered to Landlord at least five (5) business days prior to
      the effective date thereof.

      (b) In the event of any assignment, Tenant will deliver to Landlord at
      least five (5) business days prior to the effective date thereof an
      assumption agreement wherein the assignee (except Landlord) agrees to
      assume all of the terms, covenants and conditions of this lease to be
      performed by Tenant hereunder and which provides that Tenant named herein
      and such assignee shall after the effective date of such assignment be
      jointly and severally liable for the performance of all of the terms,
      covenants and conditions of this lease.

      (c) Each sublease of the demised premises shall contain or shall be deemed
      to contain, whether or not specifically included therein, the following
      provisions:

           (i) 'In the event of a default under any underlying lease of all or
           any portion of the premises demised hereby which results in the
           termination of such lease, or if the lessor under any such underlying
           lease shall exercise any right to cancel or terminate such underlying
           lease, the subtenant hereunder shall, at the option of the lessor
           under any such lease, attorn to and recognize such lessor as Landlord
           hereunder and shall, promptly upon such lessor's request, execute and
           deliver all instruments necessary or appropriate to confirm such
           attornment and recognition. The subtenant hereunder hereby waives all
           rights under present or future law to elect, by reason of the
           termination of such underlying lease, to terminate such sublease or
           surrender possession of the premises demised hereby. If the lessor
           under such underlying lease does not exercise the aforesaid option,
           the term of this sublease shall terminate simultaneously with the
           term of the underlying lease and subtenant hereby agrees to vacate
           the premises subleased on or before the effective date of termination
           of the underlying lease.'

           (ii) 'This sublease may not be assigned or the sublet premises
           further sublet, in whole or in part, without the prior written
           consent of the lessor under any underlying lease of all or any
           portion of the premises demised hereby.'

                                     - 4 -

      "If this lease is assigned and Landlord consents to such assignment,
Tenant covenants and agrees that the terms, covenants and conditions of this
lease may be changed, altered or modified in any manner whatsoever by Landlord
and the assignee without the prior written consent of Tenant and that no such
change, alteration or modification shall release Tenant from the performance by
it of any of the terms, covenants and conditions on its part to be performed
under this lease. Any such change, alteration or modification which would have
the effect of increasing or enlarging Tenant's obligations or liabilities under
this lease shall not, to the extent only of such increases or enlargement, be
binding upon Tenant.

      "Tenant covenants that notwithstanding any subletting or assignment to
Landlord or to any other subtenant or assignee and/or acceptance of rent or
additional rent by Landlord from any subtenant or assignee, Tenant shall and
will remain fully liable for the payment of the annual rent and additional rent
due and to become due hereunder and for the performance of all the covenants,
agreements, terms, provisions and conditions contained in this lease on the part
of the Tenant to be performed.

      "The consent by Landlord to any assignment, subletting, or occupancy shall
not in any wise be construed to relieve Tenant from obtaining the express
consent, in writing, of Landlord to any further assignment, subletting,
sub-subletting, or occupancy, which consent Landlord shall have the right to
withhold for any reason whatsoever.

      "If Landlord shall decline to grant its consent to the proposed assignment
of this lease or subletting of the demised premises, or if Landlord shall
exercise any of its options under subparagraph (a) or (b) of this Article, or if
Landlord shall grant its consent to the proposed assignment of this lease or
subletting of the demised premises, Tenant shall indemnify and save Landlord
harmless of, from and against any and all claims (and all expenses and fees,
including attorneys' fees, related thereto) for commissions or compensation made
by any broker or entity, arising out of or relating to the proposed assignment
or subletting.

      "In any event, Tenant agrees not to advertise or in any manner to list the
demised premises, or any part thereof, for rent or assignment or subletting
without Landlord's prior written consent in each instance, which consent shall
not be unreasonably withheld in the case of a proposed advertisement which does
not identify the exact Building address. Any consent granted by Landlord
pursuant hereto shall not, in any event, otherwise alter or modify the other
provisions of this lease related to assignments or sublettings by Tenant."

      Except as specifically set forth in this Article, nothing in this Article
is intended to modify the provisions of Article 11 of this lease.

      42. Rent Escalations.

      (A) For the purposes of this Article, the following quoted words, terms or
phrases shall have the meaning in this subdivision (A) ascribed to them:

            (1) "Lease Year" shall mean the period of twelve (12) months or less
commencing with the commencement date of the term of this lease and ending on
the following December 31st, and each successive period of twelve (12) months
thereafter during the term, and the final period of twelve (12) months or less
commencing with January 1st immediately preceding the expiration of the term;

                                     - 5 -

            (2) "Base Tax Year" shall mean the fiscal year ending June 30, 1998;

            (3) "Building" shall mean the building in which the demised premises
are located and the land upon which such building is situated;

            (4) "Tenant's Percentage" shall mean 1.95%.

      (B) (1) In the event that the real estate taxes payable with respect to
the Building for any fiscal tax year (July 1 through June 30), or any portion
thereof, subsequent to the Base Tax Year (the "Tax Escalation Year") shall be
greater than the amount of such taxes due and payable during the Base Tax Year,
whether by reason of an increase in either the tax rate or the assessed
valuation, or both, or by reason of the levy, assessment or imposition of any
tax on real estate as such, ordinary or extraordinary, not now levied, assessed
or imposed, or for any other reason, Tenant shall pay and does covenant to pay
to Landlord, within ten (10) days of Landlord's rendering to Tenant a statement
therefor, as additional rent for the Tax Escalation Year in which such date
occurs, an amount equal to Tenant's Percentage of the increase in the amount of
such tax or installment over the corresponding tax or installment for the Base
Tax Year. Tenant shall also pay and does covenant to pay to Landlord, within ten
(10) days of Landlord's rendering to Tenant a statement therefor, as additional
rent for the Tax Escalation Year in which such date occurs, an amount equal to
Tenant's Percentage of any assessment or installment thereof for public
betterments or improvements which may be levied upon or in respect of the
Building. Landlord may take the benefit of the provisions of any statute or
ordinance permitting any such assessment to be paid over a period of time and in
such event Tenant shall be obligated to pay only Tenant's Percentage of the
installments of any such assessments which shall become due and payable during
the term of this lease. Upon request, Landlord shall furnish Tenant with a copy
of the real estate tax bill for any Tax Escalation Year in which Tenant is
hereunder required to pay additional rent. If at any time during the term of
this lease the method(s) of taxation prevailing at the date of execution hereof
shall be altered so that in lieu of or as an addition to or as a substitution
for the whole or any part of the taxes, assessments, levies or impositions or
charges now levied, assessed or imposed on real estate and the improvements
thereon, there shall be levied, assessed or imposed an alternative, additional
or new tax or fee, same shall be considered "real estate taxes" for the purposes
hereof and if in excess of the real estate taxes due and payable during the Base
Tax Year, Tenant shall pay Tenant's Percentage of such excess as herein
provided. For the purposes of this subdivision (1), at Landlord's election,
vault taxes or charges shall be considered real estate taxes.

            (2) Notwithstanding anything in this subdivision (B) to the
contrary, it is understood and agreed that if Landlord shall receive a refund of
any portion of real estate taxes in respect of which Tenant shall have paid
additional rental under this subdivision (B), then and under such circumstances
and if this lease shall then be in full force and effect without default on the
part of Tenant, Tenant shall be entitled to a credit against future payments of
additional rental under this subdivision (B) in an amount equal to Tenant's
Percentage of such refund, after first deducting from such total refund all
fees, costs and expenses incurred by Landlord in collecting same. If at the
expiration of the term of this lease any credit to which Tenant might be
entitled pursuant to the preceding sentence shall not have been used as a credit
as in such sentence provided, then and under such circumstances and subsequent
to Tenant properly vacating the demised premises as herein provided and so long
as Tenant is not and has not been otherwise in default hereunder,

                                     - 6 -

Tenant shall be entitled to a payment equal to the amount of any such remaining
credit. If the taxes for the Base Tax Year shall be reduced by certiorari
proceedings or otherwise, Landlord shall be entitled to recalculate the
additional rent in respect of any fiscal tax year after the Base Tax Year that
would have been payable by Tenant hereunder in accordance with (1) of this
subdivision (B) had such reduction occurred or been known at or prior to the
time additional rent for any such fiscal tax year was being originally
calculated, and Tenant agrees to pay any additional rent resulting from such
recalculation.

      (C) If the first or final Lease Year or a Tax Escalation Year shall
contain less than twelve months, the additional rent payable under this Article
for such Lease Years or a Tax Escalation Year shall be prorated (and in
determining whether any additional rent is payable therefor, the Base Tax Year
shall also be considered on a pro rata basis). Tenant's obligation hereunder to
pay additional rent for any Lease Year or a Tax Escalation Year shall survive
the expiration or termination of the term of this lease. In the event that the
additional rent to be paid by Tenant under this Article for the final Lease Year
has not then as yet been determined, Tenant covenants to pay to Landlord on the
first day of the month next preceding the expiration of the term hereof, as
additional rent and on account of the additional rent required to be paid
pursuant to this Article for the final Lease Year, a sum equal to the additional
rent paid or required to be paid by Tenant hereunder for the Lease Year next
preceding the final Lease Year prorated to the extent that the final Lease Year
is less than a full calendar year. Upon a determination being made by Landlord
of the precise amount of additional rent required to be paid by Tenant pursuant
to this Article for such final Lease Year, there shall be an adjustment of said
additional rent for said Lease Year to the extent that Tenant shall be required
to pay to Landlord promptly the sum by which said determination exceeds the
prorated sum previously paid, or Landlord shall promptly refund to Tenant the
sum by which said determination is less than the prorated sum previously paid.
For the non-payment of any additional rent Landlord shall have the same
remedies, rights and privileges that Landlord has for the non-payment of any
Base Rent hereinbefore provided for. Receipt and acceptance by Landlord of any
installment of Base Rent provided for under this lease or any of the additional
rent that may be required to be paid by Tenant under this lease, shall not be or
be deemed to be a waiver of any other additional rent or Base Rent then due and
no delay in determining or billing the amount of any additional rent due
pursuant to this Article shall be or be deemed to be a waiver of Landlord's
rights thereto.

      (D) (l) Commencing with the second Lease Year, it is agreed that Landlord
shall be entitled to charge, receive and collect from Tenant and Tenant agrees
to pay to Landlord on the first day of each month during each such Lease Year
and each Lease Year thereafter an amount equal to 1/12th of 110% of the
additional rent hereunder required to be paid by Tenant to Landlord for the
preceding Lease Year (such preceding Lease Year's additional rent to be
annualized for the purposes hereof, if such Lease Year was a period of less than
twelve (12) months), it being further understood and agreed that if the precise
amount of additional rent required to be paid by Tenant for such Lease Year
shall ultimately be determined to be in excess of such amount theretofore paid
by Tenant hereunder, Tenant shall forthwith pay to Landlord the amount of such
excess, and if such determination shall be that Tenant paid more than the
precise amount of additional rent required to be paid by Tenant for such Lease
Year, the amount of such excess shall be credited to future payments of
additional rent required to be paid by Tenant hereunder.

                                     - 7 -

            (2) Additionally, any time during any Lease Year that it becomes
evident to Landlord that monthly payments under this subdivision (D) will be
insufficient to satisfy Tenant's additional rental obligation under this Article
for such Lease Year, Landlord, on notice to Tenant, may appropriately increase
the monthly payments hereunder and Tenant agrees to pay same.

      (E) In no event shall anything contained in this Article be deemed or
construed to reduce the Base Rent or additional rent provided to be paid under
any of the other terms and provisions of this lease.

      43. Brokerage. Tenant represents, warrants and confirms to Landlord that
Newmark & Company Real Estate, Inc. and Koll Real Estate Services Company
(collectively, the "Brokers") are the sole and only brokers with whom it has
dealt with respect to this lease or the demised premises. Tenant agrees to
indemnify and save Landlord and the Brokers harmless of, from and against any
and all claims (and all expenses and fees, including attorneys' fees, related
thereto) for commissions or compensation made by any broker or entity (other
than the Brokers), arising out of or relating to this lease, the demised
premises, the Building and/or the acts of Tenant, its employees or agents. As,
if and when this lease shall be mutually executed and delivered by Landlord and
Tenant, Landlord agrees to pay the commission that may be due the Brokers in
connection with this lease in accordance with separate agreements between
Landlord and the Brokers.

      44. Maintenance of Air-Conditioning Equipment. Notwithstanding anything
contained herein to the contrary, Landlord agrees, at its sole expense, to
maintain and keep in good order, condition and repair all air-conditioning
equipment currently placed within or serving the demised premises. Anything
contained in Article 29 hereof to the contrary notwithstanding, Tenant agrees to
keep and cause to be kept closed (during any periods when air-conditioning is in
use) all windows in the demised premises and at all times to cooperate fully
with Landlord and otherwise to abide by all reasonable regulations and
requirements which Landlord may prescribe to permit the proper functioning and
protection of the heating and air-conditioning systems (if any) of the Building.

      45. Electricity.

            (1) As long as Tenant is not in default in the payment of any rent
      or the performance or observance of any covenants or provisions of this
      lease on Tenant's part to be observed or performed, but subject in any
      event to the other provisions of this Article, Landlord shall furnish the
      electric energy that Tenant shall reasonably require for ordinary
      reasonable use in the demised premises on a rent inclusion basis. That is,
      there shall be no charge to Tenant for such electric energy by way of
      measuring the same on any meter, such electric energy being included in
      Landlord's services which are covered by the Base Rent reserved hereunder.
      Landlord shall not be liable in any way to Tenant for any failure or
      defect in the supply or character of electric energy furnished to the
      demised premises by reason of any requirement, act or omission of the
      public utility serving the Building with electricity or for any other
      reason whatsoever. Throughout the term of this lease, Landlord reserves
      the right to approve the electrical equipment which Tenant may desire to
      utilize in the demised premises and any additions, supplements or
      replacements thereof. Tenant shall furnish and maintain and install all
      lighting tubes, lamps, starters, bulbs and ballasts required in the
      demised premises, at Tenant's expense or, at Landlord's election, shall
      purchase the same from Landlord and shall pay Landlord's charges therefor
      on demand.

                                     - 8 -

            (2) Tenant's use of and/or demand for electric energy in the demised
      premises shall not at any time exceed the capacity of any of the
      electrical conductors and equipment in or otherwise serving the demised
      premises. In order to insure that such capacity is not exceeded and to
      avoid possible adverse effect upon the electrical service of the Building,
      Tenant shall not, without Landlord's prior written consent in each
      instance, connect any additional fixtures, appliances or equipment (other
      than lamps, typewriters and other usual small business office machines
      having electric current requirements similar to electric typewriters and
      the electrical equipment that may have been initially approved by
      Landlord) to the electric distribution system of the Building or make any
      alteration or addition to the electric system of the demised premises. If
      Landlord grants such consent, all additional risers, feeders, or other
      conductors or equipment required therefor shall be provided by Landlord
      and the cost thereof shall be paid by Tenant upon Landlord's demand. As a
      condition to granting such consent, Landlord may require Tenant to agree
      to an increase in the Base Rent by an amount which will reflect the then
      value to Tenant of the additional service to be furnished by Landlord,
      that is, the potential additional electric energy to be made available to
      Tenant based upon the estimated additional capacity of such additional
      risers, feeders, conductors or other equipment. If Landlord and Tenant
      cannot agree thereon, such amount shall be determined in accordance with
      the procedure set forth in Subdivision (3) of this Article. Pending the
      determination of such increase Landlord, if requested by Tenant, may make
      such additional electrical service available to Tenant provided Tenant
      agrees in writing to pay the increase in accordance with Landlord's
      initial determination while such dispute is being determined. When the
      amount of such increase is so determined, the parties shall execute an
      agreement supplementary to this lease in the form prepared by Landlord to
      reflect such increase in the amount of Base Rent and the amount as
      determined by the procedure set forth in said Subdivision (3), effective
      from the date such additional service is made available to Tenant, but
      such increase shall be effective from such date even if such supplementary
      agreement is not executed. Landlord may withhold its consent until a
      written agreement thereon is reached. Additionally, throughout the term of
      this lease, Landlord shall have the right and privilege, from time to
      time, to survey the plans and specifications for the demised premises and
      the actual installations made or utilized by Tenant therein in order to
      determine the nature of Tenant's equipment and installations and the value
      of the electrical service being or to be furnished to Tenant. It is agreed
      that on the date of execution of this lease there is included in Base Rent
      the sum of EIGHT THOUSAND ONE HUNDRED THIRTY SIX ($8,136.00) DOLLARS in
      respect of electrical service. Such estimate of the value of electrical
      service to Tenant shall be based upon total connected load, as well as the
      electrical service then necessary for the operation of all lighting and
      other electrical equipment in the demised premises. If any such survey
      shall result in a determination that the value to Tenant of the electrical
      service and/or demand being furnished is or should be above that then
      included therefor in the Base Rent hereunder, Landlord shall notify Tenant
      thereof and (unless Tenant objects thereto within ten (10) days of receipt
      of such notice -- in which event the amount of the increase in Base Rent
      shall be determined pursuant to the procedure set forth in Subdivision
      (3)) the Base Rent shall be appropriately increased on an annual basis
      from and as of the date of any such survey, or as of such earlier date as
      it may be determined that Tenant has been receiving such additional value.
      Upon request of Landlord, Tenant shall execute an

                                     - 9 -

      agreement supplementary to this lease confirming any increases in
      Base Rent pursuant hereto, but such increase shall become effective
      regardless of whether any such supplementary agreement is executed.

            (3) Wherever in this Article it is provided that an amount or value
      shall be determined in accordance with the procedure set forth in
      Subdivision (3), it is intended that the following procedure shall be
      followed:

            Landlord shall select a reputable independent electrical engineer or
            utility consultant at the equal expense of Landlord and Tenant to
            determine the amount or value. If Tenant disagrees with the findings
            of Landlord's engineer or utility consultant, Tenant, within ten
            (10) days after Landlord shall have delivered such findings to
            Tenant, shall have the right, at Tenant's expense, to select a
            reputable independent electrical engineer to determine the amount
            and such party shall make such determination within twenty (20) days
            after such selection. If Tenant's engineer disagrees with the
            findings of Landlord's representative, Landlord's representative and
            Tenant's engineer shall select a third reputable independent
            engineer or utility consultant, at Tenant's expense, to determine
            such amount and his determination shall be binding and conclusive
            upon Landlord and Tenant. If Landlord's representative and Tenant's
            engineer cannot agree upon the selection of a third engineer or
            utility consultant, the amount shall be determined by arbitration as
            provided for hereinafter. In all situations, however, pending the
            determination of such dispute, the Base Rent and increases thereof
            shall be payable in accordance with Landlord's initial
            determination.

            (4) If at any time or times after the date of this lease the public
      utility rate schedule for the supply of electric current to the Building
      shall be increased for whatever reason during the term of this lease, or
      any charges, fuel adjustments or taxes are imposed upon Landlord in
      connection therewith or are increased, the Base Rent herein reserved shall
      be appropriately increased by the same percentage as the resulting
      increase in Landlord's cost of furnishing electric service to the demised
      premises. When the amounts of such adjustments are so determined, Landlord
      and Tenant shall execute an agreement supplementary hereto as prepared by
      Landlord to reflect such adjustments in the amount of the Base Rent,
      effective from the effective date of such increase in the public utility
      rate schedule; but such adjustment shall be effective from the effective
      date of the change in rates or imposition of or change in charges or
      taxes, as the case may be, whether or not such a supplementary agreement
      is executed.

            (5) Landlord also reserves the right at any time and for any reason
      to discontinue furnishing electric energy to Tenant in the demised
      premises upon not less than thirty (30) days' notice to Tenant or upon
      such shorter notice as may be required by the public utility serving the
      Building. However, in the event of Tenant's default in payment of any rent
      due under the terms of this lease or otherwise, in addition to Landlord's
      other remedies by reason thereof, Landlord may, without notice,
      discontinue the service of electric energy to the demised premises for the
      duration of such default or the term hereof (as Landlord may elect),
      without releasing Tenant from any liability under this lease and without
      Landlord incurring any liability for any damage or loss sustained by
      Tenant by such discontinuance, this lease shall continue in full force and
      effect and shall be

                                     - 10 -

      unaffected thereby, and the same shall not be deemed to be a lessening or
      diminution of services within the meaning of any law, rule or regulation
      now or hereafter enacted, promulgated or issued, except only that, from
      and after the effective date of such discontinuance, Landlord shall not be
      obligated to furnish electric energy to Tenant and the Base Rent shall be
      reduced to exclude the amount included in the Base Rent in respect of
      electrical service, but in no event shall the Base Rent be reduced by more
      than EIGHT THOUSAND ONE HUNDRED THIRTY SIX ($8,136.00) DOLLARS or the
      amount then included in Base Rent on account of electricity. If Landlord
      so discontinues furnishing electric energy to Tenant, Tenant at Tenant's
      expense shall arrange to obtain electric energy directly from the public
      utility company furnishing electric service to the Building. Except in
      such circumstances where a discontinuance of the furnishing of electric
      energy results from or relates to a default by Tenant, such electric
      energy may be furnished to Tenant by means of the then existing Building
      system feeders, risers and wiring to the extent that the same are
      available, suitable and safe for such purposes. All meters and additional
      panel boards, feeders, risers, wiring and other conductors and equipment
      which may be required to obtain electric energy directly from such public
      utility company shall be installed and maintained by Tenant at its
      expense, provided, however, that Tenant shall make no alterations or
      additions to the electrical equipment and/or appliances without the prior
      written consent of Landlord in each instance. Landlord shall not in any
      wise be liable or responsible to Tenant for any loss or damage or expense
      which Tenant may sustain or incur if either the quantity or character of
      electric energy is changed or is no longer available or suitable for
      Tenant's requirements. Tenant shall be liable for all loss or damage
      sustained in connection with its supply of the electric energy.

            (6) At no time shall Tenant's connected electrical load in the
      demised premises exceed four (4) watts per square foot. Tenant has
      reviewed the electrical capacity available to the demised premises and
      represents that it is satisfied therewith. For the purposes of this
      subdivision (6) only it is agreed that the demised premises contain 2,712
      square feet.

            (7) If any tax is imposed upon Landlord with respect to electrical
      energy furnished as a service to Tenant by any Federal, State or Municipal
      Authority, Tenant, unless prohibited by law or by any governmental
      authority having jurisdiction thereover, shall pay to Landlord, on demand,
      Tenant's pro rata share of such taxes.

            (8) Tenant shall enter into such modifications of this lease as
      Landlord may from time to time request in connection with any requirement
      of any public utility or any requirement of law pertaining to electric
      energy service or charges therefor.

      46. Landlord's Agent. Whenever Landlord is required or desires to send any
notice or other communication to Tenant under or pursuant to this lease, it is
understood and agreed that such notice or communication, if sent by Landlord's
agent (of whose agency Landlord shall have advised Tenant), for all purposes
shall be deemed to have been sent by Landlord. Landlord hereby advises Tenant
that Landlord's current agent is Newmark & Company Real Estate, Inc. of 125 Park
Avenue, New York, New York 10017.

      Tenant agrees that all of the representations, warranties, waivers and
indemnifications made in this lease by Tenant for the benefit of Landlord shall
also be deemed to inure to and be for

                                     - 11 -

the benefit of Landlord's agent, its officers, directors, employees and
independent contractors.

      47. Tenant's Certificate. At any time and from time to time within five
(5) days after written demand therefor, Tenant shall execute, acknowledge and
deliver to Landlord, without charge, a statement addressed to Landlord (and/or
such other persons or parties as Landlord shall require), certifying that to the
best knowledge of Tenant, this lease is in full force and effect and is
unmodified (or, if there have been modifications, specifying same) and setting
forth the dates to which the rentals and other charges payable hereunder have
been paid and stating that Landlord is not in default in the performance of any
of the covenants or agreements on its part to be performed hereunder (or, if
that is not the case, specifying each particular in which the Tenant alleges
that Landlord is in default) and certifying as to such other items in respect of
this lease as Landlord may reasonably require.

      48. Insurance and Indemnity. Landlord and Tenant, respectively, hereby
each releases the other party (which term as used in this Article shall include
such party's employees, agents, partners, officers, shareholders and directors)
from all liability, whether for negligence or otherwise, in connection with loss
covered by any insurance policies which the releasor carries with respect to the
demised premises, or any interest or property therein or thereon (whether or not
such insurance is required to be carried under this lease), but only to the
extent that such loss is collectible under such insurance policies. Such release
is also conditioned upon the inclusion in the applicable policy or policies of a
provision whereby any such release shall not adversely affect said policies, or
prejudice any right of the releasor to recover thereunder. Each party agrees
that its insurance policies aforesaid will include such a provision so long as
the same shall be obtainable without extra cost, or if extra cost shall be
charged therefor, so long as the other party shall be willing to pay such extra
cost. If extra cost shall be chargeable therefor, the holder of the policy shall
advise the other party of the amount of the extra cost, and the other party at
its election may pay the same, but shall not be obligated to do so.

      Additionally, Tenant hereby covenants and agrees forever to indemnify and
hold Landlord harmless from and against any and all claims, actions, judgments,
damages, liabilities, losses or expenses, including attorneys' fees, in
connection with damage to property or injury or death to persons, or any other
matters, arising from or out of the use, alteration or occupation of the demised
premises except on account of Landlord's negligence. In case Landlord shall be
made a party to any litigation commenced against Tenant or others, then Tenant
shall protect and hold Landlord forever harmless and shall pay all costs and
expenses, including attorneys' fees, incurred or paid by Landlord in connection
with such litigation. In furtherance of Tenant's obligations under this Article
and this lease (but not in limitation thereof) Tenant covenants and agrees, at
its sole cost and expense, to carry and maintain in force from and after the
date of this lease and throughout the term hereof (i) workmen's compensation and
other required statutory forms of insurance, in statutory limits, and (ii)
comprehensive general public liability insurance, which shall be written on an
occurrence basis, naming Tenant as the insured and naming Landlord and its agent
and, if requested by Landlord, the lessor under any ground or underlying lease
or others having an interest in the land and/or the Building of which the
demised premises form a part, as additional insureds, in limits of not less than
$3,000,000.00 for bodily and personal injury or death to any one person and not
less than $3,000,000.00 for bodily and personal injury or death in any one
occurrence, and for property damage of not less than $3,000,000.00 per
occurrence, including water damage and

                                     - 12 -

sprinkler leakage legal liability, protecting the aforementioned parties from
all such claims for bodily or personal injury or death or property damage
occurring in or about the demised premises and its appurtenances. All insurance
required to be maintained by Tenant shall be carried with a company or companies
acceptable to Landlord licensed to do business in the State of New York, shall
be written for terms of not less than one year, and Tenant shall furnish
Landlord (and any other parties required to be designated as additional insureds
under any such policies) with certificates evidencing the maintenance of such
insurance and the payment of the premiums therefor, and with renewals thereof
and evidence of the payment of the premiums therefor at least thirty (30) days
prior to the expiration of any such policy or policies. Such policy or policies
shall also provide that it or they shall not be cancelled or materially altered
without giving Landlord at least twenty (20) days' prior written notice thereof,
sent to Landlord by registered mail at Landlord's address to which notices are
required to be sent to Landlord hereunder. Upon Tenant's default in obtaining or
delivering any such policy or policies or failure to pay the premiums therefor,
Landlord (in addition to and not in limitation of its other rights, remedies and
privileges by reason thereof) may (but shall not be obligated to) secure or pay
the premium for any such policy or policies and charge Tenant as additional rent
therefor an amount equal to 110% of Landlord's costs therefor.

      49. Landlord's Liability. Notwithstanding anything herein or any rule of
law or statute to the contrary, it is expressly understood and agreed that to
the extent that Landlord shall at any time have any liability under, pursuant to
or in connection with this lease, neither Tenant nor any officer, director,
partner, associate, employee, agent, guest, licensee or invitee of Tenant (or
any other party claiming through or on behalf of Tenant) shall seek to enforce
any personal or money judgment against Landlord, but shall only pursue any such
rights or remedies against Landlord's interest in the Building. In addition to
and not in limitation of the foregoing provision of this Article it is agreed
that, in no event and under no circumstances, shall Landlord or any partner,
officer, employee, agent or principal (disclosed or undisclosed) of Landlord
have any personal liability or monetary or other obligation of any kind under or
pursuant to this lease. Any attempt by Tenant or any officer, director, partner
of Tenant (or any other party claiming through or on behalf of Tenant) to seek
to enforce any such personal liability or monetary or other obligation shall, in
addition to and not in limitation of Landlord's other rights, powers, privileges
and remedies under the terms and provisions of this lease or otherwise afforded
by law in respect thereof, immediately vest Landlord with the unconditional
right and option to cancel this lease on five (5) days' notice to Tenant.

      50. Additional Re Article "7". Anything contained in Article "7" hereof to
the contrary notwithstanding, Tenant covenants and agrees that, except as herein
otherwise set forth, this lease shall not terminate upon the termination of any
ground lease or underlying lease or mortgage at any time affecting the real
property of which the demised premises forms a part or any such lease. If for
any reason or cause whatsoever any such ground or underlying lease is terminated
by summary dispossess proceedings or otherwise or if such ground or underlying
lease is terminated through foreclosure proceedings brought by the holder of any
mortgage to which such ground or underlying lease is subject and/or subordinate
or otherwise, or if Landlord's fee title is foreclosed upon by the holder of any
mortgage thereon, all without Tenant having been made a party in any such
dispossess and/or foreclosure proceeding, Tenant shall attorn to the lessor
under such ground or underlying lease or the purchaser in any such foreclosure
proceeding, as the case may be, and this lease shall not be affected in any way
whatsoever (except as herein otherwise expressly provided) by any such
proceeding or

                                     - 13 -

termination, and this lease shall continue in full force and effect in
accordance with its terms; but if Tenant shall be named in any such dispossess
and/or foreclosure proceeding, this lease and Tenant's estate shall be
terminated thereby.

      If such ground or underlying lease shall terminate or any such mortgage be
foreclosed, and Tenant shall attorn to the lessor under such ground or
underlying lease or the purchaser in any such foreclosure proceeding, such
lessor or purchaser shall not be required to accept attornment by Tenant unless
such attornment shall be pursuant to a written agreement required by such lessor
or purchaser which, among other things, shall contain provisions to the effect
that in no event shall such lessor or purchaser, as landlord, (a) be obligated
to repair, replace or restore the Building or the demised premises in the event
of damage or destruction, beyond such repair, replacement or restoration as can
be reasonably accomplished from the net proceeds of insurance actually received
by or made available to such landlord, (b) be responsible for any previous act
or omission of the landlord or the tenant under such ground or underlying lease
or for the return of any security deposit unless actually received by such
landlord, (c) be subject to any liability or offset accruing to Tenant against
Landlord, (d) be bound by any previous modification or extension of this lease
unless previously consented to, or (e) be bound by any previous prepayment of
more than one month's rent or other charge.

      51. Additional Re Article "22". Article "22" hereof is hereby amended to
add the following:

      "If the demised premises are not surrendered and vacated as and at the
time required by this lease (time being of the essence), Tenant shall be liable
to Landlord for (a) all losses and damages which Landlord may incur or sustain
by reason thereof, including, without limitation, attorneys' fees, and Tenant
shall indemnify Landlord against all claims made by any succeeding tenants
against Landlord or otherwise arising out of or resulting from the failure of
Tenant timely to surrender and vacate the demised premises in accordance with
the provisions of this lease, and (b) per diem use and occupancy in respect of
the demised premises equal to two (2) times the Base Rent and additional rent
payable hereunder for the last year of the term of this lease (which amount
Landlord and Tenant presently agree is the minimum to which Landlord would be
entitled and is presently contemplated by them as being fair and reasonable
under such circumstances and not a penalty). In no event shall any provision
hereof be construed as permitting Tenant to hold over in possession of the
demised premises after expiration or termination of the term hereof, and no
acceptance by Landlord of payments from Tenant after the expiration or
termination of the term hereof shall be deemed to be other than on account of
the amount to be paid by Tenant in accordance with the provisions of this
Article. The provisions of this Article shall survive the expiration or
termination of the term of this lease."

      52. Late Charge. If, during the term of this lease, Tenant shall fail to
pay the Base Rent or additional rent or any other charge at any time due or
payable hereunder within ten (10) days after same is due and payable, Tenant
agrees to pay to Landlord, as and for a late charge by reason thereof, without
further notice or demand by Landlord, a sum equal to $.10 for every dollar
thereof, which sum shall be considered as additional rent. Nothing contained in
this Article is intended to grant Tenant any extension of time in respect of the
due dates for any payments under this lease, nor shall same be construed to be a
limitation of or a substitution for any other rights, remedies and privileges of
Landlord under this lease or otherwise.

      53. Fees and Expenses. Whenever any default, request, action or inaction
by Tenant causes Landlord to engage an

                                     - 14 -

attorney and/or incur any other costs or expenses, Tenant agrees that it shall
pay and/or reimburse Landlord for such costs or expenses within ten (10) days
after being billed therefor as additional rent.

      54. Arbitration. In such cases where this lease expressly provides for the
settlement of a dispute or question by arbitration, and only in such cases, the
same shall be settled by arbitration in the Borough of Manhattan, City and State
of New York, in accordance with the rules then obtaining of the American
Arbitration Association, governing commercial arbitration. In the event that the
American Arbitration Association shall not be then in existence, the party
desiring arbitration shall appoint a disinterested person as arbitrator on its
behalf and give notice thereof to the other party who shall, within fifteen (15)
days thereafter, appoint a second disinterested person as arbitrator on its
behalf and give written notice thereof to the first party. The arbitrators thus
appointed shall appoint a third disinterested person, who shall be an attorney
at law admitted to practice in the State of New York actively engaged in the
practice of his or her profession for not less than ten (10) years. If the
arbitrators thus appointed shall fail to appoint such third disinterested
person, then either party may, by application to the presiding Justice,
Appellate Division of the Supreme Court of the State of New York for the First
Judicial Department seek to appoint such third disinterested person. Upon such
appointment, such person shall be the third arbitrator as if appointed by the
original two arbitrators. The decision of the majority of the arbitrators shall
be conclusive and binding on all parties and judgment upon the award may be
entered in any court having jurisdiction. If a party who shall have the right
pursuant to the foregoing to appoint an arbitrator fails or neglects to do so,
then and in such event the other party shall select the arbitrator not so
selected by the first party, and upon such selection, such arbitrator shall be
deemed to have been selected by the first party. The expenses of arbitration
shall be shared equally by Landlord and Tenant, unless this lease expressly
provides otherwise, but each party shall pay and be separately responsible for
its own counsel and witness fees, unless this lease expressly provides
otherwise. Landlord and Tenant agree to sign all documents and to do all other
things necessary to submit any such matter to arbitration and further agree to,
and hereby do, waive any and all rights they or either of them may at any time
have to revoke their agreement hereunder to submit to arbitration and to abide
by the decision rendered thereunder and agree that a judgment or order may be
entered in any court of competent jurisdiction based on an arbitration award
(including the granting of injunctive relief).

      The arbitrators shall have the right to retain and consult experts and
competent authorities skilled in the matters under arbitration, but any such
consultation shall be made in the presence of both parties, with full right on
their part to cross-examine such experts and authorities. The arbitrators shall
render their decision and award not later than sixty (60) days after the
appointment of the third arbitrator. Their decision and award shall be in
writing and counterpart copies thereof shall be delivered to each of the
parties. In rendering their decision and award, the arbitrators shall have no
power to modify or in any manner alter or reform any of the provisions of this
lease, and the jurisdiction of the arbitrators is limited accordingly.

      55. Default Under Other Lease(s). A default by Tenant under this lease
shall be considered a default under any other lease Tenant may at any time have
in respect of other space in the Building or other space owned or controlled by
Landlord or any of Landlord's principals. Similarly, a default by Tenant under
any such other lease shall be considered a default under this lease.

                                     - 15 -

      56. Additional Re Article "9". Supplementing the provisions of Article "9"
hereof, Landlord shall not be obligated to commence any repairs or restorations
to the demised premises as required thereunder unless and until Landlord has
received the proceeds of all fire insurance policies affecting the building of
which the demised premises forms a part.

      57. Diagram. Tenant acknowledges that it has been informed by Landlord
that any diagram attached to this lease is solely for the purpose of identifying
the premises demised hereunder and Landlord has made no representation and is
unwilling to make any representation and nothing in this lease shall be deemed
or construed to be a representation or covenant as to the dimensions of and/or
the square foot area contained in the demised premises.

      58. No Attornment. All checks tendered to Landlord as and for the rent
and/or additional rent required hereunder shall be deemed payments for the
account of the Tenant. Acceptance by the Landlord of rent and/or additional rent
from anyone other than the Tenant shall not be deemed to operate as an
attornment to the Landlord by the payor of such rent and/or additional rent or
as a consent by the Landlord to an assignment of this lease or subletting by the
Tenant of the demised premises to such payor, or as a modification of any of the
provisions of this lease.

      59. Liens. Tenant shall not create or suffer to be created or to remain,
and shall (within ten (10) days of the filing or imposition thereof) remove or
discharge, by bonding or payment, any lien, encumbrance or charge upon the
demised premises or the real property of which the same forms a part caused by
or in any manner related to any act or alleged act of commission or omission on
the part of Tenant, or any of its agents or contractors. Further, should any
such lien be bonded and should Landlord or its agents be thereafter named as a
party to any action or proceeding in respect of such bond or claim, Tenant
agrees to indemnify and save harmless Landlord and its agents in respect thereof
and to pay all costs and expenses (including legal fees) of Landlord related
thereto. Tenant agrees to surrender the demised premises free and clear of all
liens, charges or encumbrances thereon of every nature and description, and free
and clear of all violations thereon placed by any governmental or
quasi-governmental body resulting from any act of omission or commission on the
part of Tenant or any of its agents or contractors, or otherwise related to
Tenant's use or occupancy of the demised premises. Nothing in this lease
contained shall be construed as constituting the consent or request of Landlord
to any contractor, laborer or materialman for the performance of any labor or
services or the furnishing of any materials for the improvement or repair of the
demised premises.

      60. Notice of Damage. Tenant shall give prompt notice to Landlord of any
fire, accident, loss or damage or dangerous or defective condition materially
affecting the demised premises or any part thereof or the fixtures or other
property of Landlord therein of which Tenant has any knowledge. Such notice
shall not, however, be deemed or construed to impose upon Landlord any
obligation to perform any work to be performed by Tenant under this lease or not
otherwise hereunder undertaken to be performed by Landlord.

      61. Building Renovation. Tenant understands and acknowledges that Landlord
may alter, restore and/or renovate the entrance lobby and/or other portions of
the Building (including, without limitation, the relocation of the entrance to
the Building) and that such alterations, restoration and/or renovation or other
work in the Building may result in certain inconveniences or disturbances to
Tenant and other occupants of the Building; such renovations, however, shall not
result in preventing Tenant's reasonable access to the demised premises.

                                     - 16 -

Tenant agrees that the performance of any such work shall not constitute or be
deemed to be a constructive eviction or be grounds for a termination of this
lease or the terms hereof, nor shall the same in any way affect the obligations
of Tenant under this lease, including, without limitation, the obligation to pay
the rents herein reserved or give Tenant the right to claim damages or any
matter or thing from Landlord or Landlord's agent(s) or contractor(s).

      62. Conditional Limitation. In the event Tenant shall make default in the
payment of the rent reserved herein, or any item of additional rent herein
mentioned, or any part of either, or in making any other payment herein required
for a total of two (2) months, whether or not consecutive, in any twelve (12)
month period, and Landlord shall have served upon Tenant petitions and notices
of petition to dispossess Tenant by summary proceedings in each such instance,
then, notwithstanding that such default may have been cured prior to the entry
of a judgment against Tenant, any further default in the payment of any money
due Landlord hereunder shall be deemed to be deliberate and Landlord may serve a
written three (3) days' notice of cancellation of this lease upon Tenant, and
upon the expiration of said three (3) days, this lease and the term thereunder
shall end and expire as fully and completely as if the expiration of such three
(3) day period were the day herein definitely fixed for the end and expiration
of this lease and the term thereof, and Tenant shall then quit and surrender the
demised premises to Landlord, but Tenant shall remain liable as elsewhere
provided in this lease.

      63. Subsidiaries and Affiliates. So long as Tenant is not in default in
any of the terms, covenants, or conditions of this lease, Tenant may, without
the prior written consent of Landlord, permit all or any portion of the demised
premises to be used by an entity which is a subsidiary or affiliate of Tenant.
The terms "subsidiary" and "affiliate", as used herein, shall include any entity
(i) which holds a majority of the shares of stock of all classes of Tenant; or
(ii) a majority of the shares of stock of all classes of which (if the
subsidiary or affiliate is a corporation), or a majority of the interest in the
entity and control thereof (if the subsidiary or affiliate is not a
corporation), shall be held by Tenant; or (iii) a majority of the shares of
stock of all classes of which (if the subsidiary or affiliate is a corporation),
or a majority of the interest in the entity and control thereof (if the
subsidiary or affiliate is not a corporation), shall be held by the same person,
corporation or entity which holds all of the shares of stock of all classes of
Tenant. If, for any reason whatsoever, such ownership is reduced to less than a
majority of the interest, such reduction shall constitute a prohibited
assignment of this lease or a sublease of all or a portion of the demised
premises, as the case may be, and Tenant shall cause such subsidiary or
affiliate to vacate that portion of the demised premises which it occupies
simultaneously with the occurrence of such reduction. The failure of the
subsidiary or affiliate to vacate that portion of the demised premises which it
occupies shall constitute a substantial default under the terms of this lease
and Landlord shall have all the rights and remedies set forth herein in the
event of a default by Tenant.

      64. Modifications Requested by Mortgagee. If any prospective mortgagee of
the Building, the land thereunder or any leasehold interest in either requires,
as a condition precedent to issuing its loan, the modification of this lease in
such manner as does not materially lessen Tenant's rights or increase its
obligations hereunder, Tenant shall not withhold or delay its consent to such
modification and shall execute and deliver such confirming documents therefor as
such mortgagee requires.

      65. Basement Space. If any basement or sub-basement space is included in
the premises demised hereunder, Tenant agrees

                                     - 17 -

that, notwithstanding anything to the contrary contained in this lease, such
basement or sub-basement space (i) shall not be used for any purpose other than
storage and (ii) shall not be sublet or used by anyone other than Tenant without
the prior written consent of Landlord, which consent Landlord shall have the
right to withhold for any reason whatsoever.

      66. Building Directory. At the written request of Tenant, Landlord shall
list on the building's directory the name of Tenant, any trade name under which
Tenant has the right to operate, any other entity permitted to occupy any
portion of the demised premises under the terms of this lease, and the officers
and employees of each of the foregoing entities, provided the number of names so
listed does not exceed Tenant's Percentage of the capacity of such directory. If
requested by Tenant, Landlord may (but shall not be required to) list the name
of Tenant's subsidiaries and affiliates; however, the listing of any name other
than that of Tenant shall neither grant such party or entity any right or
interest in this lease or in the demised premises nor constitute Landlord's
consent to any assignment or sublease to, or occupancy of the demised premises
by, such party or entity. Except for the name of Tenant, any such listing may be
terminated by Landlord, at any time, without notice.

      67. Miscellaneous.

      (A) If at the commencement of, or at any time or times during the term of
this lease, the rents reserved in this lease shall not be fully collectible by
reason of any Federal, State, County, City or other governmental law,
proclamation, order or regulation, or direction of a public officer or body
pursuant to law, Tenant shall enter into such agreements and take such other
steps as Landlord may request and as may be legally permissible to permit
Landlord to collect the maximum rents which may from time to time during the
continuance of such legal rent restriction be legally permissible (but not in
excess of the amounts reserved therefor under this lease). Upon termination of
such legal rent restriction prior to the expiration of the term of this lease,
(a) the rents shall become and thereafter be payable thereunder in accordance
with the amounts reserved in this lease for the periods following such
termination and (b) Tenant shall pay to Landlord, if legally permissible, an
amount equal to (i) the rents which would have been paid pursuant to this lease
but for such legal rent restriction less (ii) the rents paid by Tenant to
Landlord during the period or periods such legal rent restriction was in effect.

      (B) If at any time Tenant is other than a single, partnership, firm,
corporation, individual or other entity, the act of, or notice, demand, request
or other communication from or to, or any payment or refund from or to, or
signature of, any of the individuals, partnerships, firms, corporations or other
entities then constituting Tenant with respect to Tenant's estate or interest in
the demised premises or this lease shall bind all of them as if all of them so
had acted, or so had given or received such notice, demand, request or other
communication, or so had given or received such payment or refund, or had so
signed, and they shall be jointly and severally liable for the performance of
Tenant's obligations hereunder.

      (C) If any provision of this lease shall be held invalid or unenforceable,
such invalidity or unenforceability shall affect only such provision and shall
not in any manner affect or render invalid or unenforceable any other provision
of this lease, and this lease shall be enforced as if any such invalid or
unenforceable provision were not contained herein.

      (D) Landlord and Tenant hereby agree that this lease shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York without giving reference

                                     - 18 -

to principles of conflict of laws. The state courts of the State of New York
shall have jurisdiction to hear and determine any dispute between Landlord and
Tenant pertaining directly or indirectly to this lease or any matter arising
therefrom, and Tenant hereby expressly consents and submits in advance to such
jurisdiction in any action or proceeding commenced in such courts by either
party hereto.

      (E) It is expressly noted, acknowledged and confirmed by Tenant that a
breach, default or failure to observe, perform or otherwise comply with any
material obligations, covenants, conditions, rules and regulations in this lease
on Tenant's part to be observed, performed or complied with shall be and be
deemed to be a violation by Tenant of a substantial obligation of the tenancy
created by this lease entitling Landlord to pursue any and all rights, remedies
and privileges provided under this lease or at law or in equity, including,
without limitation, the right to terminate said tenancy and recover possession
of the demised premises.

      (F) Supplementing Article 3, Landlord's consent shall not be required for
minor changes to the demised premises such as the installation of furniture,
furnishings, cabinets and shelves which are not affixed to the realty. All other
renovations, decorations, additions, installations, improvements and alterations
of any kind or nature in or to the demised premises whether performed by Tenant
or by Landlord ("Tenant Changes") shall require the prior written consent of
Landlord which, in the case of non-structural interior Tenant Changes, Landlord
agrees not to unreasonably withhold, provided Tenant first complies with all
applicable requirements of this lease including any Workletter attached to this
lease and the building Rules and Regulations Governing Tenant Alterations
("Alterations Rules") In granting its consent to any Tenant Changes, Landlord
may impose such conditions (as to guarantee of completion including, without
limitation, requiring Tenant to post a bond to insure the completion of Tenant
Changes, payment for Tenant Changes and other charges payable under this
Article, restoration or otherwise), as Landlord may reasonably require. In no
event shall Landlord be required to consent to any Tenant Changes which would
affect the structure of the building, the exterior thereof, any part of the
building outside of the demised premises or the mechanical, electrical, heating,
ventilation, air conditioning, sanitary, plumbing or other service systems and
facilities (including elevators) of the building, and such Tenant Changes shall
be performed only by contractors designated or approved by Landlord. Tenant
shall, promptly upon demand, reimburse Landlord's agent for any reasonable
out-of-pocket fees, expenses and other charges incurred by Landlord or its agent
in connection with the review, modification and/or approval of such plans and
specifications by Landlord's agent and other professional consultants of
Landlord and shall pay to Landlord's agent during the course of the work, as a
charge of Landlord's agent for the supervision and coordination by Landlord's
agent of any Tenant Changes for Landlord's benefit and without waiver of any of
the requirements of this lease, the Workletter, if any, or the Alterations
Rules, a fee of five (5%) percent of the cost of such Tenant Changes. Tenant
shall promptly provide such evidence as Landlord or Landlord's agent may request
to substantiate any such costs incurred by Tenant. Tenant shall, at its sole
cost and expense, in making any Tenant Changes, comply with all requirements of
the Alterations Rules.

      (G) Tenant agrees that in connection with any work which may be performed
by Tenant pursuant to this lease, such work shall not be performed in a manner
which would create any work stoppage, picketing, labor disruption or dispute or
violate union contracts affecting the land and/or the Building nor unreasonably
interfere with the business of Landlord or any tenant or occupant of the
Building.

                                     - 19 -

      (H) If there shall be any conflict between any provision contained in this
Rider and the printed provisions of this lease, the provisions of this Rider
shall prevail.

      68. Binding Clause. Neither the submission of this lease form to Tenant
nor the execution of this lease by Tenant shall constitute an offer by Landlord
to Tenant to lease the space herein described as the demised premises or
otherwise. This lease shall not be or become binding upon Landlord to any extent
or for any purpose unless and until it is executed by Landlord and a fully
executed copy thereof is delivered to Tenant or Tenant's counsel.

      69. Substitute Space. At any time and from time to time during the term of
this lease Landlord shall have the right to substitute for the demised premises
(for the purposes of this Article only, the demised premises are hereinafter
called the "Replaced Premises") other space in the Building (such other space
hereinafter called the "Substitute Premises") by written notice (the "Notice")
given to Tenant no later than sixty (60) days prior to the date set forth in
said notice as the effective date (the "Substitution Date") for such
substitution. Landlord's notice shall include a floor plan identifying the
Substitute Premises, which premises shall have a rentable area equal to or
greater than the Replaced Premises and shall be similar thereto in
configuration. Tenant shall vacate the Replaced Premises and surrender the same
to Landlord on or before the Substitution Date. Promptly after Tenant enters
into occupancy of the Substitute Premises and provided Tenant is not then in
default under any of the terms or conditions of this lease, Landlord shall
reimburse Tenant for any reasonable moving expenses, any other reasonable costs
and expenses incurred by Tenant in duplicating the Substitute Premises, the
alterations and additions previously made by Tenant in the Replaced Premises,
and other reasonable expenses incurred by Tenant as a result of the move. From
and after the Substitution Date, the term "demised premises" shall mean the
Substitute Premises for all purposes hereunder.

      70. Security Deposit. Article 34 hereof is hereby amended to add the
following:

      "Said security deposit shall be placed by Landlord in an interest bearing
federally insured account. Interest that may accrue thereon shall belong to
Tenant, except such portion thereof as shall be equal to one (1%) percent of
such interest per annum, which such percentage shall belong to and be the sole
property of Landlord and which Landlord may withdraw from time to time and
retain. Landlord shall, upon Tenant's request, advise Tenant of the name of the
bank where such deposit is held. Landlord shall give Tenant notice of any
transfer of such deposit to a different bank simultaneous with or promptly after
any such transfer. The obligation to pay any taxes, whether income or otherwise,
related to or affecting any interest earned on such security deposit (except as
to that portion thereof which belongs to Landlord) shall be the sole
responsibility of Tenant and Tenant hereby agrees to pay same and to forever
indemnify and save harmless Landlord in respect thereof. Tenant shall, within
fifteen (15) days after demand, furnish Landlord or its agent with a tax
identification number for use in respect of such cash deposit. If Landlord at
any time utilizes any portion of the cash security deposit in respect or by
reason of a default by Tenant, Tenant shall, within ten (10) days after demand,
restore and pay to Landlord the amount so utilized."

      71. Office Door Signage. Notwithstanding anything herein to the contrary,
Tenant shall not place any sign on the exterior door to the demised premises, it
being understood and agreed that Landlord, in an effort to provide uniform
signage in the Building, shall install any such sign with Building Standard

                                     - 20 -

lettering and Tenant shall, upon demand, pay Landlord's reasonable cost
therefor.

      72. Environmental Obligations. Tenant covenants and agrees that it shall
not permit any materials to be used on the demised premises in violation of any
applicable environmental law, and Tenant hereby indemnifies Landlord for any
loss incurred by Landlord as a result of the breach of the foregoing covenant
and agreement. Tenant hereby agrees promptly to notify Landlord in the event
that it becomes aware of any violation of any applicable environmental law
affecting the demised premises.

      73. Condition of Tenant. Tenant represents that (i) it is a corporation
duly formed and validly existing in good standing under the laws of the State of
Delaware, (ii) it is duly qualified as a foreign corporation authorized to
transact business existing in good standing under the laws of the State of New
York, and (iii) the party executing this lease on Tenant's behalf is authorized
to so execute this lease and bind Tenant.

      74. Rent Concession. So long as Tenant shall not then be in default of any
of the terms, covenants, conditions and agreements to be performed by Tenant
under this lease, Tenant shall be entitled to a rent credit in the amount of
$6,780.00 on the first (1st) day of the second (2nd) month of the term of this
lease.

                                     - 21 -

                               [GRAPHIC OMITTED]

      Exhibit A attached hereto and forming a part of lease dated as of the
29th day of May, 1997 between 509 Madison Avenue Associates, as Landlord, and
Discovery Laboratories, Inc., as Tenant, with respect to Suite 1406 at 509
Madison Avenue, New York, New York.

                                    GUARANTY

      FOR VALUE RECEIVED, and in consideration for, and as an inducement to
Owner making the within lease with Tenant, the undersigned guarantees to Owner,
Owner's successors and assigns, the full performance and observance of all the
covenants, conditions and agreements, therein provided to be performed and
observed by Tenant, including the "Rules and Regulations" as therein provided,
without requiring any notice of non-payment, non-performance, or non-observance,
or proof, or notice, or demand, whereby to charge the undersigned therefor, all
of which the undersigned hereby expressly waives and expressly agrees that the
validity of this agreement and the obligations of the guarantor hereunder shall
in no wise be terminated, affected or impaired by reason of the assertion by
Owner against Tenant of any of the rights or remedies reserved to Owner pursuant
to the provisions of the within letter. The undersigned further covenants and
agrees that this guaranty shall remain and continue in full force and effect as
to any renewal, modification or extension of this lease and during any period
when Tenant is occupying the premises as a "statutory tenant." As a further
inducement to Owner to make this lease and in consideration thereof. Owner and
the undersigned covenant and agree that in any action or proceeding brought by
either Owner or the undersigned against the other on any matters whatsoever
arising out of, under, or by virtue of the terms of this lease or of this
guaranty that Owner and the undersigned shall and do hereby waive trial by jury.

      Dated New York City __________________ 19__

WITNESS:

_________________________________________________

STATE OF NEW YORK, ) ss.:
   County of       )

On this ___ day of ________________, 19__, before me personally came ___________
_______________________________________________________________________________,
to me known and known to me to be the individual described in, and who executed
the foregoing Guaranty and acknowledged to me that he executed the same.

                                        ________________________________________
                                                          Notary

Residence ______________________________________________________________________

Business Address _______________________________________________________________

Firm Name ______________________________________________________________________

                            IMPORTANT - PLEASE READ

                     RULES AND REGULATIONS ATTACHED TO AND
                           MADE A PART OF THIS LEASE
                         IN ACCORDANCE WITH ARTICLE 33.

      1. The sidewalks, entrances, driveways, passages, courts, elevators,
vestibules, stairways, corridors or halls shall not be obstructed or encumbered
by any Tenant or used for any purpose other than for ingress or egress from the
demised premises and for delivery of merchandise and equipment in a prompt and
efficient manner using elevators and passageways designated for such delivery by
Owner. There shall not be used in any space, or in the public hall of the
building, either by any Tenant or by jobbers or others in the delivery or
receipt of merchandise, any hand trucks, except those equipped with rubber tires
and sideguards. If said premises are situated on the ground floor of the
building, Tenant thereof shall further, at Tenant's expense, keep the sidewalk
and curb in front of said premises clean and free from ice, snow, dirt and
rubbish.

      2. The water and wash closets and plumbing fixtures shall not be used
for any purposes other than those for which they were designed or constructed
and no sweepings, rubbish, rags, acids or other substances shall be deposited
therein, and the expense of any breakage, stoppage, or drainage resulting from
the violation of this rule shall be borne by the Tenant who, or whose clerks,
agents, employees or visitors, shall have caused it.

      3. No carpet, rug or other article shall be hung or shaken out of any
window of the building; and no Tenant shall sweep or throw or permit to be swept
or thrown from the demised premises any dirt or other substances into any
of the corridors or halls, elevators, or out of the doors or windows or
stairways of the building and Tenant shall not use, keep or permit it to be used
or kept any foul or noxious gas or substance in the demised premises, or permit
or suffer the demised premises to be occupied or used in a manner offensive or
objectionable to Owner or other occupants of the buildings by reason of
noise, odors, and/or vibrations, or interfere in any way with other
Tenants or those having business therein, nor shall any animals or birds be kept
in or about the building. Smoking or carrying lighted cigars or cigarettes in
the elevators of the building is prohibited.

      4. No awnings or other projections shall be attached to the outside walls
of the building without the prior written consent of Owner.

      5. No sign, advertisement, notice or other lettering shall be exhibited,
inscribed, painted or affixed by any Tenant on any part of the outside of the
demised premises or the building or on the inside of the demised premises if the
same is visible from the outside of the premises without the prior written
consent of Owner, except that the name of Tenant may appear on the entrance door
of the premises. In the event of the violation of the foregoing by any Tenant,
Owner may remove same without any liability, and may charge the expense incurred
by such removal to Tenant or Tenants violating this rule. Interior signs on
doors and directory tablet shall be inscribed, painted or affixed for each
Tenant by Owner at the expense of such Tenant, and shall be of a size, color and
style acceptable to Owner.

      6. No Tenant shall mark, paint, drill into, or in any way deface any part
of the demised premises or the building of which they form a part. No boring,
cutting or stringing of wires shall be permitted, except with the prior written
consent of Owner, and as Owner may direct. No Tenant shall lay linoleum, or
other similar floor covering, so that the same shall come in direct contact with
the floor of the demised premises, and, if linoleum or other similar floor
covering is desired to be used an interlining of builder's deadening felt shall
be first affixed to the floor, by a paste or other material, soluble in water,
the use of cement or other similar adhesive material being expressly prohibited.

      7. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by any Tenant, nor shall any changes be made in existing
locks or mechanism thereof. Each Tenant must, upon the termination of his
Tenancy, restore to Owner all keys of stores, offices and toilet rooms, either
furnished to, or otherwise procured by, such Tenant, and in the event of the
loss of any keys, so furnished, such Tenant shall pay to Owner the cost thereof.

      8. Freight, furniture, business equipment, merchandise and bulky matter of
any description shall be delivered to and removed from the premises only on the
freight elevators and through the service entrances and corridors, and only
during hours and in a manner approved by Owner. Owner reserves the right to
inspect all freight to be brought into the building and to exclude from the
building all freight which violates any of these Rules and Regulations of the
lease or which these Rules and Regulations are a part.

      9. Canvassing, soliciting and peddling in the building is prohibited and
each Tenant shall cooperate to prevent the same.

      10. Owner reserves the right to exclude from the building, between the
hours of 6 P.M. and 8 A.M. and at all hours on Sundays, and legal holidays all
persons who do not present a pass to the building signed by Owner. Owner will
furnish passes to persons for whom any Tenant requests same in writing. Each
Tenant shall be responsible for all persons for whom he requests such pass and
shall be liable to Owner for all acts of such persons.

      11. Owner shall have the right to prohibit any advertising by an Tenant
which in Owner's opinion, tends to impair the reputation of the building or its
desirability as a building for offices, and upon written notice from Owner,
Tenant shall refrain from or discontinue such advertising.

      12. Tenant shall not bring or permit to be brought or kept in or on the
demised premises, any inflammable, combustible or explosive fluid, material,
chemical or substance, or cause or permit any odors of cooking or other
processes, or any unusual or other objectionable odors to permeate in or emanate
from the demised premises.

      13. If the building contains central air conditioning and ventilation,
Tenant agrees to keep all windows closed at all times and to abide by all rules
and regulations issued by the Owner with respect to such services. If Tenant
requires air conditioning or ventilation after the usual hours, Tenant shall
give notice in writing to the building superintendent prior to 3:00 P.M. in the
case of services required on week days, and prior to 3:00 P.M. on the day prior
in the case of after hours service required on weekends or on holidays.

      14. Tenant shall not move any safe, heavy machinery, heavy equipment,
bulky matter, or fixtures into or out of the building without Landlord's prior
written consent. If such safe, machinery, equipment, bulky matter or fixtures
requires special handling, all work in connection therewith shall comply with
the Administrative Code of the City of New York and all other laws and
regulations applicable thereto and shall be done during such hours as Owner may
designate.

Address

Premises
================================================================================

                                       TO

================================================================================

                                STANDARD FORM OF
[LOGO]                               OFFICE                               [LOGO]
                                     LEASE

                     The Real Estate Board of New York, Inc.
                    (c) Copyright 1983. All rights Reserved.
                  Reproduction in whole or in part prohibited.

================================================================================

Dated _______________________________ 19__.

Rent per Year __________________________________________________________________

Rent per Month _________________________________________________________________

Term ___________________________________________________________________________

From ___________________________________________________________________________

To _____________________________________________________________________________

Drawn by ________________________________ Checked by ___________________________

Entered by ______________________________ Approved by __________________________

================================================================================

                     [LETTERHEAD OF MAIN STREET GROUP, INC.]

                                   MEMORANDUM

DATE:       November 11, 1996

TO:         Acute Therapeutics, Inc.

FROM:       Walter S. Smerconish

RE:         3359 Durham Road, Buckingham Township

- --------------------------------------------------------------------------------

This letter will confirm that I have received a copy of a lease agreement
(attached hereto), that establishes a leasehold interest for your firm at the
subject property.

In the event that I am the successful purchaser of said property, then I agree
to abide by the provisions of said lease agreement as Lessor.

                                          /s/ Walter S. Smerconish
                                          --------------------------------------
                                          Walter S. Smerconish
                                          Owner in Equity: 3359 Durham Road,
                                                Buckingham, PA

                                                      11/11/96
                                          --------------------------------------
                                          Date

WSS/lc

                                   MEMORANDUM

DATE:       November 8, 1996

TO:         Acute Therapeutics, Inc.

FROM:       Kevin and Marilyn MacDonald

RE:         Lessee's Right to Early Termination of Lease Agreement
            Dated November 8, 1996

- --------------------------------------------------------------------------------

This letter will confirm that Acute Therapeutics, Inc. (hereinafter "Lessee")
shall have the right to terminate the above referenced lease agreement for 5,400
square feet, located at 3359 Durham Road, Buckingham, Pennsylvania, at the end
of the twenty-fourth (24th) month of said agreement. Early termination may
therefore occur on November 10, 1998, provided however, that written notice of
Lessee's intent to exercise Lessee's option for early termination is delivered
by Lessee, to Lessor, in writing at least one hundred twenty (120) days prior to
November 10, 1998. Notice is therefore required, in writing, from Lessee to
Lessor, by July 10, 1998. If notice of intent to terminate is not delivered from
Lessee to Lessor in accordance with the foregoing, then the lease agreement will
continue in full force and effect.

/s/ Kevin MacDonald                             /s/ Marilyn MacDonald
- --------------------------------                --------------------------------

                                                /s/ Robert J. Capetola         
- --------------------------------                --------------------------------
Lessor                                          Lessee         
                                                                                
Nov. 9, 1996                                    Nov. 11, 1997                   
- --------------------------------                --------------------------------
Date                                            Date                           

                                Lease Agreement

1. Parties

This Agreement, MADE THE 8th day of November one thousand nine hundred and
Ninety Six (1996), by and between Kevin MacDonald and Marilyn MacDonald
(hereinafter called Lessor), of the one part, and Acute Therapeutics, Inc.
(hereinafter called Lessee), of the other part.

2. Premises; 3. Term; 4. Minimum Rent

      WITNESSETH THAT: Lessor does hereby demise and let unto Lessee all that
certain 3359 Durham Road, in the Buckingham Twp., PA, being the converted stone
barn, in its entirety, comprising approximately 5,400 square feet. Tax map
parcel 6-7-8. The stone farmhouse and free-standing storage shed are
specifically excluded, in the township of Buckingham, State of Pennsylvania, to
be used and occupied as professional offices and for no other purpose, for the
term of five (5) years beginning the 11th day of November, one thousand nine
hundred and ninety six (1996), and ending the 10th day of November, two thousand
and one (2001), for the minimum annual rental of sixty-three thousand six
hundred (base years) Dollars ($63,600.00) lawful money of the United States of
America, payable in monthly installments in advance during the said term of this
lease, or any renewal hereof, in sums of five thousand three hundred (base
years) Dollars ($5,300.00) on the first day of each month, rent to begin from
the eleventh day of November, 1996, the first installment to be paid at the time
of signing this lease. The first rental payment to be made during the occupancy
of the premises shall be adjusted to pro-rate a partial month of occupancy, if
any, at the inception of this lease.

      Rental payments shall be fixed for the first two years of the lease term
      ("Base Years"). Annual rental shall increase to sixty-six thousand seven
      hundred eighty dollars for lease years three through five, and shall be
      payable in monthly installments, in advance in sums of five thousand five
      hundred sixty-five dollars ($5,565.00).

5. Inability to give Possession

      If Lessor is unable to give Lessee possession of the demised premises, as
herein provided, by reason of the holding over of a previous occupant, or by
reason of any cause beyond the control of the Lessor, the Lessor shall not be
liable in damages to the Lessee therefor, and during the period that the Lessor
is unable to give possession, all rights and remedies of both parties hereunder
shall be suspended, and if Lessor is unable for any reason to give possession of
the demised premises with 5 days of Lessee's demand therefor following
commencement of the term hereof Lessee shall have the option, by notice to
Lessor, to cancel this lease agreement and receive return of any prepaid rents
and security deposit in full and final settlement of any and all claims against
Lessor.

6. Additional Rent 

(a) Damages for Default

      (a) Lessee agrees to pay as rent in addition to the minimum rental herein
reserved any and all sums which may become due by reason of the failure of
Lessee to comply with all of the covenants of this lease and any and all
damages, costs and expenses which the Lessor may suffer or incur by reason of
any default of the Lessee or failure on his part to comply with the covenants of
this lease, and each of them, and also any and all damages to the demised
premises caused by an act or neglect of the Lessee.

(b) Taxes

      (b) Lessee further agrees to pay as rent in addition to the minimum rental
herein reserved all taxes assessed or imposed upon the demised premises and/or
the building of which the demised premises is a part during the term of this
lease, in excess of and over and above those assessed or imposed at the time of
making this lease. The amount due hereunder on account of such taxes shall be
apportioned for that part of the first and last calendar years covered by the
term hereof. The same shall be paid by Lessee to Lessor on or before the first
day of July of each and every year.

(c) Fire Insurance Premiums

      (c) Lessee further agrees to pay to Lessor as additional rent all increase
or increases in fire insurance premiums upon the demised premises and/or the
building of which the demised premises is a part, due to an increase in the rate
of fire insurance in excess of the rate on the demised premises at the time of
making this lease, if said increase is caused by any act or neglect of the
Lessee or the nature of the Lessee's business.

(d) Water Rent

      (d) Lessee further agrees to pay as additional rent, if there is a metered
water connection to said premises, all charges for water consumed upon the
demised premises in excess of the yearly minimum meter charge and all charges
for repairs to the said meter or meters on the premises, whether such repairs
are made necessary by ordinary wear and tear, freezing, hot water, accident or
other causes, immediately when the same become due.

      (e) Lessee further agrees to pay as additional rent, if there is a metered
water connection to said, premises, all sewer rental or charges for use of
sewers, sewage system, and sewage treatment works servicing the demised premises
in excess of the yearly minimum of such sewer charges, immediately when the same
become due.

7. Place of Payment

      All rent shall be payable without prior notice or demand at the office of
Lessor, _______________________________ or at such other place as Lessor may
from time to time designate by notice in writing.

8. Affirmative Covenants of Lessee 

      Lessee covenants and agrees that he will without demand

(a) Payment of Rent

      (a) Pay the rent and all other charges herein reserved as rent at the
times and at the place that the same are payable, without fail; and if Lessor
shall at any time or times accept said rent or rent charges after the same shall
have become delinquent, such acceptance shall not excuse delay upon subsequent
occasions, or constitute or be construed as a waiver of any of Lessor's rights.
Lessee agrees that any charge or payment herein reserved, included, or agreed to
be treated or collected as rent and/or any other charges, expenses, or costs
herein agreed to be paid by Lessee may be proceeded for and recovered by Lessor
by legal process in the same manner as rent due and in arrears.

(b) Cleaning, Repairing, etc.

      (b) Keep the demised premises clean and free from all ashes, dirt and
other refuse matter; replace all glass windows, doors, etc., broken; keep all
waste and drain pipes open; repair all damage to plumbing and to the premises in
general; keep the same in good order and repair as they are now, reasonable wear
and tear and damage by accidental fire or other casualty not occurring through
the negligence of Lessee or those employed by or acting for Lessee alone
excepted. The Lessee agrees to surrender the demised premises in the same
condition in which Lessee has herein agreed to keep the same during the
continuance of this lease.

(c) Requirements of Public Authorities

      (c) Comply with any requirements of any of the constituted public
authorities, and work with the terms of any State or Federal statute or local
ordinance or regulation applicable to Lessee or his use of the demised premises,
and save Lessor harmless from penalties, fines, costs or damages resulting from
failure so to do.

(d) Fire

      (d) Use every reasonable precaution against fire.

(e) Rules and Regulations

      (e) Comply with rules and regulations of Lessor promulgated as hereinafter
provided.

(f) Surrender of Possession

      (f) Peaceably deliver up and surrender possession of the demised premises
to the Lessor at the expiration or sooner termination of this lease, promptly
delivering to Lessor at his office all keys for the demised premises.

(g) Notice of Fire, etc.

      (g) Give to Lessor prompt written notice of any accident, fire, or damage
occurring on or to the demised premises.

(h) Condition of Pavement

      (h) Lessee shall be responsible for the condition of the pavement, curb,
cellar doors, awnings and other erections in the pavement during the term of
this lease; shall keep the pavement free from snow and ice; and shall be and
hereby agrees that Lessee is solely liable for any accidents, due or alleged to
be due to their defective condition, or to any accumulations of snow and ice.

(i) Agency on Removal

      (i) The Lessee agrees that if, with the permission in writing of Lessor,
Lessee shall vacate or decide at any time during the term of this lease, or any
renewal thereof, to vacate the herein demised premises prior to the expiration
of this lease, or any renewal hereof, Lessee will not cause or allow any other
agent to represent Lessee in any sub-letting or reletting of the demised
premises other than an agent approved by the Lessor and that should Lessee do
so, or attempt to do so, the Lessor may remove any signs that may be placed on
or about the demised premises by such other agent without any liability to
Lessor or to said agent, the Lessee assuming all responsibility for such action.

(j) Indemnification

      (j) Indemnify and save Lessor harmless from any and all loss occasioned by
Lessee's breach of any of the covenants, terms and conditions of this lease, or
caused by his family, guests, visitors, agents and employees.

9. Negative Covenants of Lessee

      Lessee covenants and agrees that he will do none of the following things
without first obtaining the consent, in writing of Lessor, which consent Lessor
shall not unreasonably withhold, and without providing Lessor with reimbursement
for any expenses incurred or incidental for Lessee's proposed action.

(a) Use of Premises

      (a) Occupy the demised premises in any other manner or for any other
purposes than as above set forth.

(b) Assignment and Subletting

      (b) Assign, mortgage or pledge this lease or under-let or sub-lease the
demised premises, or any part thereof, or permit any other person, firm or
corporation to occupy the demised premises, or any part thereof; nor shall any
assignee or sub-lessee assign, mortgage or pledge this lease or such sub-lease,
without an additional written consent by the Lessor, and without such consent no
such assignment, mortgage or pledge shall be valid. If the Lessee becomes
embarrassed or insolvent, or makes an assignment for the benefit of creditors,
or if a petition in bankruptcy is filed by or against the Lessee or a bill in
equity or other proceeding for the appointment of a receiver for the Lessee is
filed, or if the real or personal property of the Lessee shall be sold or levied
upon by any Sheriff, Marshal or Constable, the same shall be a violation of this
covenant.

(c) Signs

      (c) Place or allow to be placed any stand, booth, sign or show case upon
the doorsteps, vestibules or outside walls or pavements of said premises, or
paint, place, erect or cause to be painted, placed or erected any sign,
projection or device on or in any part of the premises. Lessee shall remove any
sign, projection or device painted, placed or erected, if permission has been
granted and restore the walls, etc., to their former conditions, at or prior to
the expiration of this lease. In case of the breach of this covenant (in
addition to all other remedies given to Lessor in case of the breach of any
conditions or covenants of this lease) Lessor shall have the privilege of
removing said stand, booth, sign, show case, projection or device, and restoring
said walls, etc., to their former condition, and Lessee, at Lessor's option,
shall be liable to Lessor for any and all expenses so incurred by Lessor.

(d) Alterations, Improvements 

      (d) Make any alterations, improvements, or additions to the demised
premises. All alterations, improvements, additions or fixtures, whether
installed before or after the execution of this lease, shall remain upon the
premises at the expiration or sooner determination of this lease and become the
property of Lessor, unless Lessor shall, prior to the determination of this
lease, have given written notice to Lessee to remove the same, in which event
Lessee will remove such alterations, improvements and additions and restore the
premises to the same good order and condition in which they now are. Should
Lessee fail so to do, Lessor may do so, collecting, at Lessor's option, the cost
and expense thereof from Lessee as additional rent.

(e) Machinery

      (e) Use or operate any machinery that, in Lessor's opinion, is harmful to
the building or disturbing to other tenants occupying other parts thereof.

(f) Weights

      (f) Place any weights in any portion of the demised premises beyond the
safe carrying capacity of the structure.

(g) Fire Insurance

      (g) Do or suffer to be done, any act, matter or thing objectionable to the
fire insurance companies whereby the fire insurance or any other insurance now
in force or hereafter to be placed on the demised premises, or any part thereof,
or on the building of which the demised premises may be a part, shall become
void or suspended, or whereby the same shall be rated as a more hazardous risk
than at the date of execution of this lease, or employ any person or persons
objectionable to the fire insurance companies or carry or have any benzine or
explosive matter of any kind in and about the demised premises. In case of a
breach of this covenant (in addition to all other remedies given to Lessor in
case of the breach of any of the conditions or covenants of this lease) Lessee
agrees to pay to Lessor as additional rent any and all increase or increases of
premiums on insurance carried by Lessor on the demised premises, or any part
thereof, or on the building of which the demised premises may be a part, caused
in any way by the occupancy of Lessee.

(h) Removal of Goods

      (h) Remove, attempt to remove or manifest an intention to remove Lessee's
goods or property from or out of the demised premises otherwise than in the
ordinary and usual course of business, without having first paid and satisfied
Lessor for all rent which may become due during the entire term of this lease.

(i) Vacate Premises

      (i) Vacate or desert said premises during the term of this lease, or
permit the same to be empty and unoccupied. 

10. Lessor's Rights

      Lessee covenants and agrees that Lessor shall have the right to do the
following things and matters in and about the demised premises:

(a) Inspection of premises

      (a) At all reasonable times by himself or his duly authorized agents to go
upon and inspect the demised premises and every part thereof and/or at his
option to make repairs, alterations and additions to the demised premises or the
building of which the demised premises is a part.

(b) Rules and Regulations

      (b) At any time or times and from time to time make such reasonable rules
and regulations as may be necessary or desirable for the safety, care, and
cleanliness of the demised premises and/or of the building of which the demised
premises is a part and of real and personal property contained therein and for
the preservation of good order. Such rules and regulations shall, when
communicated in writing to Lessee, form a part of this lease.

(c) Sale or Rent Sign, Prospective Purchasers or Tenants

      (c) To display a "For Sale" sign at any time, and also, after notice from
either party of intention to determine this lease, or at anytime within three
months prior to the expiration of this lease, a "For Rent" sign, or both "For
Rent" and "For Sale" signs; and all of said signs shall be placed upon such part
of the premises as Lessor may elect and may contain such matter as Lessor shall
require. Persons authorized by Lessor may inspect the premises at reasonable
hours during the said periods.

(d) Discontinue Facilities and Service

      (d) Lessor may discontinue at any time, any or all facilities furnished
and services rendered by Lessor not expressly covenanted for herein or required
to be furnished or rendered by law; it being understood that they constitute no
part of the consideration for this lease.

11. Responsibility of Lessee

      (a) Lessee agrees to relieve and hereby relieves the Lessor from all
liability by reason of any injury or damage to any person or property in the
demised premises, whether belonging to the Lessee or any other person caused by
any fire, breakage, or leakage in any part or portion of the building of which
the demised premises is a part or from water, rain or snow that may leak into,
issue or flow from any part of the said premises, or of the building of which
the demised premises is a part, from the drains, pipes, or plumbing work of the
same or from any place or quarter, unless such breakage, leakage, injury or
damage be caused by or results from the negligence of Lessor or its servants or
agents.

      (b) Lessee also agrees to relieve and hereby relieves Lessor from all
liability by reason of any damage or injury to any property or to Lessee or
Lessee's guests, servants or employees which may arise from or be due to the
use, misuse or abuse of all or any of the elevators, hatches, openings,
stairways, hallways of any kind whatsoever which may exist or hereafter be
erected or constructed on the said premises or the sidewalks surrounding the
building of which may arise from defective construction, failure of water
supply, light, power, electric wiring, plumbing or machinery, wind, lightning,
storm or any other case whatsoever on the said premises or the building of which
the demised premises is a part, unless such damage, injury, use, misuse or abuse
be caused by or result form the negligence of Lessor, its servants or agents.

12. Responsibility of Lessor

(a) Total Destruction of Premises

      (a) In the event the demised premises are totally destroyed or so damaged
by fire or other casualty that, in the opinion of a licensed architect retained
by Lessor, the same cannot be repaired and restored within ninety days from the
happening of such injury this lease shall absolutely cease and determine, and
the rent shall abate for the balance of the term.

(b) Partial Destruction of Premises

      (b) If the damage be only partial and such that the premises can be
restored, in the opinion of a licensed architect retained by Lessor, to
approximately their former condition within ninety days from the date of the
casualty loss Lessor may, at Lessor's option, restore the same with reasonable
promptness, reserving the right to enter upon the demised premises for that
purpose. Lessor also reserves the right to enter upon the demised premises
whenever necessary to repair damage caused by fire or other casualty to the
building of which the demised premises is a part even though the effect of such
entry be to render the demised premises or a part thereof untenantable. In
either event the rent shall be apportioned and suspended during the time Lessor
is in possession, taking into account the proportion of the demised premises
rendered untenantable and the duration of Lessor's possession. If a dispute
arises as to the amount of rent due under this clause, Lessee agrees to pay the
full amount claimed by Lessor, but Lessee shall have the right to proceed by law
to recover the excess payment, if any.

(c) Repairs by Lessor

      (c) Lessor shall make such election to repair the premises or terminate
this lease by giving notice thereof to Lessee at the leased premises within
thirty days from the day Lessor received notice that the demised premises had
been destroyed or damaged by fire or other casualty.

(d) Damage for Interruption of Use

      (d) Except to the extent hereinbefore provided, Lessor shall not be liable
for any damage, compensation, or claim by reason of the necessity of repairing
any portion of the building, the interruption in the use of the premises, any
inconvenience or annoyance arising as a result of such repairs or interruption,
or the termination of this lease by reason of damage to or destruction of the
premises.

(e) Representation of Condition of Premises

      (e) Lessor has let the demised premises in their present "as is" condition
and without any representations, other than those specifically endorsed hereon
by Lessor, through its officers, employees, servants and/or agents. It is
understood and agreed that Lessor is under no duty to make repairs, alterations,
or decorations at the inception of this lease or at any time thereafter unless
such duty of Lessor shall be set forth in writing endorsed hereon.

(f) Zoning

      (f) It is understood and agreed that the Lessor hereof does not warrant or
undertake that the Lessee shall be able to obtain a permit under any Zoning
Ordinance or Regulation for such use as Lessee intends to make of the said
premises, and nothing in this lease contained shall obligate the Lessor to
assist Lessee in obtaining said permit; the Lessee further agrees that in the
event a permit cannot be obtained by Lessee under any Zoning Ordinance or
Regulation, this lease shall not terminate without Lessor's consent, and the
Lessee shall use the premises only in a manner permitted under such Zoning
Ordinance or Regulations.

13. Miscellaneous Agreements and Conditions

(a) Effect of Repairs on Rental

      (a) No contract entered into or that may be subsequently entered into by
Lessor with Lessee, relative to any alterations, additions, improvements or
repairs, nor the failure of Lessor to make such alterations, additions,
improvements or repairs as required by any such contract, nor the making by
Lessor or his agents or contractors of such alternations, additions,
improvements or repairs shall in any way affect the payments of the rent or said
other charges a the times specified in this lease, except to the extent and in
the manner hereinbefore provided.

(b) Agency

      (b) It is hereby expressly agreed and understood that the said Flo
Smerconish, Realtor is acting as agent only and shall not in any event be held
liable to the owner or to Lessee for the fulfillment or non-fulfillment of any
of the terms or conditions of this lease, or for any action or proceedings that
may be taken by the owner against Lessee, or by Lessee against the owner.

(c) Waiver of Custom

      (c) It is hereby covenanted and agreed, any law, usage or custom to the
contrary notwithstanding, that Lessor shall have the right at all times to
enforce the covenants and provisions of this lease in strict accordance with the
terms hereof, notwithstanding any conduct or custom on the part of the Lessor in
refraining from so doing at any time or times; and, further, that the failure of
Lessor at any time or times to enforce his rights under said covenants and
provisions strictly in accordance with the same shall not be construed as having
created a custom in any way or manner contrary to the specific terms, provisions
and covenants of this lease or as having in any way or manner modified the same.

(d) Conduct of Lessee

      (d) This lease is granted upon the express condition that Lessee and/or
the occupants of the premises herein leased shall not conduct themselves in a
manner which is improper or objectionable, and if at any time during the term of
this lease or any extension or continuation thereof Lessee or any occupier of
the said premises shall have conducted himself in a manner which is improper or
objectionable, Lessee shall be taken to have broken the covenants and conditions
of this lease, and Lessor will be entitled to all of the rights and remedies
granted and reserved herein for the Lessee's failure to observe all of the
covenants and conditions of this lease.

(e) Failure of Lessee to Repair

      (e) In the event of the failure of Lessee promptly to perform the
covenants of Section 8(b) hereof, Lessor may go upon the demised premises and
perform such covenants, the cost thereof, at the sole option of Lessor, to be
charged to Lessee as additional and delinquent rent.

(f) Waiver of Subrogation

      (f) Lessor and Lessee hereby agree that all insurance policies which each
of them shall carry to insure the demised premises and the contents therein
against casualty loss, and all liability policies which they shall carry
pertaining to the use and occupancy of the demised premises shall contain
waivers of the right of subrogation against Lessor and Lessee herein, their
heirs, administrators, successors, and assigns.

(g) Security Interest

      (g) Lessee hereby grants to Lessor a security interest under the Uniform
Commercial Code in all of Lessee's goods and property in, on, or about the
demised premises. Said security interest shall secure unto Lessor the payment of
all rent (and charges collectible or reserved as rent) hereunder which shall
become due under the provisions of this lease. Lessee hereby agrees to execute,
upon request of Lessor, such financing statements as may be required under the
provisions of the said Uniform Commercial Code to perfect a security interest in
Lessee's said goods and property.

14. Remedies of Lessor

      If the Lessee

      (a) Does not pay in full when due any and all installments of rent and/or
any other charge or payment herein reserved, included, or agreed to be treated
or collected as rent and/or any other charge, expense, or cost herein agreed to
be paid by the Lessee, or

      (b) Violates or fails to perform or otherwise breaks any covenant or
agreement herein contained; or

      (c) Vacates the demised premises or removes or attempts to remove or
manifests an intention to remove any goods or property therefrom otherwise than
in the ordinary and usual course of business without having first paid and
satisfied the Lessor in full for all rent and other charges then due or that may
thereafter become due until the expiration of the then current term, above
mentioned; or

      (d) Becomes embarrassed or insolvent, or makes an assignment for the
benefit of creditors, or if a petition in bankruptcy is filed by or against
Lessee or a complaint in equity or other proceedings for the appointment of a
receiver for Lessee is filed, or if proceedings for reorganization or for
composition with creditors under any State or Federal law be instituted by or
against Lessee, or if the real or personal property of Lessee shall be levied
upon or be sold, of if for any other reason Lessor shall, in good faith, believe
that Lessee's ability to comply with the covenants of this lease, including the
prompt payment of rent hereunder, is or may become impaired,

      thereupon:

      (1) The whole balance of rents and other charges, payments, costs, and
expenses herein agreed to be paid by Lessee, or any part thereof, and also all
costs and officers' commissions including watchmen's wages shall be taken to be
due and payable and in arrears as if by the terms and provisions of this lease
said balance of rent and other charges, payment, taxes, costs and expenses were
on that date, payable in advance. Further, if this lease or any part thereof is
assigned, or if the premises or any part thereof is sublet, Lessee hereby
irrevocably constitutes and [illegible]

[illegible].
 
      (2) At the option of Lessor, this lease and the terms hereby created shall
determine and become absolutely void without any right on the part of Lessee to
reinstate this lease by payment of any sum due or by other performance of any
condition, term, or covenant broken; whereupon, Lessor shall be entitled to
recover damages for such breach in an amount equal to the amount of rent
reserved for the balance of the term of this lease, less the fair rental value
of the said demised premises for the remainder of the lease term.

15. Further Remedies of Lessor

      In the event of any default as above set forth in Section 14, Lessor, or
anyone acting on Lessor's behalf, at Lessor's option:

      (a) May let said premises or any part or parts thereof to such person or
persons as may, in Lessor's discretion, be best; and Lessee shall be liable for
any loss of rent for the balance of the then current term. Any such re-entry or
re-letting by Lessor under the terms hereof shall be without prejudice to
Lessor's claim for actual damages, and shall under no circumstances, release
Lessee from liability for such damages arising out of the breach of any of the
covenants, terms, and conditions of this lease.

      (b) May proceed as a secured party under the provisions of the Uniform
Commercial Code against the goods in which Lessor has been granted a security
interest pursuant to Section 13(g) hereof; and

      (c) May have and exercise any and all other rights and/or remedies,
granted or allowed landlords by any existing or future Statute, Act of Assembly,
or other law of this state in cases where a landlord seeks to enforce rights
arising under a lease agreement against a tenant who has defaulted or otherwise
breached the terms of such lease agreement; subject, however, to all of the
rights granted or created by any such Statute, Act of Assembly, or other law of
this state existing for the protection and benefit of tenants; and

      (d) May have and exercise any and all other rights and remedies contained
in this lease agreement, including the rights and remedies provided by Sections
16 and 17 hereof.

16. Confession of Judgment for Money

      Lessee covenants and agrees that if the rent and/or any charges reserved
in this lease as rent (including all accelerations of rent permissible under the
provisions of this lease) shall remain unpaid five (5) days after the same is
required to be paid, then and in that event, Lessor may cause Judgment to be
entered against Lessee, and for that purpose Lessee hereby authorizes and
empowers Lessor or any Prothonotary, Clerk of Court or Attorney of any Court of
Record to appear for and confess judgment against Lessee and agrees that Lessor
may commence an action pursuant to Pennsylvania Rules of Civil Procedure No.
2950 et seq. for the recovery from Lessee of all rent hereunder (including all
accelerations of rent permissible under the provisions of this lease) and/or for
all charges reserved hereunder as rent, as well as for interest and costs and
Attorney's commission, for which authorization to confess judgment, this lease,
or a true and correct copy thereof, shall be sufficient warrant. Such Judgment
may be confessed against Lessee for the amount of rent in arrears (including
all accelerations of rent permissible under the provisions of this lease) and/or
for all charges reserved hereunder as rent, as well as for interest and costs;
together with an attorney's commission of five percent (5%) of the full amount
of Lessor's claim against Lessee. Neither the right to institute an action
pursuant to Pennsylvania Rules of Civil Procedure No. 2950 et seq. nor the
authority to confess judgment granted herein shall be exhausted by one or more
exercises thereof, but successive complaints may be filed and successive
judgments may be entered for the aforedescribed sums five days or more after
they become due as well as after the expiration of the original term and/or
during or after expiration of any extension or renewal of this lease.

17. Confession of Judgment for Possession of Real Property

      Lessee covenants and agrees that if this lease shall be terminated (either
because of condition broken during the term of this lease or any renewal or
extension thereof and/or when the term hereby created or any extension thereof
shall have expired) then, and in that event, Lessor may cause a judgment in
ejectment to be entered against Lessee for possession of the demised premises,
and for that purpose Lessee hereby authorizes and empowers any Prothonotary,
Clerk of Court or Attorney of any Court of Record to appear for Lessee and to
confess judgment against Lessee in Ejectment for possession of the herein
demised premises, and agrees that Lessor may commence an action pursuant to
Pennsylvania Rules of Procedure No. 2970 et seq. for the entry of an order in
Ejectment for the possession of real property, and Lessee further agrees that a
Writ of Possession pursuant thereto may issue forthwith, for which authorization
to confess judgment and for the issuance of a writ or writs of possession
pursuant thereto, this lease, or a true and correct copy thereof, shall be
sufficient warrant. Lessee further covenants and agrees, that if for any reason
whatsoever, after said action shall have commenced the action shall be
terminated and the possession of the premises demised hereunder shall remain in
or be restored to Lessee, Lessor shall have the right upon any subsequent
default or defaults, or upon the termination of this lease as above set forth to
commence successive actions for possession of real property and to cause the
entry of successive judgments by confession in Ejectment for possession of the
premises demised hereunder.

18. Affidavit of Default

      In any procedure or action to enter Judgment by Confession for Money
pursuant to Section 16 hereof, or to enter Judgment by Confession in Ejectment
for possession of real property pursuant to Section 17 hereof, if Lessor shall
first cause to be filed in such action an affidavit or averment of the facts
constituting the default or occurrence of the condition precedent, or event, the
happening of which default, occurrence, or event authorizes and empowers Lessor
to cause the entry of judgment by confession, such affidavit or averment shall
be conclusive evidence of such facts, defaults, occurrences, conditions
precedent, or events; and if a true copy of this lease (and of the truth of
which such affidavit or averment shall be sufficient evidence) be filed in such
procedure or action, it shall not be necessary to file the original as a Warrant
of Attorney, any rule of court, custom, or practice to the contrary
notwithstanding.

19. Waivers by Lessee of Errors, Right of Appeal, Stay, Exemption, Inquisition

      Lessee hereby releases to Lessor and to any and all attorneys who may
appear for Lessee all errors in any procedure or action to enter Judgment by
Confession by virtue of the warrants of attorney contained in this lease, and
all liability therefor. Lessee further authorizes the Prothonotary or any Clerk
of any Court of Record to issue a Write of Execution or other process, and
further agrees that real estate may be sold on a Writ of Execution or other
process. If proceedings shall be commenced to recover possession of the demised
premises either at the end of the term or sooner termination of this lease, or
for non-payment of rent or for any other reason, Lessee specifically waives the
right to the three (3) months' notice to quit and/or the fifteen (15) or thirty
(30) days' notice to quit required by the Act of April 6, 1951, P.I. 69, as
amended, and agrees that five (5) days' notice shall be sufficient in either or
any such case.

20. Right of Assignee of Lessor

      The right to enter judgment against Lessee by confession and to enforce
all of the other provisions of this lease herein provided for may at the option
of any assignee of this lease, be exercised by any assignee of the Lessor's
right, title and interest in this lease in his, her, or their own name, any
statute, rule of court, custom, or practice to the contrary notwithstanding.

21. Remedies Cumulative

      All of the remedies hereinbefore given to Lessor and all rights and
remedies given to it by law and equity shall be cumulative and concurrent. No
determination of this lease or the taking or recovering possession of the
premises shall deprive Lessor of any of its remedies or actions against the
Lessee for rent due at the time or which, under the terms hereof, would in the
future become due as if there had been no determination, nor shall the bringing
of any action for rent or breach of covenant, or the resort to any other remedy
herein provided for the recovery of rent be construed as a waiver of the right
to obtain possession of the premises.

22. Condemnation

      In the event that the premises demised herein, or any part thereof, is
taken or condemned for a public or quasi-public use, this lease shall, as to the
part so taken, terminate as of the date title shall vest in the condemnor, and
rent shall abate in proportion to the square feet of leased space taken or
condemned or shall cease if the entire premises be so taken. In either event the
Lessee waives all claims against the Lessor by reason of the complete or partial
taking of the demised property.

23. Subordination

      This Agreement of Lease and all its terms, covenants and provisions are
and each of them is subject and subordinate to any lease or other arrangement or
right to possession, under which the Lessor is in Control of the demised
premises, to the rights of the owner or owners of the demised premises and of
the land or buildings of which the demised premises are a part, to all rights of
the Lessor's landlord and to any and all mortgages and other encumbrances now or
hereafter placed upon the demised premises or upon the land and/or the buildings
containing the same; and Lessee expressly agrees that if Lessor's tenancy,
control, or right to possession shall terminate either by expiration, forfeiture
or otherwise, then this lease shall thereupon immediately terminate and the
Lessee shall, thereupon, give immediate possession; and Lessee hereby waives any
and all claims for damages or otherwise by reason of such termination as
aforesaid.

24. Termination of Lease

      It is hereby mutually agreed that either party hereto may determine this
lease at the end of said term by giving to the other party written notice
thereof at least 120 days prior thereto, but in default of such notice, this
lease shall continue upon the same terms and conditions in force immediately
prior to the expiration of the term hereof as are herein contained for a further
period of one month and so on from month to month unless or until terminated by
either party hereto, giving the other 120 days written notice for removal
previous to expiration of the then current term; PROVIDED, however, that should
this lease be continued for a further period under the terms hereinabove
mentioned, any allowances given Lessee on the rent during the original term
shall not extend beyond such original term, and further provided, however, that
if Lessor shall have given such written notice prior to the expiration of any
term hereby created, of his intention to change the terms and conditions of this
lease, and Lessee shall not within ten days from such notice notify Lessor of
Lessee's intention to vacate the demised premises at the end of the then current
term, Lessee shall be considered as Lessee under the terms and conditions
mentioned in such notice for a further term as above provided, or for such
further term as may be stated in such notice. In the event that Lessee shall
give notice, as stipulated in this lease, of intention to vacate the demised
premises at the end of the present term, or any renewal or extension thereof,
and shall fail or refuse to vacate the same on the date designated by such
notice, then it is expressly agreed that Lessor shall have the option either (a)
to disregard the notice so given as having no effect, in which case all the
terms and conditions of this lease shall continue thereafter with full force
precisely as if such notice had not been given, or (b) Lessor may, at any time
within thirty days after the present term or any renewal or extension thereof,
as aforesaid, give the said Lessee ten days' written notice of his intention to
terminate the said lease; whereupon the Lessee expressly agrees to vacate said
premises at the expiration of the said period of ten days specified in said
notice. All powers granted to Lessor by this lease may be exercised and all
obligations imposed upon Lesser by this lease shall be performed by Lessee as
well during any extension of the original term of this lease as during the
original term itself.

25. Notices

All notices must be given by certified mail, return receipt requested.

26. Lease Contains all Agreements

      It is expressly understood and agreed by and between the parties hereto
that this lease and the riders attached hereto and forming a part hereof set
forth all the promises, agreements, conditions and understandings between Lessor
or his Agent and Lessee relative to the demised premises, and that there are no
promises, agreements, conditions or understandings, either oral or written,
between them other than herein set forth. It is further understood and agreed
that, except as herein otherwise provided, no subsequent alteration, amendment,
change or addition to this lease shall be binding upon Lessor or Lessee unless
reduced to writing and signed by them.

27. Heirs and Assignees

      All rights and liabilities herein given to, or imposed upon, the
respective parties hereto shall extend to and bind the several and respective
heirs, executors, administrators, successors and assigns of said parties; and if
there shall be more than one Lessee, they shall all be bound jointly and
severally by the terms, covenants and agreements herein, and the word "Lessee"
shall be deemed and taken to mean each and every person or party mentioned as a
Lessee herein, be the same one or more; and if there shall be more than one
Lessee, any notice required or permitted by the terms of this lease may be given
by or to any one thereof, and shall have the same force and effect as if given
by or to all thereof. The words "his" and "him" wherever stated herein, shall be
deemed to refer to the "Lessor" or "Lessee" whether such Lessor or Lessee be
singular of plural and irrespective of gender. No rights, however, shall inure
to the benefit of any assignee of Lessee unless the assignment to such assignee
has been approved by Lessor in writing as aforesaid.

28. Security Deposit

      Lessee does herewith deposit with Lessor the sum of fifteen thousand
Dollars, to be held as security for the full and faithful performance by Lessee
of Lessee's obligations under this Lease and for the payment of damages to the
demised premises. Said security deposit is to be held by Lessor as an Escrow
Fund pursuant to the terms and provisions of the Penna Act of Assembly approved
December 29, 1972, Act. No. 363. Except for such sum as shall be lawfully
applied by Lessor to satisfy valid claims against Lessee arising from defaults
under this lease or by reason of damages to the demised premises, the Escrow
Fund shall be returned to Lessee at the expiration of the terms of this lease or
any renewals or extensions thereof but as provided for in the said Act of
Assembly. It is understood that no part of any security deposit or Escrow Fund
is to be considered as the last rental due under the terms of the lease.

29. Headings no part of Lease 

      Any headings preceding the test of the several paragraphs and
sub-paragraphs hereof are inserted solely for convenience of reference and shall
not constitute a part of this lease nor shall they affect its meaning,
construction or effect.

30.   SPECIAL     Lessee agrees to pay Lessee's pro rata charges for snow       
      CLAUSES     removal, trash removal, and all utility charges (electric and 
                  fuel.) Lessee office space of approximately 5,400 square feet 
                  is approximately 68% (sixty-eight percent) of entire office   
                  site of approximately 8,000 square feet, (stone barn, plus    
                  stone farmhouse, plus storage shed.) Payments by Lessee to    
                  Lessor will be on demand.                                     

      In Witness Whereof, the parties hereto have executed these presents the
day and year first above written, and intend to be legally bound thereby.

SEALED AND DELIVERED IN THE
PRESENCE OF:

                                               /s/ [ILLEGIBLE]
- --------------------------------               --------------------------- Agent

X /s/ Kevin MacDonald                          /s/ Robert J. Capetola
- -------------------------------                -------------------------- [SEAL]

X /s/ Marilyn MacDonald
- -------------------------------                -------------------------- [SEAL]

- -------------------------------                -------------------------- [SEAL]

- -------------------------------                -------------------------- [SEAL]

                                      =====
                                      LEASE
                                      =====

                              Kevin MacDonald and
                              Marilyn MacDonald
                            
                                       TO
                            
                              Acute Therapeutics, Inc.                  
                              
                              Premises  Converted Stone Barn
                                        3359 Durham Rd.
                                        Buckingham, TWP., PA
                              
                              Rent      $5,300/mo. (BASE YEARS)
                              
                              Dated     Nov. 8, 1996
                              
                              Term      Nov. 11, 1996 thru
                                        Nov. 10, 2001

                =================================================
                            
      FOR VALUE RECEIVED _________ hereby assign, transfer and set over unto
____________________________________________________________________ Executors, 
Administrators and assigns all _____________ right, title and interest in the 
within ________________ and all benefit and advantages to be derived therefrom.

      WITNESS _________ hand and seal this _________ day of _____________ A.D.
19__.

SEALED IN THE PRESENCE OF )
                          )                     -----------------------------
                          )

                CONSULTATION AND MEDICAL ADVISORY BOARD AGREEMENT

      THIS CONSULTATION and MEDICAL ADVISORY BOARD AGREEMENT (the "Agreement"),
dated as of October 1, 1996, between Discovery Laboratories, Inc., 787 Seventh
Avenue, 44th floor, New York, New York 10019 (the "Company"), and Hector DeLuca,
Ph.D. ("Consultant").

                                   WITNESSETH

      WHEREAS, Consultant is an expert in scientific and medical matters of
particular importance to the advancement of the Company's technology relating to
the ST-630 compound for use in the treatment of osteoporosis;

      WHEREAS, the Company desires to have the benefit of Consultant's knowledge
and experience, and Consultant desires to provide consulting services to the
Company, all as hereinafter provided in this Agreement; and

      WHEREAS, the Company desires to have Consultant serve as a member of the
Company's Medical Advisory Board (the "MAB"), and Consultant desires to serve as
a member of such Board;

      NOW, THEREFORE, in consideration of the promises and mutual agreements
hereinafter set forth, effective the date hereof, the Company and Consultant
hereby agree as follows:

      1. Consultation and Medical Advisory Board. The Company shall retain
Consultant as a consultant, and Consultant shall serve the Company as a
consultant and a member of the MAB upon the terms and conditions hereinafter set
forth.

      2. Term. Subject to the terms and conditions hereinafter set forth, the
term of the Consultant's consulting arrangement and service on the MAB hereunder
(hereinafter referred to as the "Consultation Period") shall commence on the
date hereof, and shall continue through September 31, 1999.

      3. Consulting and Board Member Duties.

            3.1 During the Consultation Period, Consultant shall render to
Company or to Company's designee such consulting services in his fields of
expertise and knowledge related to the business of Company and at such times and
places as Company may from time to time request, including (i) attending
meetings of the MAB and (ii) providing advice to the Company on clinical trial
design, scientific planning and research and development relating to the ST-630

Compound for use in treating osteoporosis. The Company shall give Consultant
reasonable advance notice of any services required of him hereunder.

            3.2 All work-to be performed by Consultant for the Company shall be
under the general supervision of the Company.

            3.3 Consultant shall devote his best efforts and ability to the
performance of the duties attaching to this obligation. All work performed by
Consultant to the Company shall be at times reasonably convenient to the
Consultant, and nothing contained herein shall interfere with Consultant's
teaching responsibilities, research duties or his other teaching and
administrative responsibilities.

            3.4 During the Consultation Period, Consultant shall serve as a
member of the MAB which will meet periodically to advise the Company on
scientific affairs.

      4. Compensation.

            4.1 Consulting Fees. The Company shall pay to the Consultant (i) an
annual consulting fee of $30,000, payable monthly and (ii) stock options granted
pursuant to Section 5 hereof.

            4.2 Benefits. The Consultant shall not be entitled to any benefits,
coverages or privileges, including, without limitation, social security,
unemployment, medical or pension payments, made available to employees of the
Company.

      5. Stock Options to Consultant.

            5.1 The Company shall grant to Consultant an option (the "Option")
to purchase 15,000 shares of Common Stock of the Company at a price of $0.20 per
share (the "Option Shares") pursuant to the terms and conditions of the
Company's Stock Option Plan.

            5.2 The Option granted hereunder shall become exercisable
immediately with respect to 3,750 of the Option Shares and, thereafter, an
additional 3,750 of the Option Shares shall become exercisable on each
anniversary of the date hereof, on a cumulative basis for the next three years.
The Options granted under this agreement shall expire on the tenth anniversary
of the date hereof

      6. Termination. The Company may, without prejudice to any right or remedy
it may have due to any failure of the Consultant to perform his obligations
under this Agreement, terminate the Consultation Period upon 30 days, prior
written notice to the Consultant. In the event of such termination, the
Consultant shall be entitled to payment for services performed prior to the
effective date of termination. Such payments shall constitute full settlement of
any and all claims of the Consultant of every description against the Company.
Notwithstanding the foregoing, the Company may terminate the Consultation
Period, effective immediately upon receipt of written notice, if the Consultant
breaches or threatens to breach any provision of Sections 7, 8, or 10.

                                       2

      7. Cooperation. The Consultant shall use his best efforts in the
performance of his obligations under this Agreement. The Company shall provide
such access to its information and property as may be reasonably required in
order to permit the Consultant to perform his obligations hereunder. The
Consultant shall cooperate with the Company's personnel, shall not interfere
with the conduct of the Company's business and shall observe all rules,
regulations and security requirements of the Company concerning the safety of
persons and property.

      8. Proprietary Information and Inventions Agreement. Upon commencement of
this Agreement, Consultant shall execute the Company's standard form of
Intellectual Property and Confidential Information Agreement (the
"Confidentiality Agreement") a copy of which is attached to this Agreement as
Exhibit A.

      9. Independent Contractor Status. The Consultant shall perform all
services under this Agreement as an "independent contractor" and not as an
employee or agent of the Company. The Consultant is not authorized to assume or
create any obligation or responsibility, express or implied, on behalf of, or in
the name of, the Company or to bind the Company in any manner.

      10. Noncompetition. Consultant agrees, during the Consultation Period, and
for two (2) years thereafter, not to render services (i) to any competitors of
the Company in the field of the development, clinical evaluation and manufacture
of ST-630 for use in the treatment of osteoporosis or (ii) for any other group
that is developing an oral version of the ST-630 compound; provided however,
Consultant may provide such services for Sumitomo Pharmaceuticals and Taisho
Pharmaceuticals.

      11. Notices. All notices required or permitted under this Agreement shall
be in writing and shall be deemed effective upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail,
postage prepaid, addressed to the other party at the address shown above, or at
such other address or addresses as either party shall designate to the other in
accordance with this Section 11.

      12. Pronouns. Whenever the context may require, any pronouns used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular forms of nouns and pronouns shall include the plural, and vice
versa.

      13. Entire Agreement. This Agreement constitutes the entire agreement
between the parties and supersedes all prior agreements and understandings,
whether written or oral, relating to the subject matter of this Agreement.

      14. Amendment. This Agreement may be amended or modified only by a written
instrument executed by both the Company and the Consultant.

      15. Governing Law. This Agreement shall be construed, interpreted and
enforced in accordance with the laws of the State of New York.

                                       3

      16. Successors and Assigns. This Agreement shall be binding upon, and
inure to the benefit of, both parties and their respective successors and
assigns, including any corporation with which, or into which, the Company may be
merged or which may succeed to its assets or business, provided, however, that
the obligations of the Consultant are personal and shall not be assigned by him.

      17. Miscellaneous.

            17.1 No delay or omission by the Company in exercising any right
under this Agreement shall operate as a waiver of that or any other right. A
waiver or consent given by the Company on any one occasion shall be effective
only in that instance and shall not be construed as a bar or waiver of any right
on any other occasion.

            17.2 The captions of the sections of, this Agreement are for
convenience of reference only and in no way define, limit or affect the scope or
substance of any section of this Agreement.

            17.3 In the event that any provision of this Agreement shall be
invalid, illegal or otherwise unenforceable, the validity, legality and
enforceability of the remaining provisions shall in no way be affected or
impaired thereby.

      IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year set forth above.

                                     DISCOVERY LABORATORIES, NC.

                                     /s/ James S. Kuo, M.A.
                                     --------------------------------------
                                     By:    James S. Kuo, M.A.
                                     Title: President

                         Address:    787 Seventh Avenue
                                     44th Floor
                                     New York, New York 10019

                                     CONSULTANT

                                     /s/ Hector DeLuca
                                     --------------------------------------
                                     By:    

                         Address:    1809 Hwy BB
                                     Deerfield, WI 53531

                                       4

                         [Letterhead of The Sage Group]

October 28, 1996

Robert J. Capetola                                              
President/CEO                                                   
Acute Therapeutics, Inc.
6097 Hidden Valley Drive
Doylestown, PA

Dear Bob,

As discussed I am revising our Valere agreement of June 25, 1996 to reflect the
changes anticipated given the Castle Group (Discovery Labs) financing and
corporate name change to Acute Therapeutics, Inc. (ATI).

This letter sets out some of the key aspects of a proposed arrangement between
ATI and The Sage Group and addresses more specifically some of the issues we
discussed. The objective of working closely with ATI is to play a key role in
helping to establish the company via a J & J license and subsequently to
assisting management in the strategic, product development and commercialization
aspects required to successfully develop and grow the business. We view the role
of The Sage Group essentially as serving the Business Development Department of
ATI with at least the general activities shown below included in our
responsibilities:

      o     Develop a formal business plan in conjunction with management and
            assist in implementation.

      o     Design corporate development plan in conjunction with company and
            direct implementation of partnering activities.

      o     Assist management in operational business activities as needed.

To provide ATI flexibility and reduced risk, we propose the term be 18 months,
renewable upon mutual agreement, and that this agreement be non-cancelable, by
ATI, during the first term except for non-performance by The Sage Group.
Non-performance would be defined as failure of The Sage Group to carry out the
above activities in a reasonably due diligent fashion. We suggest that there be
formalized quarterly reviews to track performance.

In recognition of our past efforts on behalf of the founders and in anticipation
of The Sage Group future involvement with ATI, Sage Partners has been fully
vested in equity in the newly formed company, i.e., 15,000 total shares @ $0.01
per share, plus each of Daniel Tripodi, Wayne Pambianchi, Gordon Ramseier, R.
Douglas Hulse and Richard G. Power has received options to purchase 1,000 shares
of ATI Common Stock exercisable six (6) months after October 28, 1996

and options to purchase 1,120 shares of ATI stock Common Stock exercisable upon
certain acceleration events as defined in the Notice of Grant to the stock
option agreements entered into by the Company and each of Messrs. Pambianchi,
Ramseier, Hulse, Power and Tripodi as of October 10, 1996.

In addition, The Sage Group will receive a monthly management fee of $7500
payable on the first of each month beginning November 1, 1996. ATI also will
reimburse The Sage Group for all out-of-pocket expenses with significant travel
and related expenses pre-approved by ATI.

Bob, I trust that this revised letter of agreement reflects the general
discussions we have had and that it is acceptable to you. If it meets with your
approval, kindly countersign this letter and return it to me.

We look forward to a successful endeavor with Valere.

Nov. 4, 1996                               /s/ Richard G. Power
- -------------------                        ---------------------------------
Date                                       Richard G. Power
                                           Executive Director
                                           THE SAGE GROUP

Nov. 4, 1996                               /s/ Robert Capetola
- -------------------                        ---------------------------------
Date                                       Robert Capetola
                                           President/CEO
                                           Acute Therapeutics, Inc.

                  [LETTERHEAD OF COOK PHARMACEUTICAL SOLUTIONS]

                             First Amendment to the
                             ACUTE THERAPEUTICS INC.
                          and COOK IMAGING CORPORATION
                        dba COOK PHARMACEUTICAL SOLUTIONS
        Clinical Product Development Agreement effective January 3, 1997

This First Amendment to the Clinical Product Development Agreement ("First
Amendment") is entered into this 16th day of January, between Acute
Therapeutics, Inc. ("CLIENT"), a Pennsylvania corporation, and Cook Imaging
Corporation dba Cook Pharmaceutical Solutions ("COOK"), an Indiana corporation,

WITNESSETH:

WHEREAS, CLIENT and COOK entered into a certain Clinical Product Development
Agreement ("Agreement") effective January 3, 1997 and a Manufacturing Project
Manual effective January 3, 1997 ("Manual") regarding KL4 Pulmonary Lung
Surfactant whereby COOK agreed to provide development services to CLIENT;

WHEREAS, CLIENT has requested an amendment to the Agreement and Manual so as to
include development of different strength batches of KL4 Pulmonary Lung
Surfactant;

WHEREAS, COOK has agreed to CLIENTS's request to amend the Agreement and Manual
to include COOK's performance of the development and production of the batches
outlined in Attachment I.

NOW, THEREFORE, in consideration of the premises and the mutual promises
contained herein, the receipt and sufficiency of which hereby are acknowledged
by the parties, the parties agree as follows:

1.    Attachment I to this First Amendment shall be incorporated into and become
      part of the Agreement and Manual as though fully set forth therein.

2.    All terms and conditions set forth in the Agreement and Manual regarding
      KL4 Pulmonary Lung Surfactant shall also apply and be legally binding.

3.    This Amendment shall be binding and in full effect for a period of twelve
      (12) months from February 12, 1998.

4.    Notwithstanding anything contained in the Agreement or Manual to the
      contrary, COOK will not be responsible for batches rejected due to
      equipment/process complications due to the complexity of the process.
      CLIENT will pay full price for rejected batches unless due solely to the
      wilful misconduct of COOK.

First Amendment to Agreement and Manual - 129; 2/12/98 - 03                    1

5.    COOK reserves the right, in its sole discretion, to move scheduled
      manufacturing dates if necessary, without prior notice to CLIENT.

6.    COOK will ship CLIENT's equipment (F.O.B. Bloomington) to CLIENT or
      CLIENT's designate fifteen (15) days following COOK's release of the final
      batch. If CLIENT fails to designate a shipping destination within the
      fifteen (15) day period, then CLIENT will accrue a [***], payable in
      advance and not prorated.

7.    Except as specifically amended hereby, the Agreement and the Manual shall
      remain in full force and effect.

8.    CLIENT shall be responsible for obtaining and maintaining sufficient
      quantities of Bulk Drug Substance and Drug Product reserve samples as
      defined in Good Manufacturing Practices regulations 21 CFR, Section
      211.170.

9.    CLIENT shall be responsible for supplying COOK with sufficient quantities
      of Palmitic Acid, DPPC, KL4, and POPG to complete the manufacturing
      campaign outlined in Attachment I.

10.   Simultaneously with the execution of this Agreement, CLIENT shall pay COOK
      [***] to secure the manufacturing dates.

11.   COOK may terminate the Agreement as hereby amended with or without cause,
      upon ten (10) days notice to CLIENT.

12.   Notwithstanding anything contained herein to the contrary, shall be liable
      to the other for any incidental or consequential damage arising in
      connection with this Agreement or the Product sold hereunder. Cook's sale
      obligation shall be to refund purchase price and indemnify.

13.   The filled product will be inspected and packaged within two weeks after
      the fill date so that it may be immediately shipped to CLIENT under
      quarantine. If CLIENT fails to take delivery under quarantine, then CLIENT
      will accrue a [***] (or any quantity thereunder), payable in advance and
      not prorated.

IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be
executed by their duly authorized officers.

ACUTE THERAPEUTICS INC.                   COOK IMAGING CORPORATION
                                          dba COOK PHARMACEUTICAL SOLUTIONS

By: /s/ Robert J. Capetola                By: /s/ Jerry C. Arthur
   ----------------------------              -------------------------

Name: Robert J. Capetola                  Name:  Jerry C. Arthur
     --------------------------                -----------------------

Title: President/CEO                      Title: President
      -------------------------                 ----------------------

Date:  2/14/98                            Date: February 12, 1998
     --------------------------                -----------------------

First Amendment to Agreement and Manual - 129; 2/12/98 - 03                    2

[***] -- Confidential treatment requested.

                                  ATTACHMENT I

                                       TO

                             First Amendment to the
              ACUTE THERAPEUTICS INC. and COOK IMAGING CORPORATION
         Clinical Product Development Agreement effective January 3,1997

                       DEVELOPMENT ACTIVITIES AND PRICING

Development of the Drug Product for use in Clinical Studies will consist of the
following:

- --------------------------------------------------------------------------------
                                     Timing
- --------------------------------------------------------------------------------
   Strength   Fill   Components    Batch    Theoretical   Batch    Project 
   (mg/mL)    Date    (mL/mm)     Size(L)      Yield      Number     Code
- --------------------------------------------------------------------------------
               [***]                                      M800065    129
- --------------------------------------------------------------------------------
               [***]                                       800060  0129-004
- --------------------------------------------------------------------------------
               [***]                                       800061  0129-003
- --------------------------------------------------------------------------------
               [***]                                       800062  0129-003
- --------------------------------------------------------------------------------
               [***]                                       800063  0129-003
- --------------------------------------------------------------------------------
               [***]                                       800064  0129-004
- --------------------------------------------------------------------------------

Storage - o Finished product: [***]

Prior to initial manufacture, the following must occur at COOK:

1.    Revision of batch records.

2.    Equipment set-up, calibration, and maintenance.

3.    Confirmations for the steam-in-place validations of the TFE, supply, and
      receiving vessel(s).

4.    Minimum of one media fill to qualify the set-up of the equipment and the
      filling process.

Required from CLIENT prior to initial manufacture:

1.    MSDS and C of A for each raw material supplied by CLIENT.

2.    Name of shipper to be used and name/address of recipient.

3.    Reference standards for [***]. They must be complete with C of As,
      chromatograms, NMR, MS, etc.

4.    Methods (preferably validated methods) and specifications for in-process.
      CLIENT is responsible for keeping COOK supplied with the most current
      methods and specifications.

5.    Bulk drug substance and excipients must arrive at COOK no later than three
      (3) weeks prior to the fill date.

6.    Batch records must be approved by CLIENT two (2) weeks prior to the date
      of manufacture or the date will be forfeited and CLIENT will pay a 20%
      cancellation fee.

[***] -- Confidential treatment requested.

First Amendment to Agreement and Manual - 129; 2/12/98 - 03                    3

- --------------------------------------------------------------------------------
                           Raw Materials & Components
- --------------------------------------------------------------------------------

                                      [***]

- --------------------------------------------------------------------------------
NOTE: COOK will store any remaining bulk drug substance for fifteen (15) days
after the fill date (unless other runs are scheduled) at which time all the
inventory will be sent back to CLIENT, F.O.B. Bloomington.
- --------------------------------------------------------------------------------

[***] -- Confidential treatment requested.

First Amendment to Agreement and Manual - 129; 2/12/98 - 03                    4

Formulation -

                                     [***]

Filling -

1.    The product will be maintained at [***] during filling.

2.    The product will be aseptically processed.

3.    Upon completion, the product will be stored at [***].

Chemistry/Microbiology (see also Stability) -

1.    Cleaning assay (TOC; already in place).

2.    Incoming release of components and excipients per CIC procedures.

3.    Incoming release of bulk drug substances by:

      a.    IR (except KL4, which is done by HPLC)

      b.    Verification of Consumer Products Testing's C of A

4.    In-process testing:

      [***]

5.    Final release testing (including sterility) will be performed by CLIENT or
      CLIENT's designate.

Inspection -   o     Product will be 100% visually inspected per COOK
                     procedures.

Labeling -     o     COOK to supply labels for and label vials, boxes, and
                     cases.

Packaging -    o     COOK will package all batches in boxes of seven (7)
                     vials. Entire batch will be packaged and shipped to
                     CLIENT or CLIENT's designate. COOK will not sublot and
                     package.

Shipping -     o     Shipments are F.O.B. Bloomington at [***] via Caliber 
                     Logistics

Disposal -     o     Disposal of product and process waste will be performed
                     by COOK. Any disposal costs incurred by COOK will be
                     charged back to Client plus 10% for COOK handling.

[***] -- Confidential treatment requested.

First Amendment to Agreement and Manual - 129; 2/12/98 - 03                    5

Documentation provided by COOK -

1.    Master batch record for review and approval by COOK and CLIENT.

2.    Product specific validation summaries (must be approved by CLIENT prior to
      use).

3.    Executed batch records.

4.    QA certification letter (to accompany clinical samples; see Jennifer
      Walls)

            -------------------------------------------------------
                                  Project Price
            -------------------------------------------------------
            Tasks                                            Cost
            =======================================================
            Media fill (to qualify processing & filling)    [***]
            -------------------------------------------------------
            First 144 L GMP batch                           [***]
            -------------------------------------------------------
            Second 40 L GMP batch                           [***]
            -------------------------------------------------------
            Third 40 L GMP batch                            [***]
            -------------------------------------------------------
            Fourth 40 L GMP batch                           [***]
            -------------------------------------------------------
            Fifth 144 L GMP batch                           [***]
            -------------------------------------------------------
            New die cut for 200 mL boxes                    [***]
            -------------------------------------------------------
                               TOTAL                        [***]
            -------------------------------------------------------
            Technology transfer                             [***]
            -------------------------------------------------------

- --------------------------------------------------------------------------------
                                  Payment Plan
- --------------------------------------------------------------------------------
Deposit (due by February 15, 1998)                                       [***]
- --------------------------------------------------------------------------------
Due within thirty (30) days after the fill of the first batch            [***]
- --------------------------------------------------------------------------------
Due within thirty (30) days after the fill of the second batch           [***]
- --------------------------------------------------------------------------------
Due within thirty (30) days after the fill of the third batch            [***]
- --------------------------------------------------------------------------------
Due within thirty (30) days after the fill of the fourth batch           [***]
- --------------------------------------------------------------------------------
Due within thirty (30) days after the fill of the fifth batch            [***]
- --------------------------------------------------------------------------------
                                                TOTAL                    [***]
- --------------------------------------------------------------------------------

First Amendment to Agreement and Manual - 129; 2/12/98 - 03                    6

[***] -- Confidential treatment requested.

                            [LETTERHEAD OF COVANCE]

                       Covance Clinical Research Unit Inc.
                                   Madison, WI

                 MASTER CLINICAL DEVELOPMENT SERVICES AGREEMENT

This Clinical Development Services Agreement dated as of 1 December 1997, is
between - Discovery Laboratories, Inc. ("Sponsor") and Covance Clinical Research
Unit ("Covance").

1.    Protocol/Pricing Schedule

      a.    Covance will perform a study or studies ("Study") for Sponsor in
            accordance with a detailed protocol document ("Protocol") that will
            be provided by Sponsor or prepared by Covance with the Sponsor's
            input and approved by Sponsor. The Protocol will specify the Study
            design, objectives, number of subjects, measurements, estimated
            duration of the Study, and all other relevant matters. Covance will
            perform its services for the Sponsor in connection with the Study on
            the terms specified in the pricing schedule attached hereto as
            Exhibit A (the "Pricing Schedule"). The Pricing Schedule will set
            forth the pricing and payment terms for the Study and is deemed a
            part of this Agreement and is incorporated herein by reference.

      b.    If requested by Sponsor, Covance will consult with Sponsor to assist
            Sponsor in developing the Study design in a manner consistent with
            current regulatory guidelines. Covance does not warrant the Protocol
            or Study design, or that the Study results, will satisfy the
            requirements of any regulatory agencies at the time of submission of
            study results to such agencies.

2.    Study Materials

      Sponsor will provide Covance with sufficient amounts of drug with which to
      perform the Study, as well as such sufficient and comprehensive data as
      may be required by Covance concerning the stability of the test material
      end storage and safety requirements.

3.    Principal Investigator

      Covance will appoint a "Principal Investigator" to be responsible for the
      Study.

                            [LETTERHEAD OF COVANCE]

4.    Compliance with Government Regulations

      a.    Covance will perform the Study in accordance with the Protocol.
            Covance will also comply in all material respects with all current
            government regulatory requirements concerning Good Clinical
            Practices as considered to be appropriate at the time of study
            initiation.

      b.    Should such government regulatory requirements be changed, Covance
            will make every reasonable effort to satisfy the new requirements.
            In the event that compliance with such new regulatory requirements
            necessitates a change in the Protocol for the Study, Covance will
            submit to Sponsor a revised Pricing Schedule for Sponsor's
            acceptance prior to making any changes in the Protocol or Study.

5.    Sponsor Visits to Facilities

      Sponsor's representatives may visit Covance's clinic with reasonable
      frequency, upon reasonable notice, during normal business hours to observe
      the progress of the Study. Covance will assist Sponsor in scheduling such
      visits.

6.    Confidential Information/Legal Proceedings

      a.    Covance will not disclose to any business or institution not
            affiliated with Covance, without Sponsor's written permission, any
            information pertaining to Sponsor's Study or this Agreement unless
            such disclosure is required by any law, rule, regulation, order,
            decision, decree, subpoena, or other legal process ("Law").
            Disclosures to Institutional Review Boards are understood to be
            required by Law. If such disclosure is requested by Law, Covance
            will notify sponsor of this request promptly, and, if possible,
            prior to any disclosure to permit Sponsor to oppose such disclosure
            by appropriate legal action.

      b.    If Covance shall be obliged to provide, assistance, including
            testimony, or records regarding any Sponsor Study in any legal or
            administrative proceeding, then Sponsor shall reimburse Covance its
            out-of-pocket costs and an hourly fee for its employees or
            representatives.

7.    Work Product

      a.    All reports, including case report forms, will be prepared in
            Covance's standard format unless otherwise specified in the
            Protocol.

Master Clinical Development Services Agreement

                            [LETTERHEAD OF COVANCE]

      b.    Raw data in paper, magnetic or other form, will be retained by
            Covance in compliance with regulatory requirements and the study
            price includes the cost of meeting these requirements. Upon
            expiration of any regulatory requirements to maintain such data or
            after 15 years, whichever is later, Sponsor shall upon Covance's
            request direct that such data be delivered to Sponsor or be retained
            by Covance for a standard storage fee and Covance will comply with
            such direction.

8.    Test Article

      Upon completion of the Study, unless required by Law and so notified by
      the Sponsor in writing, any remaining samples of test or control materials
      will be returned to Sponsor, at Sponsor's expense, for retention in
      compliance with regulatory requirements. If so notified by the Sponsor,
      Covance will retain samples of test or control materials for a standard
      storage fee.

9.    Inventions and Patents

      At Sponsor's request, Covance will assign to Sponsor the rights to any
      patentable invention discovered by Covance's employees exclusively as a
      result of performing Sponsor's Study and pertaining to the Test Article,
      provided Sponsor requests such assignment within 90 days of notification
      of such invention and further provided that if such invention relates to
      testing methods or processes, Sponsor shall grant to Covance and its
      affiliates a [***] to practice such methods or processes in perpetuity. If
      Sponsor requests and at Sponsor's expense, Covance will provide Sponsor
      with reasonable assistance to obtain patents covering such inventions.

10.   Independent Contractor

      Covance shall perform the Study as an independent contractor and shall
      have complete and exclusive control over its employees and agents.

11.   Insurance

      Covance shall secure and maintain in full force and effect throughout the
      performance of the Study insurance coverage for (a) Workmen's
      Compensation, (b) General Liability, and (c) Automobile Liability in
      amounts appropriate to the conduct of Covance's business in Covance's sole
      and exclusive judgement. Certificates evidencing such insurance will be
      made available for examination upon request by Sponsor.

[***] -- Confidential treatment requested.

Master Clinical Development Services Agreement

                            [LETTERHEAD OF COVANCE]

12.   Remedies/Indemnities

      a.    In the event of a material error by Covance in the performance of
            the Study that renders the Study invalid, Covance's sole obligation
            to Sponsor shall be for Covance, at its option, to either (a) repeat
            the Study at Covance's own cost, or (b) refund to Sponsor the
            contract price paid. UNDER NO CIRCUMSTANCES SHALL SPONSOR BE
            ENTITLED TO INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES FOR
            COVANCE'S NONPERFORMANCE OR IMPROPER PERFORMANCE OF ITS OBLIGATIONS
            UNDER THIS AGREEMENT, STUDY, OR PROTOCOL.

      b.    Covance shall indemnify Sponsor from any claims or expense incurred
            by Sponsor arising solely out of Covance's willful or negligent acts
            giving rise to any personal injury, death, or property damage
            occurring during the conduct of the Study. Such indemnity shall not
            extend to any loss or expense resulting from any claim arising out
            of Sponsor's use or marketing of any substance that is the subject
            of the Study.

      c.    Sponsor shall indemnify Covance and its affiliates and their
            respective officers, directors, employees, agents and independent
            contractors, (including the University of Wisconsin-Madison and
            University of Wisconsin-Madison personnel) the "Covance GROUP" from
            any loss, damage, cost or expense (including reasonable attorney's
            fees) (collectively, a "Loss") arising from any claim, demand,
            assessment, action, suit or proceeding (a "Claim") as a result of
            (i) Covance's performance of or involvement with the Study or its
            obligations under this Agreement or the Protocol or (ii) Sponsor's
            tortuous conduct or inaction provided that neither willful nor
            negligent acts by the Covance GROUP were responsible for such Loss.
            In addition, and without limiting the foregoing, Sponsor shall
            indemnify Covance GROUP from any Loss from any Claim arising out of
            Sponsor's use or marketing of any substance tested by Covance.

      d.    Upon receipt of notice of any Claim which may give rise to a right
            of indemnity from the other party hereto, the party seeking
            indemnification (the "Indemnified Party") shall give written notice
            thereof to the other party, (the Indemnifying Party") with a claim
            for indemnity. Such Claim for indemnity shall indicate the nature of
            the Claim and the basis therefore. Promptly after a Claim is made
            for which the Indemnified Party seeks indemnity, the Indemnified
            Party shall permit the Indemnifying Party, at its option and
            expense, to assume the complete defense of such Claim, provided that
            (i) the Indemnified Party will have the right to participate in the
            defense of any such Claim at its own cost and expense, (ii) the
            Indemnifying Party will conduct the defense of any Claim with due
            regard for the business interests and potential related liabilities
            of the Indemnified Party and (iii)

Master Clinical Development Service Agreement

                            [LETTERHEAD OF COVANCE]

            the Indemnifying Party will, prior to making any settlement, consult
            with the Indemnified Party as to the terms of such settlement. The
            Indemnified Party shall have the right, at its election, to release
            and hold harmless the Indemnifying Party from its obligations
            hereunder with respect to such Claim and assume the complete defense
            of the same in return for payment by the Indemnifying Party to the
            Indemnified Party of the amount of the Indemnifying Party's
            settlement offer. The indemnifying Party will not, in defense of any
            such Claim, except with the consent of the Indemnified Party,
            consent to the entry of any judgment or enter into any settlement
            which does not include, as an unconditional term thereof, the giving
            by the claimant or plaintiff to the Indemnified Party of a release
            from all liability in respect thereof. After notice to the
            Indemnified Party of the Indemnifying Party's election to assume the
            defense of such Claim, the Indemnifying Party shall be liable to the
            Indemnified Party for such legal or other expenses subsequently
            incurred by the Indemnified Party in connection with the defense
            thereof at the request of the Indemnifying Party. As to those Claims
            with respect to which the Indemnifying Party does not elect to
            assume control of the defense, the Indemnified Party will afford the
            Indemnifying Party an opportunity to participate in such defense, as
            the Indemnifying Party's own cost and expense, and will not settle
            or otherwise dispose of any of the same without the consent of the
            Indemnifying Party.

13.   Generic Drug Enforcement Act of 1992

      Covance Clinical Research Unit Inc.: (a) represents that it has never
      been, and its employees have never been debarred or convicted of a crime
      for which a person can be debarred under 21 USC Sec. 335a ("335a"); nor
      threatened to be debarred or indicted for a crime or otherwise engaged in
      conduct for which a person can be debarred under 335a; (b) agrees that it
      will promptly notify Sponsor in the event of any such debarment,
      conviction, threat or indictment occurring during the term of this
      Agreement or three (3) years following its termination or expiration; and
      (c) agrees not to employ any person in connection with any of the work to
      be performed under this Agreement who has been debarred or convicted of a
      crime for which a person can be debarred.

14.   Force Majeure

      Either party shall be excused from performing its obligations under this
      Agreement if its performance is delayed or prevented by any cause beyond
      such party's control, including, without limitation, acts of God, fire,
      explosion, weather, disease, war, insurrection, civil strife, riots,
      government action, or power failure. Performance shall be excused only to
      the extent of and during the reasonable continuance of such disability.
      Any deadline or time for performance specified in the Protocol that falls
      due during or subsequent to the occurrence of any of the disabilities
      referred to herein shall be automatically extended for a period of time
      equal to the period of such disability.

Master Clinical Development Services Agreement

                            [LETTERHEAD OF COVANCE]

      Covance will notify Sponsor as soon as practicable if, by reason of any of
      the disabilities referred to herein, Covance is unable to meet any
      deadline or time for performance specified in the Protocol. In the event
      that any part of the Study is rendered invalid as a result of such
      disability, Covance will, upon written request from Sponsor and at
      Sponsor's sole cost and expense, repeat that part of the Study affected by
      the disability.

15.   Allocation of Resources

      If delays in performance of the Study are experienced because of Sponsor's
      inability to supply Covance with materials or information required to
      perform the Study, Covance reserves the right to reallocate resources
      otherwise reserved for performance of the Study without incurring
      liability to Sponsor.

16.   Use of Names

      Sponsor shall not use Covance's name or the names of Covance's employees
      in any advertising or sales promotional material or in any publication
      without prior written permission of Covance. Covance will not use
      Sponsor's name or the names of Sponsor's employees in any advertising or
      sales promotional material or in any publication without prior written
      permission of the Sponsor.

17.   Termination

      a.    Sponsor shall have the right at any time to terminate any Study
            prior to completion by giving written notice to Covance. In the
            event of termination by the Sponsor, Sponsor shall pay Covance upon
            receipt of Covance's invoice the amount specified as set forth in
            Exhibit A.

      b.    Covance shall have the right to terminate the Study prior to
            completion for any of the following reasons:

            (1)   Sponsor's breach of the Agreement.

            (2)   Covance's good faith determination that it is not safe to
                  continue the Study.

            In the event of termination by Covance due to (1) and/or (2) above,
            Sponsor shall pay Covance upon receipt of Covance's invoice the
            amount specified as set forth in Exhibit A.

      c.    The termination of this Agreement shall not relieve either party of
            its obligation to the other in respect of (i) maintaining the
            confidentiality of information, (ii)

Master Clinical Development Services Agreement

                            [LETTERHEAD OF COVANCE]

            obtaining consents for advertising purposes and publications, (iii)
            indemnification, and (iv) compensation for services performed.

18.   Assignment

      Covance shall not assign the clinic portion of this Agreement without the
      prior written consent of Sponsor, which consent shall not be unreasonably
      withheld.

19.   Notice

      All notices given under this Agreement shall be in writing and shall be
      delivered personally, sent by telegram, telefax, or mailed to the parties
      at the addresses set forth below, or such other addresses as the parties
      may designate in writing.

20.   Amendments

      Any amendments or revisions to this Agreement, the Pricing Schedule or the
      Protocol must be proposed in writing by either party and accepted in
      writing by the other party before they shall become effective and binding.

21.   Waiver

      No waiver of any term, provision, or condition of this Agreement, the
      Pricing Schedule or the Protocol whether by conduct or otherwise in any
      one or more instances shall be deemed to be or construed as a further or
      continuing waiver of any such term, provision, or condition or of any
      other term, provision, or condition of this Agreement.

22.   Arbitration

      a.    All disputes between the parties which are not resolved by means of
            direct negotiations between them and which arise out of this
            Agreement, the Pricing Schedule or the Protocol shall be finally
            settled by arbitration in accordance with this Section. The
            arbitration shall be held in or around Madison, Wisconsin as
            determined by Covance, and shall be conducted in accordance with the
            rules of the American Arbitration Association by two arbitrators
            appointed, one by each party to this Agreement. If the arbitrators
            appointed cannot agree on the resolution of the dispute within 60
            days after the dispute is submitted to them, they shall thereupon
            appoint a third arbitrator, and if they fail to agree upon a third
            arbitrator within 30

Master Clinical Development Services Agreement

                            [LETTERHEAD OF COVANCE]

            days after a deadlock is declared by either arbitrator, a third
            arbitrator will be appointed by the American Arbitration Association
            upon the request of either such arbitrator.

      b.    Any decision by the third arbitrator and either one of the other
            arbitrators shall be binding upon the parties and may be entered as
            a final judgement in any court having jurisdiction. The arbitration
            shall be conducted completely in the English language. The cost of
            any arbitration proceeding shall be borne by the parties as the
            arbitrators shall determine if the parties have not otherwise
            agreed. The arbitrators shall render their final decision in writing
            in English to the parties, which decision shall explain the reasons
            therefor.

23.   Entirety

      This Agreement, together with the Pricing Schedule and the Protocol, is
      the entire understanding between Sponsor and Covance. It replaces,
      supersedes and renders void any and all predecessor and contemporaneous
      negotiations, agreements, representations, understandings and commitments
      between the parties.

24.   Governing Law

      This Agreement is a Wisconsin contract. It shall be governed, construed,
      and interpreted in accordance with the laws of Wisconsin.

      In witness whereof, the parties have executed this Agreement.

DISCOVERY LABORATORIES, INC.

By: /s/ David R. Crockford                12/04/97
   ----------------------------           -------------
                                          Date
Title: Vice President
      -------------------------

COVANCE CLINICAL RESEARCH UNIT

By:    /s/ Kenneth E. Moritz              12-1-97
       ------------------------           -------------
       Authorized Signature               Date
       Kenneth E. Moritz

Title: Contracts Administrator/
       Senior Client Manager

Master Clinical Development Services Agreement

                         Covance Clinical Research Unit

                                   EXHIBIT A
                                PRICING SCHEDULE

Pricing Schedule dated as of 1 December 1997, is between Client ("Sponsor") and
Covance Clinical Research Unit ("Covance").

                                   WITNESSETH

WHEREAS, Sponsor and Covance have entered into that certain Master Clinical
Development Services Agreement dated as of 1 December 1997, (as amended or
modified from time to time, the "Master Clinical Development Services
Agreement"; terms defined therein an used herein as defined therein unless
otherwise defined herein);

WHEREAS, Covance has agreed to perform the Study for the Sponsor on the terms of
the Clinical Development Services Agreement, the Protocol and this Pricing
Schedule;

WHEREAS, this Pricing Schedule is the Pricing Schedule referred to in the
Clinical Development Services Agreement;

WHEREAS, Covance will perform such Study on the price specified in this Pricing
Schedule.

NOW, THEREFORE, the Sponsor and Covance hereby agree to the following price and
payment schedule in connection with Study and Protocol identified below.

      STUDY NO.:        8475        PROTOCOL NO.:     ST-630-01A

      TITLE:      A Phase IA, Double-Blind, Placebo-Controlled, Rising
                  Single-and Multiple-Dose, Safety, Tolerance and
                  Pharmacokinetic Study of ST-630 Softgel Capsules Administered
                  at 0.0625, 0.125, 0.25, 0.375, or 0.5 (mu)g in Normal Healthy,
                  Volunteers

      PRICE:      $393,554

PAYMENT SCHEDULE:

At signing of the Agreement                                               [***]
Following successful completion of Group A                                [***]
Following successful completion of Group B                                [***]
Following successful completion of Group C                                [***]
Following successful completion of Group D                                [***]

Master Clinical Development Services Agreement

[***] - Confidential treatment requested.

Following successful completion of Group E                                [***]
Following completion and approval of the CTR                              [***]

Price quoted is predicated on Covance receiving all necessary test material and
other data required to conduct the Study outlined in this proposal within 30
days of Covance's signing of this Pricing Schedule.

Termination Terms:

If the study is terminated after initiation but prior to completion of 5 groups,
the following fees will be charged:

               [***] 

Postponement Terms:

If the study is postponed within 30 days of 4 December 1997, Sponsor is
responsible for payment of all variable costs incurred to date, as well as, any
costs associated with additional advertising, recruiting, and screening efforts
to ensure enrollment of a full panel plus a fee of 5% of the full study price.

IN WITNESS WHEREOF, the undersigned have executed this Pricing Schedule as of
the date first above written.

Discovery Laboratories, Inc.              Covance Clinical Research Unit

By: /s/ David R. Crockford                By: /s/ Kenneth E. Moritz
   ----------------------------              -------------------------------
                                          Authorized Signature

Name: DAVID R. CROCKFORD                  Title: Contract Administrator/
     --------------------------                 ----------------------------
                                                 Senior Client Manager

Title: Vice President
      -------------------------

Master Clinical Development Services Agreement

[***] - Confidential treatment requested.

                                     Budget

                   Prepared for Discovery Laboratories, Inc.
                     by Covance Clinical Research Unit Inc.
                    Protocol No. ST-630-01A - Study No. 8475
                          30 Volunteers, 5 Groups of 6
                                1 December 1997

- --------------------------------------------------------------------------------
FIXED COST FOR STUDY                                                  TOTAL
- --------------------------------------------------------------------------------
Advertising                                                                [***]
- --------------------------------------------------------------------------------
Recruiting/Screening                                                       [***]
- --------------------------------------------------------------------------------
IRB                                                                        [***]
- --------------------------------------------------------------------------------
Project Management                                                         [***]
- --------------------------------------------------------------------------------
Quality Assurance                                                          [***]
- --------------------------------------------------------------------------------
Clinical Confinement (Includes all meals)   30 Volunteers x 5 Nights       [***]
                                            15 Alternates x 1 Night
- --------------------------------------------------------------------------------
State Unemployment Insurance                                               [***]
- --------------------------------------------------------------------------------
Archiving                                                                  [***]
- --------------------------------------------------------------------------------
Supplies and Shipping                                                      [***]
- --------------------------------------------------------------------------------
FIXED COSTS PER GROUP (X5)
- --------------------------------------------------------------------------------
Physician [***]                                                            [***]
- --------------------------------------------------------------------------------
Clinical Procedures [***]                                                  [***]
- --------------------------------------------------------------------------------
Data Entry [***]                                                           [***]
- --------------------------------------------------------------------------------
Report Writing [***]                                                       [***]
- --------------------------------------------------------------------------------
VARIABLE COSTS
- --------------------------------------------------------------------------------
Volunteer Stipends - On-Study                                              [***]
- --------------------------------------------------------------------------------
[***] x 30 Volunteers
[***] x 15 Alternates
- --------------------------------------------------------------------------------
Labs and ECG                                                               [***]
- --------------------------------------------------------------------------------
Screening             75 Volunteers x 1 Timepoint
- --------------------------------------------------------------------------------
On-Study              30 Volunteers x Study Timepoints
                      15 Alternates x 1 Timepoint
- --------------------------------------------------------------------------------
                                                   Clinical Cost Total     [***]
- --------------------------------------------------------------------------------
Data Management Costs                                                      [***]
- --------------------------------------------------------------------------------
Costs Incurred for Protocol and IND Development                            [***]
- --------------------------------------------------------------------------------
Monitoring                                                                 [***]
- --------------------------------------------------------------------------------
                                                      Total Study Cost     [***]
- --------------------------------------------------------------------------------

Price quoted is contingent on final protocol and is valid for 30 days.

Additional medical expenses (i.e., consultations) will be billed to the Sponsor
on a case by case basis.

[***] - Confidential treatment requested.

                                SUPPLY AGREEMENT

THIS AGREEMENT is made as of this 10th day of December, 1997, by and between
Acute Therapeutics, Inc. (a corporation organized and existing under the laws
Delaware, with its principal office at 3359 Durham Road, Doylestown, PA 18901;
hereinafter "ATI"), and PolyPeptide Laboratories (a corporation organized and
existing under the laws of Delaware, with principal manufacturing facilities at
365 Maple Avenue, Torrance, California 90503; hereinafter "PPL").

                                   WITNESSETH

WHEREAS, ATI is active in the pharmaceutical business and is the owner of all
rights to certain proprietary technical information, patents and patent
applications relating to the KL(4)-peptide Substance (hereinafter "Substance");
and

WHEREAS, ATI desires to contract with PPL for the processing of the
KL(4)-peptide (hereinafter "Substance"); and

WHEREAS, PPL possesses the requisite expertise, personnel and facilities for the
manufacture and supply of the Substance to ATI;

NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants
and conditions herein contained, ATI and PPL agree as follows:

1.    DESCRIPTION OF WORK

      PPL shall supply ATI's requirements for the conversion of insoluble
      Substance to soluble Substance (using a procedure supplied by ATI and
      attached as Exhibit A) for use in the production of clinical product for
      human use. Such Substance shall meet the specifications in Exhibit B
      (hereinafter "Specifications"). Subject to PPL's prior written consent,
      such consent not to be unreasonably withheld, ATI may, as needed, change
      the Specifications.

2.    QUANTITIES

      ATI will provide PPL with [***] of insoluble Substance, which PPL will
      process to Soluble Substance in six (6) lots of approximately [***] each.
      ATI and PPL shall cooperate in scheduling the production of these lots.

3.    QUALITY

      3.1.  ATI or its agent shall have the right, but not the obligation, to
            inspect PPL's quality control procedures and records and to obtain
            specimens for analysis of the Substance from PPL's production to
            confirm quality. ATI's employees may perform inspections of PPL's
            manufacturing facilities. ATI employees who inspect PPL's facilities
            shall comply with PPL regulations and rules.

[***] - Confidential treatment requested.

Supply Agreement                                                               2
between Acute Therapeutics, Inc., and PolyPeptide
Laboratories, Inc.
December 10, 1997

      3.2.  ATI will approve initial testing documents, the master batch record,
            and any revisions to these documents thereafter.

      3.3.  For each batch of the Substance produced by PPL, ATI shall undertake
            testing for compliance with the Specifications. PPL will supply ATI
            with a pre-shipment sample of each finished lot along with a
            Certificate of Analysis from PPL, which will be shipped to ATI in
            accord with instructions provided by ATI. Upon receipt of the
            pre-shipment sample, ATI will engage a testing facility who will
            perform the analysis according to ATI's instructions. Upon
            completion of its testing, ATI shall submit to PPL a certificate of
            analysis listing testing results and all agreed upon records for
            each lot of the Substance produced.

      3.4.  ATI or it's agent shall have thirty (30) days upon receipt of the
            pre-shipment sample to determine whether or not it conforms to the
            Specifications. ATI shall promptly give PPL written notice of any
            respect in which the Substance fails to conform to Specifications.
            If ATI fails to notify PPL of any nonconformity within such 30-day
            period, ATI shall be deemed to have accepted the Substance. At this
            point PPL will arrange to ship all the Substance of the same batch
            to ATI in accord with instructions provided by ATI. If ATI notifies
            PPL of any nonconformity, payment of the invoice for the
            nonconforming batch shall be held in abeyance until the dispute is
            resolved.

      3.5.  Pursuant to Section 3.4, if ATI shall claim that any lot(s) of the
            Substance fails to meet the Specifications, PPL reserves the right
            to retest such lot(s) at its own expense at an outside facility
            mutually agreed by both parties. In the event that the outside
            party's test results indicates that the lot(s) meets the
            Specifications, further action shall be negotiated.

      3.6.  In the event of a rejection of a batch of the Substance, PPL will
            cease further production of the Substance until such time as the
            results of an investigation have been communicated to ATI, and PPL
            has concurred with the corrective action to be taken. Should ATI
            desire to have additional lots of the Substance manufactured while
            the investigation is in process, ATI will be responsible for the
            fees for service performed by PPL whether the batch is accepted or
            not.

      3.7.  ATI will provide a lot number and expiry period for each lot
            manufactured by PPL.

      3.8.  ATI is responsible for release of the final Substance.

      3.9.  ATI is responsible for the Stability Testing Program.

      3.10. ATI is responsible for maintaining Retention Samples.

Supply Agreement                                                               3
between Acute Therapeutics, Inc., and PolyPeptide
Laboratories, Inc.
December 10, 1997

      3.11. PPL will provide the name and phone number(s) of a contact person(s)
            who may be called at any hour when PPL is manufacturing the
            Substance or when the Substance is in transit outside of PPL.

4.    PRICE

      The prices to be paid by ATI for quantities of the Substance purchased
      pursuant to Section 3 will be $[***] per batch of Substance as agreed in
      writing and will be firm for the six (6) batches ($[***] for the entire
      project).

5.    TERM OF AGREEMENT

      5.1   This Agreement shall become effective on the date first stated above
            and, except as otherwise provided herein, shall be in effect until
            the six (6) lots of soluble Substance have been produced.

      5.2.  Either party may terminate this Agreement for a material breach by
            the other party by giving the breaching party written notice,
            specifying the breach relied on, and giving the breaching party
            thirty (30) days to cure such breach. If the default has not been
            cured at the end of the thirty (30) day period, then, upon notice
            thereof to the breaching party by the other, this Agreement shall
            terminate. Termination for breach will have no effect on performance
            obligations or amounts to be paid which have accrued up to the
            effective date of such Termination.

      5.3.  In event of termination, transition will be conducted in such a
            manner as to not cause inconvenience to either party.

6.    PAYMENT TERMS

      6.1.  PPL will issue an invoice at such time as the PPL Quality Control
            Department has completed its testing, found the Substance suitable
            to be shipped and has shipped the test result documents to ATI. The
            purchase price for the Substance will be paid to PPL no later than
            thirty (30) days after the date of PPL's invoice to ATI.

      6.2.  All prices of the Substance shall be on the basis of F.O.B. on the
            dock at PPL's plant in Torrance, California.

7.    FACILITIES

      7.1.  PPL represents that it has obtained all approvals required by
            Regulatory Authorities (hereinafter "RA") for its manufacturing
            facilities and that its manufacturing facilities conform, and will
            in the future conform, to current Good Manufacturing Practices
            established by the RA from time to time. No material change in PPL's
            manufacturing or testing procedures shall be made without prior
            approval of ATI, for such testing procedures which are specific to
            the Substance.

[***] - Confidential treatment requested.

Supply Agreement                                                               4
between Acute Therapeutics, Inc., and PolyPeptide
Laboratories, Inc.
December 10, 1997

      7.2.  All documents and updates with regard to those activities covered by
            this Agreement which are required by any RA shall be provided by
            PPL, and PPL shall submit to all inquiries and inspections by such
            RA. All documents provided by PPL to any RA shall be made available
            to ATI, in advance if feasible, and in no case shall such documents
            be made available for inspection by ATI later than two (2) working
            days after such documents are provided to any RA. PPL shall promptly
            notify ATI of all RA inspections concerning those activities covered
            by this Agreement and in no case shall the written notification be
            more than seven (7) days after the inspection has begun.

8.    INDEMNIFICATION

      8.1.  ATI hereby holds harmless and indemnifies PPL against any and all
            claims, losses, liabilities, lawsuits, proceedings, costs and
            expenses, including, without limitation, reasonable attorneys' fees,
            (hereinafter collectively referred as "Claim" or "Claims") resulting
            from, arising out of or in connection with PPL's performance under
            this Agreement except to the extent that such Claims are the result
            of PPL's action, inaction or negligence in its performance under
            this Agreement. If any Claim shall be made against PPL as to which
            this indemnification applies, PPL shall immediately inform ATI of
            such Claim which will be brought against PPL and/or ATI and in such
            case PPL shall not take any step nor conduct any legal proceeding
            before consulting and obtaining ATI's written approval. At PPL's
            request, ATI and/or its insurers shall assume direction and control
            of the defense against such Claim, including, without limitation,
            the settlement thereof at the sole option of ATI or its insurer. PPL
            may, at its option and expense, have its own counsel participate in
            any proceeding which is under the direction and control of ATI. PPL
            shall cooperate with ATI and its insurer in the disposition of any
            such matters. In addition, PPL may at any time relieve ATI of its
            responsibilities under Section 8.1 as to any other Claim.

      8.2.  PPL hereby holds harmless and indemnifies ATI against any and all
            claims resulting from, arising out of or in connection with the
            action, inaction or negligence of PPL in its performance under this
            Agreement. If any Claims shall be made against ATI as to which this
            indemnification applies, ATI shall immediately inform PPL of such
            Claim which will be brought against ATI and/or PPL and in such case
            ATI shall not take any step nor conduct any legal proceeding before
            consulting and obtaining PPL's written approval. At ATI's request,
            PPL and/or its insurers shall assume direction and control of the
            defense against such Claim, including, without limitation, the
            settlement thereof at the sole option of PPL or its insurer. ATI
            may, at its option and expense, have its own counsel participate in
            any proceeding which is under the direction and control of PPL. ATI
            shall cooperate with PPL and its insurer in the disposition of any
            such matters. In addition, ATI may at any time relieve PPL of its
            responsibilities under Section 8.2 as to any other Claim.

Supply Agreement                                                               5
between Acute Therapeutics, Inc., and PolyPeptide
Laboratories, Inc.
December 10, 1997

9.    CONFIDENTIALITY

      9.1.  Except as hereinafter provided, information provided by one party to
            the other party shall be treated as confidential (hereinafter
            "Confidential Information") by the other party. Confidential
            Information shall not include:

            a)    Information which was known to the receiving party, prior to
                  receipt from the delivering party;

            b)    Information which was in the public domain or generally known
                  to the trade at the time of receipt from the delivering party;

            c)    Information which, other than by breach of this Agreement,
                  enters the public domain or becomes generally known to the
                  trade;

            d)    Information which is disclosed to the receiving party by a
                  third party who is free to make such disclosure;

            e)    Information which is independently developed by the receiving
                  party without use of the delivering party's Confidential
                  Information; or

            f)    Information which is required to be disclosed by law,
                  regulatory, administrative or judicial order.

      9.2.  Each party's Confidential Information shall be kept confidential for
            a period not less than seven (7) years by the other party and shall
            not be disclosed by such other party other than to its officers,
            employees and agents who are engaged in its operations relating to
            the Substance and who have the need to know such Confidential
            Information.

      9.3.  The provisions of Section 9 shall survive termination of this
            Agreement for any reason.

10.   FORCE MAJEURE

      Neither party shall be liable for any failure or delay in performance when
      any such failure or delay shall be caused (directly or indirectly) by
      fires, flood, earthquakes, accidents, explosions, sabotage, strikes, or
      other labor disturbances (regardless of the reasonableness of the demands
      of labor), civil commotions, riots, invasions, wars, intervening
      governmental regulations or orders, shortages of labor, fuel, power, or
      raw material, inability to obtain equipment or supplies, inability to
      obtain or delays in transportation, acts of God, or any cause (whether
      similar or dissimilar to the foregoing) beyond the reasonable control of
      ATI or PPL, as the case may be.

11.   INDEPENDENT CONTRACTOR

      Neither party shall have the right to control the activities of the other
      in performance of this Agreement and each shall perform as an independent
      contractor and nothing herein shall be construed to be inconsistent with
      that relationship or status. Under no circumstances shall the employees or
      agents of one party be considered employees or agents of the other. This
      Agreement shall not constitute, create, or in any way be interpreted as a
      joint venture, partnership, or formal business organization of any kind.

Supply Agreement                                                               6
between Acute Therapeutics, Inc., and PolyPeptide
Laboratories, Inc.
December 10, 1997

12.   NOTICES

      Any and all notices or other communications required or permitted under
      this Agreement must be in written form and be deemed to have been given
      upon receipt of telefax to the notified party (followed by hard copy of
      documents) addressed to the party to be notified as listed below or to
      such other, address as either party shall have heretofore specified in a
      notice to the other in the manner herein provided.

Contact Addresses:

            ATI:  Acute Therapeutics, Inc.
                  3359 Durham Road
                  Doylestown, PA 18901
                        Attn: Dr. Harry G. Brittain

            PPL:  PolyPeptide Laboratories, Inc. 
                  365 Maple Avenue
                  Torrance, California 90503
                        Attn: Dr. Jane Salik

13.   ASSIGNMENT OF AGREEMENT

      Neither this Agreement nor any rights or obligations hereunder may be
      assigned by either party hereto without the prior written consent of the
      other party, which shall not be unreasonably withheld. Any subsequent
      assignee, purchaser, or transferee shall be bound by the terms of this
      Agreement.

14.   DEBARRED PERSONS STATEMENT

      PPL shall not use in any capacity persons or the services of persons that
      are debarred, on the Debarment List, or that have been convicted of
      actions that could lead to debarment as described in Section 306(a) and
      (b) of The Federal Food, Drug and Cosmetic Act or its amendments.

15.   GOVERNING LAW

      This Agreement shall be construed, interpreted and applied in accordance
      with the laws of the State of Pennsylvania.

16.   ARBITRATION

      At the request of either party any controversy or claim arising out of, or
      relating to, this Agreement shall be settled by arbitration either in Los
      Angeles, CA, or in Philadelphia, PA, in accordance with the then current
      arbitration rules of the American Arbitration Association. Judgment upon
      the award rendered by the arbitrator(s) shall be binding on the parties
      and may

Supply Agreement                                                               7
between Acute Therapeutics, Inc., and PolyPeptide
Laboratories, Inc.
December 10, 1997

      be entered by either party in the court or forum, state or federal, having
      jurisdiction. Each party will bear half of the costs.

17.   ENTIRE AGREEMENT

      This Agreement constitutes the entire understanding between the parties
      and is intended as a final expression of the agreement and as a complete
      statement of terms and conditions thereof, and shall not be amended except
      in writing signed by an authorized representative of each party and
      specifically referring to this Agreement. If there is any inconsistency
      between this document and any other writings which are referred to or are
      incorporated herein, the terms and conditions of this document shall take
      precedence. This Agreement supersedes any previous agreements or
      arrangements between the parties and any customary practice of the parties
      at variance with the terms hereof.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement by their
duly authorized representatives.

ACUTE THERAPEUTICS, INC.                  POLYPEPTIDE LABORATORIES, INC.

/s/ Robert Capetola                       /s/ Jane Salik                
- -------------------------------------     --------------------------------------
      Authorized signature                      Authorized signature    
                                                                        
      Robert Capetola                           Jane Salik              
- -------------------------------------     --------------------------------------
      Printed Name                              Printed Name            
                                                                        
      12/10/97                                  12/12/97                
- -------------------------------------     --------------------------------------
      Date                                      Date                    

Supply Agreement                                                               8
between Acute Therapeutics, Inc., and PolyPeptide
Laboratories, Inc.
December 10, 1997

                                    Exhibit A

                                     [***]

[***] - Confidential treatment requested.

Supply Agreement                                                               9
between Acute Therapeutics, Inc., and PolyPeptide
Laboratories, Inc.
December 10, 1997

                                    Exhibit B

             Specifications for the Soluble KL(4) Peptide Substance

                                     [***]

[***] - Confidential treatment requested.
                                                                   EXHIBIT 10.53

                              EMPLOYMENT AGREEMENT

            This Employment Agreement (the "Agreement") is entered into as of
November 1, 1996 by and between Acute Therapeutics, Inc. a Delaware corporation
(the "Company"), and Harry Brittain, Ph.D. ("Executive").

            WHEREAS, the Company and the Executive desire that the Executive be
employed by the Company and that the terms and conditions of such employment be
defined;

            NOW, THEREFORE, in consideration of the employment of the Executive
by the Company, the Company and Executive agree as follows:

            1. Term of the Agreement. The Company shall employ Executive and
Executive shall accept employment for a period of three (3) years commencing on
November 1, 1996 (the "Commencement Date") and continuing until November 1, 1999
(the "Employment Period") subject, however, to prior termination as hereinafter
provided in Section 6.

            2. Executive's Duties and Obligations.

                  a. Duties. Executive shall serve as Vice President for
Pharmaceutical Development. Executive shall be responsible for analytical
formulation, chemical development and manufacturing technology transfer.

                  b. Location of Employment. Executive's 

principal place of business shall be at Company's office located at 6097 Hidden
Valley Drive, Doylestown, Pennsylvania 18901.

                  c. Proprietary Information and Inventions Agreement. Upon
commencement of employment with the Company, Executive shall execute the
Company's standard form of Intellectual Property and Confidential Information
Agreement (the "Confidentiality Agreement") a copy of which is attached to this
Agreement as Exhibit A.

            3. Devotion of Time to Company's Business

                  a. Full-Time Efforts. During his employment with the Company,
Executive shall devote substantially all of his business time, attention and
efforts to the high quality performance of his duties to the Company.

                  b. No Other Employment. During his employment with the
Company, Executive shall not, whether directly or indirectly, render any
services of a commercial or professional nature to any other person or
organization, whether for compensation or otherwise, without the prior written
consent of the Company's Executive Committee or Board of Directors.

                                       2

                  c. Non-Competition During Employment. During the term of this
Agreement, and for eighteen months after its termination, Executive shall not,
directly or indirectly, either as an employee, employer, consultant, agent,
principal, partner, stockholder, corporate officer, director, or in any other
individual or representative capacity (i) compete with Acute Therapeutics, Inc.
in the business or research areas of surfactant replacement therapy and other
areas which Acute Therapeutics, Inc. may enter while he remains employed, or
(ii) directly or indirectly solicit or employ any employees of the Company.

            4. Compensation and Benefits.

                  a. Base Compensation. During the term of this Agreement, the
Company shall pay to Executive base annual compensation of One Hundred Forty Two
Thousand dollars ($142,000), less all required withholdings.

                  b. Relocation Payment. Executive shall receive a one-time
payment of Fifteen Thousand dollars ($15,000) solely to cover any relocation
expenses.

                  c. Benefits. During his employment with the Company, the
Company shall provide reasonable medical and disability benefits to Executive
while Executive is a full-time employee of the Company. In addition, the Company
will provide to Executive term life insurance on behalf of Executive's
beneficiaries in the amount of Executive's annual salary for the 

                                       3

term of this Agreement.

                  d. Stock Option. The Board of Directors of the Company has
granted to Executive, on the date hereof, an incentive stock option to purchase
16,000 shares of Common Stock, $.001 par value of the Company, at an exercise
price of $0.32 per share, pursuant to the terms of the Notice of Grant of Stock
Option attached hereto as Exhibit B.

                  e. Incentive Bonus. Executive shall be eligible for an
incentive bonus at the discretion of the Chief Executive Officer of the Company.

            5. Termination of Employment.

                  a. Termination for Good Cause. The Company may terminate
Executive's employment at any time for "Good Cause," as herein defined. For the
purposes of this Agreement, "Good Cause" includes, but is not limited to, gross
misconduct, gross neglect of duties, acts involving moral turpitude, material
breach by Executive of this Agreement or the Confidentiality Agreement or any
act or omission involving fraud, embezzlement, or misappropriation of any
property or proprietary information of the Company by Executive which is not
cured by Executive within fifteen (15) days after receipt of written notice from
the Company.

                  b. Termination without Good Cause. If Executive's employment
is terminated by the Company without Good Cause, the following provisions shall
apply:

                                       4

                        i) Executive shall be entitled to any unpaid
compensation accrued through the last day of Executive's employment;

                        ii) Executive shall be entitled to receive severance
payments equal to his base compensation, payable on normal Company payroll
dates, for a six month period, subject to setoff for other employment or
consulting income received by Executive.

                  c. Death or Disability. This Agreement shall terminate if
Executive dies or is mentally or physically "Disabled" as herein defined. For
the purposes of this Agreement, "Disabled" shall mean a mental or physical
condition that renders Executive incapable of performing his duties and
obligations under this Agreement for three (3) or more consecutive months or for
a total of six (6) months during any twelve (12) consecutive months; provided,
that during such period the Company shall give Executive at least thirty (30)
days' written notice that it considers the time period for disability to be
running. If this Agreement is terminated under this paragraph 5.d., Executive or
his estate shall be entitled to any unpaid compensation accrued through the last
day of Executive's employment but shall not be entitled to any severance
benefits.

            6. Miscellaneous.

                  a. Governing Law. This Agreement shall be interpreted,
construed, governed and enforced according to the 

                                       5

laws of the State of New York.

                  b. Amendments. No amendment or modification of the terms or
conditions of this Agreement shall be valid unless in writing and signed by the
parties hereto.

                  c. Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
construed, if possible, so as to be enforceable under applicable law, else, such
provision shall be excluded from this Agreement and the balance of the Agreement
shall be interpreted as if such provision were so excluded and shall be
enforceable in accordance with its terms.

                  d. Successors and Assigns. The rights and obligations of the
Company under this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Company. Executive shall not be entitled
to assign any of his rights or obligations under this Agreement.

                  e. Notices. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery or two days after deposit in the United States Post Office, by
registered or certified mail, postage prepaid, addressed to the other party at
the address shown below such party's signature, or at such other address or
addresses as either party shall designate to the other in accordance with this
paragraph 6.e.

                  f. Entire Agreement. This Agreement, including 

                                       6

the exhibits attached hereto, constitutes the entire agreement between the
parties with respect to the employment of Executive.

                                       7

            IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date set forth above.

                                    ACUTE THERAPEUTICS, INC.

                                    By: Robert Capetola, Ph.D.
                                    Its: President

                                    /s/ Robert J. Capetola
                                    -------------------------------------

                        Address:    6097 Hidden Valley Drive
                                    Doylestown, Pennsylvania 18901

                                       EXECUTIVE:
   
                                       Harry Brittain, Ph.D.

                                       By: /s/ Harry S. Brittain
                                          -------------------------------
                        Address:    88 Courter Avenue
                                    -------------------------------------
                                    Maplewood    NJ   07040
                                    -------------------------------------

                                       8

                                                                   EXHIBIT 10.54

                              EMPLOYMENT AGREEMENT

            This Employment Agreement (the "Agreement") is entered into as of
November 18, 1996 by and between Acute Therapeutics, Inc. a Delaware corporation
(the "Company"), and Laurence Katz, Ph.D. ("Executive").

            WHEREAS, the Company and the Executive desire that the Executive be
employed by the Company and that the terms and conditions of such employment be
defined;

            NOW, THEREFORE, in consideration of the employment of the Executive
by the Company, the Company and Executive agree as follows:

            1. Term of the Agreement. The Company shall employ Executive and
Executive shall accept employment for a period of three (3) years commencing on
November 18, 1996 (the "Commencement Date") and continuing until November 18,
1999 (the "Employment Period") subject, however, to prior termination as
hereinafter provided in Section 6.

            2. Executive's Duties and Obligations.

                  a. Duties. Executive shall serve as Vice President of Project
Administration and Clinical Administration. Executive shall be responsible for
execution of clinical site selection, protocol development and management of
Clinical Research Associates and interfacing with Contact Research

Organizations.

                  b. Location of Employment. Executive's principal place of
business shall be at Company's office located at 6097 Hidden Valley Drive,
Doylestown, Pennsylvania 18901.

                  c. Proprietary Information and Inventions Agreement. Upon
commencement of employment with the Company, Executive shall execute the
Company's standard form of Intellectual Property and Confidential Information
Agreement (the "Confidentiality Agreement") a copy of which is attached to this
Agreement as Exhibit A.

            3. Devotion of Time to Company's Business

                  a. Full-Time Efforts. During his employment with the Company,
Executive shall devote substantially all of his business time, attention and
efforts to the high quality performance of his duties to the Company.

                  b. No Other Employment. During his employment with the
Company, Executive shall not, whether directly or indirectly, render any
services of a commercial or professional nature to any other person or
organization, whether for compensation or otherwise, without the prior written
consent of the Company's Executive Committee or Board of Directors.

                                       2

                  c. Non-Competition During Employment. During the term of this
Agreement, and for eighteen months after its termination, Executive shall not,
directly or indirectly, either as an employee, employer, consultant, agent,
principal, partner, stockholder, corporate officer, director, or in any other
individual or representative capacity (i) compete with Acute Therapeutics, Inc.
in the business or research areas of surfactant replacement therapy and other
areas which Acute Therapeutics, Inc. may enter while he remains employed, or
(ii) directly or indirectly solicit or employ any employees of the Company.

            4. Compensation and Benefits.

                  a. Base Compensation. During the term of this Agreement, the
Company shall pay to Executive base annual compensation of One Hundred Forty Two
Thousand dollars ($142,000), less all required withholdings.

                  b. Benefits. During his employment with the Company, the
Company shall provide reasonable medical and disability benefits to Executive
while Executive is a full-time employee of the Company. In addition, the Company
will provide to Executive term life insurance on behalf of Executive's
beneficiaries in the amount of Executive's annual salary for the term of this
Agreement.

                  c. Stock Option. The Board of Directors of the Company has
granted to Executive, on the date hereof, an 

                                       3

incentive stock option to purchase 16,000 shares of Common Stock, $.001 par
value of the Company, at an exercise price of $0.32 per share, pursuant to the
Notice of Grant of Stock Option attached hereto as Exhibit B.

                  d. Incentive Bonus. Executive shall be eligible for an
incentive bonus at the discretion of the Chief Executive Officer of the Company.

            5. Termination of Employment.

                  a. Termination for Good Cause. The Company may terminate
Executive's employment at any time for "Good Cause," as herein defined. For the
purposes of this Agreement, "Good Cause" includes, but is not limited to, gross
misconduct, gross neglect of duties, acts involving moral turpitude, material
breach by Executive of this Agreement or the Confidentiality Agreement or any
act or omission involving fraud, embezzlement, or misappropriation of any
property or proprietary information of the Company by Executive which is not
cured by Executive within fifteen (15) days after receipt of written notice from
the Company.

                  b. Termination without Good Cause. If Executive's employment
is terminated by the Company without Good Cause, the following provisions shall
apply:

                        i) Executive shall be entitled to any unpaid
compensation accrued through the last day of Executive's employment;

                                       4

                        ii) Executive shall be entitled to receive severance
payments equal to his base compensation, payable on normal Company payroll
dates, for a six month period, subject to setoff for other employment or
consulting income received by Executive.

                  c. Death or Disability. This Agreement shall terminate if
Executive dies or is mentally or physically "Disabled" as herein defined. For
the purposes of this Agreement, "Disabled" shall mean a mental or physical
condition that renders Executive incapable of performing his duties and
obligations under this Agreement for three (3) or more consecutive months or for
a total of six (6) months during any twelve (12) consecutive months; provided,
that during such period the Company shall give Executive at least thirty (30)
days' written notice that it considers the time period for disability to be
running. If this Agreement is terminated under this paragraph 5.c., Executive or
his estate shall be entitled to any unpaid compensation accrued through the last
day of Executive's employment but shall not be entitled to any severance
benefits.

            6. Miscellaneous.

                  a. Governing Law. This Agreement shall be interpreted,
construed, governed and enforced according to the laws of the State of New York.

                                       5

                  b. Amendments. No amendment or modification of the terms or
conditions of this Agreement shall be valid unless in writing and signed by the
parties hereto.

                  c. Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
construed, if possible, so as to be enforceable under applicable law, else, such
provision shall be excluded from this Agreement and the balance of the Agreement
shall be interpreted as if such provision were so excluded and shall be
enforceable in accordance with its terms.

                  d. Successors and Assigns. The rights and obligations of the
Company under this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Company. Executive shall not be entitled
to assign any of his rights or obligations under this Agreement.

                  e. Notices. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery or two days after deposit in the United States Post Office, by
registered or certified mail, postage prepaid, addressed to the other party at
the address shown below such party's signature, or at such other address or
addresses as either party shall designate to the other in accordance with this
paragraph 6.e.

                                       6

                  f. Entire Agreement. This Agreement, including the exhibits
attached hereto, constitutes the entire agreement between the parties with
respect to the employment of Executive.

                                       7

            IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date set forth above.

                                    ACUTE THERAPEUTICS, INC.

                                    By: Robert Capetola, Ph.D.
                                    Its: President

                                    /s/ Robert J. Capetola
                                    -------------------------------------

                        Address:    6097 Hidden Valley Drive
                                    Doylestown, Pennsylvania 18901

                                       EXECUTIVE:
   
                                       Laurence Katz, Ph.D.
 
                                       By: /s/ Laurence Katz
                                          -------------------------------
                        Address:    64 Haymeet Circle
                                    -------------------------------------
                                    Neshanic Station, NJ 08853
                                    -------------------------------------

                                       8

                                                                   EXHIBIT 10.55

                              EMPLOYMENT AGREEMENT

            This Employment Agreement (the "Agreement") is entered into as of
January 2, 1997 by and between Acute Therapeutics, Inc. a Delaware corporation
(the "Company"), and Lisa Mastroinni ("Executive").

            WHEREAS, the Company and the Executive desire that the Executive
be employed by the Company and that the terms and conditions of such
employment be defined;

            NOW, THEREFORE, in consideration of the employment of the Executive
by the Company, the Company and Executive agree as follows:

            1. Term of the Agreement. The Company shall employ Executive and
Executive shall accept employment for a period of three (3) years commencing on
January 2, 1997 (the "Commencement Date") and continuing until January 2, 2000
(the "Employment Period") subject, however, to prior termination as hereinafter
provided in Section 6.

            2. Executive's Duties and Obligations.

                  a. Duties. Executive shall serve as Director of Clinical
Evaluation. Executive shall be responsible for protocol development, initiation
of clinical sites, execution of clinical protocols, finalizing clinical trial
sites and overall quality of clinical data management.

                  b. Location of Employment. Executive's principal place of
business shall be at Company's office located at 3359 Durham Road, Doylestown,
Pennsylvania 18901.

                  c. Proprietary Information and Inventions Agreement. Upon
commencement of employment with the Company, Executive shall execute the
Company's standard form of Intellectual Property and Confidential Information
Agreement (the "Confidentiality Agreement") a copy of which is attached to this
Agreement as Exhibit A.

            3. Devotion of Time to Company's Business

                  a. Full-Time Efforts. During her employment with the Company,
Executive shall devote substantially all of her business time, attention and
efforts to the high quality performance of her duties to the Company.

                  b. No Other Employment. During her employment with the
Company, Executive shall not, whether directly or indirectly, render any
services of a commercial or professional nature to any other person or
organization, whether for compensation or otherwise, without the prior written
consent of the Company's Executive Committee or Board of Directors.

                                       2

                  c. Non-Competition During Employment. During the term of this
Agreement, and for eighteen months after its termination, Executive shall not,
directly or indirectly, either as an employee, employer, consultant, agent,
principal, partner, stockholder, corporate officer, director, or in any other
individual or representative capacity (i) compete with Acute Therapeutics, Inc.
in the business or research areas of surfactant replacement therapy and other
areas which Acute Therapeutics, Inc. may enter while she remains employed, or
(ii) directly or indirectly solicit or employ any employees of the Company.

            4. Compensation and Benefits.

                  a. Base Compensation. During the term of this Agreement, the
Company shall pay to Executive base annual compensation of Eighty Thousand
dollars ($80,000), less all required withholdings.

                  b. Benefits. During her employment with the Company, the
Company shall provide reasonable medical and disability benefits to Executive
while Executive is a full-time employee of the Company. In addition, the Company
will provide to Executive term life insurance on behalf of Executive's
beneficiaries in the amount of Executive's annual salary for the term of this
Agreement.

                  c. Stock Option. The Board of Directors of the Company has
granted to Executive, on the date hereof, an 

                                       3

incentive stock option to purchase 4,000 shares of Common Stock, $.001 par value
of the Company, at an exercise price of $___ per share, pursuant to the terms of
the Notice of Grant of Stock Option attached hereto as Exhibit B.

                  d. Incentive Bonus. Executive shall be eligible for an
incentive bonus at the discretion of the Chief Executive Officer of the Company.

            5. Termination of Employment.

                  a. Termination for Good Cause. The Company may terminate
Executive's employment at any time for "Good Cause," as herein defined. For the
purposes of this Agreement, "Good Cause" includes, but is not limited to, gross
misconduct, gross neglect of duties, acts involving moral turpitude, material
breach by Executive of this Agreement or the Confidentiality Agreement or any
act or omission involving fraud, embezzlement, or misappropriation of any
property or proprietary information of the Company by Executive which is not
cured by Executive within fifteen (15) days after receipt of written notice from
the Company.

                  b. Termination without Good Cause. If Executive's employment
is terminated by the Company without Good Cause, the following provisions shall
apply:

                        i) Executive shall be entitled to any unpaid
compensation accrued through the last day of Executive's employment;

                                       4

                        ii) Executive shall be entitled to receive severance
payments equal to her base compensation, payable on normal Company payroll
dates, for a three month period, subject to setoff for other employment or
consulting income received by Executive.

                  c. Death or Disability. This Agreement shall terminate if
Executive dies or is mentally or physically "Disabled" as herein defined. For
the purposes of this Agreement, "Disabled" shall mean a mental or physical
condition that renders Executive incapable of performing her duties and
obligations under this Agreement for three (3) or more consecutive months or for
a total of six (6) months during any twelve (12) consecutive months; provided,
that during such period the Company shall give Executive at least thirty (30)
days' written notice that it considers the time period for disability to be
running. If this Agreement is terminated under this paragraph 5.c., Executive or
her estate shall be entitled to any unpaid compensation accrued through the last
day of Executive's employment but shall not be entitled to any severance
benefits.

            6. Miscellaneous.

                  a. Governing Law. This Agreement shall be interpreted,
construed, governed and enforced according to the laws of the State of New York.

                                       5

                  b. Amendments. No amendment or modification of the terms or
conditions of this Agreement shall be valid unless in writing and signed by the
parties hereto.

                  c. Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
construed, if possible, so as to be enforceable under applicable law, else, such
provision shall be excluded from this Agreement and the balance of the Agreement
shall be interpreted as if such provision were so excluded and shall be
enforceable in accordance with its terms.

                  d. Successors and Assigns. The rights and obligations of the
Company under this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Company. Executive shall not be entitled
to assign any of her rights or obligations under this Agreement.

                  e. Notices. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery or two days after deposit in the United States Post Office, by
registered or certified mail, postage prepaid, addressed to the other party at
the address shown below such party's signature, or at such other address or
addresses as either party shall designate to the other in accordance with this
paragraph 6.e.

                                       6

                  f. Entire Agreement. This Agreement, including the exhibits
attached hereto, constitutes the entire agreement between the parties with
respect to the employment of Executive.

                                       7

            IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date set forth above.

                                    ACUTE THERAPEUTICS, INC.

                                    By: Robert Capetola, Ph.D.
                                    Its: President

                                    /s/ Robert J. Capetola
                                    -------------------------------------

                        Address:    6097 Hidden Valley Drive
                                    Doylestown, Pennsylvania 18901

                                       EXECUTIVE:
   
                                       Lisa Mastroinni

                                       By: /s/ Lisa M. Mastroinni
                                          -------------------------------
                        Address:    215 Summit Rd.
                                    -------------------------------------
                                    Elizabeth, NJ 07208
                                    -------------------------------------

                                       8

                                                                   EXHIBIT 10.56

                              EMPLOYMENT AGREEMENT

            This Employment Agreement (the "Agreement") is entered into as of
November 4, 1996 by and between Acute Therapeutics, Inc. a Delaware corporation
(the "Company"), and Christopher J. Schaber ("Executive").

            WHEREAS, the Company and the Executive desire that the Executive
be employed by the Company and that the terms and conditions of such
employment be defined;

            NOW, THEREFORE, in consideration of the employment of the Executive
by the Company, the Company and Executive agree as follows:

            1. Term of the Agreement. The Company shall employ Executive and
Executive shall accept employment for a period of three (3) years commencing on
November 12, 1996 (the "Commencement Date") and continuing until November 11,
1999 (the "Employment Period") subject, however, to prior termination as
hereinafter provided in Section 6.

            2. Executive's Duties and Obligations.

                  a. Duties. Executive shall serve as Vice President of
Regulatory Affairs and Quality Assurance. Executive shall be responsible for
direct interface with regulatory authorities worldwide, including the United
States Food and Drug Administration, as well as quality assurance oversight for
all 

clinical development supplies and manufacturing.

                  b. Location of Employment. Executive's principal place of
business shall be at Company's office located at 6097 Hidden Valley Drive,
Doylestown, Pennsylvania 18901.

                  c. Proprietary Information and Inventions Agreement. Upon
commencement of employment with the Company, Executive shall execute the
Company's standard form of Intellectual Property and Confidential Information
Agreement (the "Confidentiality Agreement") a copy of which is attached to this
Agreement as Exhibit A.

            3. Devotion of Time to Company's Business

                  a. Full-Time Efforts. During his employment with the Company,
Executive shall devote substantially all of his business time, attention and
efforts to the high quality performance of his duties to the Company.

                  b. No Other Employment. During his employment with the
Company, Executive shall not, whether directly or indirectly, render any
services of a commercial or professional nature to any other person or
organization, whether for compensation or otherwise, without the prior written
consent of the Company's Executive Committee or Board of Directors.

                                       2

                  c. Non-Competition During Employment. During the term of this
Agreement, and for eighteen months after its termination, Executive shall not,
directly or indirectly, either as an employee, employer, consultant, agent,
principal, partner, stockholder, corporate officer, director, or in any other
individual or representative capacity (i) compete with Acute Therapeutics, Inc.
in the business or research areas of surfactant replacement therapy and other
areas which Acute Therapeutics, Inc. may enter while he remains employed, or
(ii) directly or indirectly solicit or employ any employees of the Company.

            4. Compensation and Benefits.

                  a. Base Compensation. During the term of this Agreement, the
Company shall pay to Executive base annual compensation of One Hundred Twenty
Five Thousand dollars ($125,000), less all required withholdings.

                  b. Benefits. During his employment with the Company, the
Company shall provide reasonable medical and disability benefits to Executive
while Executive is a full-time employee of the Company. In addition, the Company
will provide to Executive term life insurance on behalf of Executive's
beneficiaries in the amount of Executive's annual salary for the term of this
Agreement. Executive shall receive an annual payment of $9,000 per year for the
length of this Agreement solely to cover tuition expenses for the Ph.D. program
in which 

                                       3

Executive is enrolled.

                  c. Stock Option. The Board of Directors of the Company has
granted to Executive, on the date hereof, an incentive stock option to purchase
1,600 shares of Common Stock, $.001 par value of the Company, at an exercise
price of $0.32 per share, pursuant to the terms of the Notice of Grant of Stock
Option attached hereto as Exhibit B.

                  d. Incentive Bonus. Executive shall be eligible for an
incentive bonus at the discretion of the Chief Executive Officer of the Company.

            5. Termination of Employment.

                  a. Termination for Good Cause. The Company may terminate
Executive's employment at any time for "Good Cause," as herein defined. For the
purposes of this Agreement, "Good Cause" includes, but is not limited to, gross
misconduct, gross neglect of duties, acts involving moral turpitude, material
breach by Executive of this Agreement or the Confidentiality Agreement or any
act or omission involving fraud, embezzlement, or misappropriation of any
property or proprietary information of the Company by Executive which is not
cured by Executive within fifteen (15) days after receipt of written notice from
the Company.

                  b. Termination without Good Cause. If Executive's employment
is terminated by the Company without Good Cause, the following provisions shall
apply:

                                       4

                        i) Executive shall be entitled to any unpaid
compensation accrued through the last day of Executive's employment;

                        ii) Executive shall be entitled to receive severance
payments equal to his base compensation, payable on normal Company payroll
dates, for a six month period, subject to setoff for other employment or
consulting income received by Executive.

                  c. Death or Disability. This Agreement shall terminate if
Executive dies or is mentally or physically "Disabled" as herein defined. For
the purposes of this Agreement, "Disabled" shall mean a mental or physical
condition that renders Executive incapable of performing his duties and
obligations under this Agreement for three (3) or more consecutive months or for
a total of six (6) months during any twelve (12) consecutive months; provided,
that during such period the Company shall give Executive at least thirty (30)
days' written notice that it considers the time period for disability to be
running. If this Agreement is terminated under this paragraph 5.d., Executive or
his estate shall be entitled to any unpaid compensation accrued through the last
day of Executive's employment but shall not be entitled to any severance
benefits.

                                       5

            6. Miscellaneous.

                  a. Governing Law. This Agreement shall be interpreted,
construed, governed and enforced according to the laws of the State of New York.

                  b. Amendments. No amendment or modification of the terms or
conditions of this Agreement shall be valid unless in writing and signed by the
parties hereto.

                  c. Severability. If one or more provisions of this Agreement
are held to be unenforceable under applicable law, such provision shall be
construed, if possible, so as to be enforceable under applicable law, else, such
provision shall be excluded from this Agreement and the balance of the Agreement
shall be interpreted as if such provision were so excluded and shall be
enforceable in accordance with its terms.

                  d. Successors and Assigns. The rights and obligations of the
Company under this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Company. Executive shall not be entitled
to assign any of his rights or obligations under this Agreement.

                  e. Notices. All notices required or permitted under this
Agreement shall be in writing and shall be deemed effective upon personal
delivery or two days after deposit in the United States Post Office, by
registered or certified mail, postage prepaid, addressed to the other party at
the address shown below such party's signature, or at such other address or

                                       6

addresses as either party shall designate to the other in accordance with this
paragraph 6.e.

                  f. Entire Agreement. This Agreement, including the exhibits
attached hereto, constitutes the entire agreement between the parties with
respect to the employment of Executive.

                                       7

            IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date set forth above.

                                    ACUTE THERAPEUTICS, INC.

                                    By: Robert Capetola, Ph.D.
                                    Its: President

                                    /s/ Robert J. Capetola
                                    -------------------------------------

                        Address:    6097 Hidden Valley Drive
                                    Doylestown, Pennsylvania 18901

                                       EXECUTIVE:
 
                                       Christopher J. Schaber

                                       By: /s/ Chris Schaber
                                          -------------------------------
                        Address:    4 Stirrup Way
                                    -------------------------------------
                                    Burlington, NJ 08016
                                    -------------------------------------

                                       8

                                                                 EXHIBIT 10.57

                             MANAGEMENT AGREEMENT

      This Management Agreement (the "Agreement"), is made and entered into as
of the 5th day of March, 1998, by and between Discovery Laboratories, Inc., a
Delaware corporation ("Discovery"), and Acute Therapeutics, Inc., a Delaware
corporation ("ATI").

                                   RECITALS

      A. Discovery, ATI and ATI Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of Discovery ("Acquisition Subsidiary"), have entered
into an Agreement and Plan of Merger and Reorganization dated as of the date
hereof (the "Merger Agreement"), pursuant to which ATI will become a
wholly-owned subsidiary of Discovery through a merger of Acquisition Subsidiary
into ATI, upon the terms and subject to the conditions set forth in the Merger
Agreement (the "Merger"). Capitalized terms used in this Agreement and not
otherwise defined herein shall have the same meanings as in the Merger
Agreement.

      B. Discovery is a development stage pharmaceutical company engaged in the
development of proprietary pharmaceuticals to treat post-menopausal
osteoporosis, cystic fibrosis and other diseases. ATI is a development stage
pharmaceutical company engaged in the development of acute care pharmaceuticals
to treat Acute Respiratory Distress Syndrome, Meconium Aspiration Syndrome and
Idiopathic Respiratory Distress Syndrome.

      C. The closing under the Merger Agreement (the "Closing") is scheduled to
occur following satisfaction of all of the conditions to Closing set forth in
the Merger Agreement but no later than July 15, 1998.

      D. Discovery and ATI wish to provide for a smooth and efficient transition
and integration of the businesses of Discovery and ATI, pending the closing of
the transactions provided for in the Merger Agreement. In furtherance of this
transition, Discovery has requested and ATI has agreed that the ATI management
personnel (the "ATI Management Team") will manage the operations of both
Discovery and ATI through the effective date of the Merger (the "Effective
Date"), with each member of the ATI Management Team assuming responsibilities on
behalf of, and a title at, Discovery comparable to the responsibilities and
title held by such individual at ATI.

      NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants herein contained, IT IS AGREED AS FOLLOWS:

      I. Management Services:

      A. Subject to the terms and conditions set forth in this Agreement,
Discovery hereby engages ATI to provide, and ATI hereby accepts such engagement
and agrees to provide, operational, transition and integration management
services to Discovery. ATI shall provide such services by making available to
Discovery each member of the ATI Management Team whose entry into an employment
agreement with Discovery is a condition to any party's obligations under the
Merger Agreement. During the term of this Agreement, the ATI Management Team
shall be responsible for the overall management of the operations of Discovery
and shall report to, and shall be subject to the policies established by,
Discovery's Board of Directors. Notwithstanding the foregoing, no member of the
ATI Management Team shall have the authority by virtue of this Agreement to
participate in any meeting of the Board of Directors of Discovery or any
committee thereof except upon invitation. Moreover, Discovery does not delegate
to ATI under this Agreement any powers, duties or responsibilities which it is
prohibited by law from delegating.

      B. Each member of the ATI Management Team shall have duties and
responsibilities on behalf of Discovery comparable to the duties and
responsibilities of such individual at ATI. Each such individual shall have the
same title at Discovery as he or she has at ATI, with the additional designation
"Acting," as set forth on Schedule A hereto.

      C. During the term of this Agreement, management and supervisory personnel
of Discovery shall report to Robert J. Capetola, Ph.D., who will serve as the
Acting President and Chief Executive Officer of Discovery.

      II. Option Grants. The ATI Management Team shall be granted, on the date
of this Agreement, options to purchase an aggregate of 126,500 shares of
Discovery Common Stock (allocated as per attached Schedule B), which shall vest
in accordance with Schedule B. Notwithstanding Schedule B, if the Merger has not
occurred by July 15, 1998, due to the failure of Discovery or its stockholders
to perform any of their obligations under the Merger Agreement, all such options
shall be immediately vested in full.

      III. Term and Termination. The term of this Agreement ("Term") shall
commence on the date of this Agreement and shall terminate on the earliest to
occur of (i) the Effective Date or (ii) termination of the Merger Agreement.

      IV. Compensation. If the Merger is consummated, no compensation shall be
payable to ATI or the ATI Management Team other than the options granted
pursuant to Section II hereof. If the Merger is not consummated on or prior to
July 15, 1998 due to the failure of Discovery or its stockholders to perform any
of their obligations under the Merger Agreement, Discovery shall pay to ATI on
the date of termination or July 15, 1998, whichever occurs first (the "Date of
Termination"), 50% of the salary expense attributable to the ATI Management 

                                      -2-

Team from the date of this Agreement through the Date of Termination and all the
options granted pursuant to Section II hereof shall be immediately vested in
full.

      V. Indemnification.

            A. Benefits Indemnification. Except as specifically provided in
Section IV hereof, Discovery and ATI shall each be liable for any wages or
benefits earned or accrued by each of its employees and owing to them under
applicable law, their respective policies and procedures or otherwise and each
of Discovery and ATI shall indemnify, defend and hold harmless each other party
and its respective employees from and against any and all costs, expenses and
liabilities with respect thereto (the "Benefits Indemnity"). The parties
specifically acknowledge and agree that in the event of the termination of this
Agreement other than upon the Closing, such Benefits Indemnity shall survive the
termination of this Agreement.

            B. Director and Officer Indemnification. The ATI Management Team
shall be indemnified by Discovery with respect to their actions as acting
officers of Discovery during the term of this Agreement to the same extent that
Discovery's officers and directors are indemnified by Discovery.

      VI. Assignment. This Agreement and the duties hereunder shall not be
assigned or delegated in whole or in part by either party, it being understood
and agreed that this Agreement is personal to Discovery and ATI.

      VII. Notices. All notices required or permitted hereunder shall be given
in writing and shall be delivered in the manner and at the addresses set forth
in the Merger Agreement.

      VIII. Relationship of the Parties. The relationship of the parties shall
be that of independent contractors and all acts performed by ATI during the Term
by ATI shall be deemed to be performed in its capacity as an independent
contractor. Nothing contained in this Agreement is intended to or shall be
construed to give rise to or create a partnership or joint venture between
Discovery, its successors and assigns on the one hand, and ATI, its successors
and assigns on the other hand. With respect to situations that involve a
potential conflict of interest between Discovery and ATI in the course of ATI's
duties under this Agreement, unless otherwise specifically agreed between
Discovery and ATI, the employees of ATI shall be deemed to act only on behalf of
ATI and the employees of Discovery shall be deemed to act only on behalf of
Discovery.

      IX. Entire Agreement, Governing Law. This Agreement contains the entire
agreement between the parties with respect to the subject matter hereof and
shall be binding upon and inure to the benefit of their successors, and shall be
interpreted, construed, governed and enforced in accordance with the laws of the
State of New York, without regard to conflicts of law principles of such state.
This Agreement may not be modified or amended except by written 

                                      -3-

instrument signed by both of the parties hereto.

      X. Captions. The captions used herein are for convenience of reference
only and shall not be construed in any manner to limit or modify any of the
terms hereof.

      XI. Severability. In the event one or more of the provisions contained in
this Agreement is deemed to be invalid, illegal or unenforceable in any respect
under applicable law, the validity, legality and enforceability of the remaining
provisions hereof shall not in any way be impaired thereby.

      XII. Cumulative; No Waiver. A right or remedy herein conferred upon or
reserved to either of the parties hereto is intended to be cumulative of any
other right or remedy, and each and every right and remedy shall be cumulative
and in addition to any other right or remedy given hereunder, or now or
hereafter legally existing upon the occurrence of an event of default hereunder.
The failure of either party hereto to insist at any time upon the strict
observance or performance of any of the provisions of this Agreement or to
exercise any right or remedy as provided in this Agreement shall not impair any
such right or remedy or be construed as a waiver or relinquishment thereof with
respect to subsequent defaults. Every right and remedy given by this Agreement
to the parties hereof may be exercised from time to time and as often as may be
deemed expedient by the parties thereto, as the case may be.

      XIII. Authorization for Agreement. Each of Discovery and ATI represents
and warrants that the execution and performance of this Agreement by Discovery
and ATI have been duly authorized by all necessary resolutions and corporate
action, and this Agreement constitutes the valid and enforceable obligations of
Discovery and ATI in accordance with its terms.

      XIV. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, and all such counterparts
shall together constitute but one and the same Agreement.

      XV. No Effect on Merger Agreement. Each of the parties hereby acknowledges
and agrees that entry into this Agreement, and the performance of their
respective obligations hereunder, shall have no effect on the Merger Agreement
including, without limitation, the

                                      -4-

satisfaction of the conditions thereto or any rights of the parties with
respect to termination thereof.

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

                                    DISCOVERY LABORATORIES, INC.

                                    /s/ James S. Kuo
                                    ------------------------------------------
                                    By: James S. Kuo, M.D.
                                    Its: Chairman of the Board

                                    ACUTE THERAPEUTICS, INC.

                                    /s/ Robert J. Capetola
                                    ------------------------------------------
                                    By: Robert J. Capetola, Ph.D.
                                    Its: President and Chief Executive Officer

                                      -5-

                                   SCHEDULE A

                               ATI MANAGEMENT TEAM

Name                           Title
- ----                           -----

Harry G. Brittain, Ph.D.       Acting Vice President of Pharmaceutical
                               Development

Robert J. Capetola, Ph.D.      Acting President and Chief Executive Officer

Cynthia Davis                  Acting Controller

Laurence B. Katz, Ph.D.        Acting Vice President of Project Administration 
                               and Clinical Administration

Lisa Mastroianni               Acting Director of Clinical Evaluation

Christopher Schaber            Acting Vice President of Regulatory Affairs
                               and Quality Assurance

Huei Tsai, Ph.D.               Acting Vice President of Biometrics

Thomas Wiswell, M.D.           Acting Vice President of Clinical Research

Joan Marie Brown

                                   SCHEDULE B

Name                             Options to be Issued*
- ----                             ---------------------
Harry G. Brittain, Ph.D.                 14,813
Joan Marie Brown                            670
Robert J. Capetola, Ph.D.                43,010**
Cynthia Davis                             4,428
Laurence B. Katz, Ph.D.                  14,813
Lisa Mastroianni                          4,326
Christopher Schaber                      14,813
Huei Tsai, Ph.D.                         14,813
Thomas Wiswell, M.D.                     14,813
Total                                   126,500
                                        =======

- ----------

*     All options, other than those granted to Robert J. Capetola, will vest in
      three equal annual installments, the first installment of which will vest
      on the first year anniversary of the Closing of the Merger;
      notwithstanding the foregoing, if the Merger has not occurred by July 15,
      1998 due to the failure of Discovery or its stockholders to perform any of
      their obligations under the Merger Agreement, all such options shall be
      immediately vested in full.

**    These option vest in full on the date of grant.

                                                                   EXHIBIT 10.58

                         [LETTERHEAD OF LEHMAN BROTHERS]

                                                               November 10, 1997

Acute Therapeutics, Inc.
3359 Durham Road
Doylestown, Pennsylvania 18901

Attention: Robert J. Capetola, Ph.D.
           President and Chief Executive Officer

Dear Sirs:

November 10, 1997

      This letter agreement (this "Agreement") will confirm the understanding
and agreement between Lehman Brothers Inc. ("Lehman Brothers") and Acute
Therapeutics, Inc. (the "Company") as follows:

      1.    The Company hereby engages Lehman Brothers on an exclusive basis to
            provide financial advisory services to the Company concerning the
            strategic development of the Company's business, including general
            advice with respect to financings, acquisitions, divestitures, joint
            ventures or other corporate transactions which the Company is
            currently contemplating entering into or which it may consider at a
            future date.

            Lehman Brothers will, if requested by the Company, advise the
            Company generally with respect to financing as well as structuring
            of any of the transactions described above.

      2.    As compensation for the services rendered by Lehman Brothers
            hereunder, the Company shall pay Lehman Brothers as follows:

            (a)   A retainer fee of $100,000, payable in equal quarterly
                  payments, in any combination of cash and common stock of the
                  Company (at a valuation to be mutually agreed between the
                  Company and Lehman Brothers), provided that at least 50% of
                  the payment is in cash, the first payment being due upon the
                  signing of this Agreement. This retainer will be credited
                  against any transaction fee payable pursuant to paragraph
                  2(b).

            (b)   If Lehman Brothers provides any additional investment banking
                  services to the Company in connection with any particular
                  transaction, then the Company shall pay to Lehman Brothers
                  additional fees to be mutually agreed upon based on Lehman
                  Brothers' customary fees for the services rendered.

Acute Therapeutics, Inc.
November 10, 1997
page 2

      3.    The Company shall reimburse Lehman Brothers upon request for its
            reasonable expenses (including, without limitation, professional and
            legal fees and disbursements) incurred in connection with its
            engagement hereunder.

      4.    The Company shall:

            (a)   indemnify Lehman Brothers and hold it harmless against any and
                  all losses, claims, damages or liabilities to which Lehman
                  Brothers may become subject arising in any manner out of or in
                  connection with the rendering of services by Lehman Brothers
                  hereunder or the rendering of additional services by Lehman
                  Brothers as requested by the Company that are related to the
                  services rendered hereunder, unless it is finally judicially
                  determined that such losses, claims, damages or liabilities
                  resulted directly from the gross negligence or willful
                  misconduct of Lehman Brothers; and

            (b)   reimburse Lehman Brothers promptly for any legal or other
                  expenses reasonably incurred by it in connection with
                  investigating, preparing to defend or defending, or providing
                  evidence in or preparing to serve or serving as a witness with
                  respect to, or otherwise relating to, any lawsuits,
                  investigations, claims or other proceedings arising in any
                  manner out of or in connection with the rendering of services
                  by Lehman Brothers hereunder or the rendering of additional
                  services by Lehman Brothers as requested by the Company that
                  are related to the services rendered hereunder (including,
                  without limitation, in connection with the enforcement of this
                  Agreement and the indemnification obligations set forth
                  herein); provided, however, that in the event a final judicial
                  determination is made to the effect specified in subparagraph
                  4(a) above, Lehman Brothers will remit to the Company any
                  amounts reimbursed under this subparagraph 4(b).

            The Company agrees that the indemnification and reimbursement
            commitments set forth in this paragraph 4 shall apply if either the
            Company or Lehman Brothers is a formal party to any such lawsuits,
            investigations, claims or other proceedings and that such
            commitments shall extend upon the terms set forth in this paragraph
            to any controlling person, affiliate, director, officer, employee or
            agent of Lehman Brothers (each, with Lehman Brothers, an
            "Indemnified Person"). The Company further agrees that, without
            Lehman Brothers' prior written consent, it will not enter into any
            settlement of a lawsuit, claim or other proceeding arising out of
            the transactions contemplated by this Agreement (whether or not
            Lehman Brothers or any other Indemnified Person is an actual or
            potential party to such lawsuit, claim or proceeding) unless such
            settlement includes an explicit and unconditional release from the
            party bringing such lawsuit, claim or other proceeding of all
            Indemnified Persons.

            Promptly after receipt by Lehman Brothers or any Indemnified Person
            of notice of any pending or threatened litigation, Lehman Brothers
            or such other Indemnified Person will promptly notify the

Acute Therapeutics, Inc.
November 10, 1997
page 3

            Company in writing of such matted; provided, however, that the
            failure to provide such prompt notice to the Company shall not
            relieve the Company of any liability which it may have to the
            Indemnified Persons under this paragraph 4 unless such failure has
            materially prejudiced the defense of such litigation and shall not
            in any event relieve the Company of any liability it may have to the
            Indemnified Persons other than under this paragraph 4. In the event
            any action is brought against Lehman Brothers, the Company shall be
            entitled to participate therein and to assume the defense thereof,
            with counsel reasonably satisfactory to Lehman Brothers; provided,
            however, that if Lehman Brothers reasonably determines that the
            defenses available to it are not available to the Company and/or may
            not be consistent with the best interests of the Company, Lehman
            Brothers shall have the right to assume its own defense at the
            Company's expense and shall so signify by promptly notifying the
            Company of its decision. Such decision shall not relieve the Company
            of any liability which it may have to Indemnified Persons under this
            paragraph 4.

      5.    The Company and Lehman Brothers agree that if any indemnification or
            reimbursement sought pursuant to the preceding paragraph 4 is
            judicially determined to be unavailable for a reason other than the
            gross negligence or willful misconduct of Lehman Brothers, then,
            whether or not Lehman Brothers is the Indemnified Person, the
            Company and Lehman Brothers shall contribute to the losses, claims,
            damages, liabilities and expenses for which such indemnification or
            reimbursement is held unavailable (i) in such proportion as is
            appropriate to reflect the relative benefits to the Company on the
            one hand, and Lehman Brothers on the other hand, in connection with
            the transactions to which such indemnification or reimbursement
            relates, or (ii) if the allocation provided by clause (i) above is
            judicially determined not to be permitted, in such proportion as is
            appropriate to reflect not only the relative benefits referred to in
            clause (i) but also the relative faults of the Company on the one
            hand, and Lehman Brothers on the other hand, as well as any other
            equitable considerations; provided, however, that in no event shall
            the amount to be contributed by Lehman Brothers pursuant to this
            paragraph exceed the amount of the fees actually received by Lehman
            Brothers hereunder.

      6.    Except as contemplated by the terms hereof or as required by
            applicable law or pursuant to an order entered or subpoena issued by
            a court of competent jurisdiction, Lehman Brothers shall keep
            confidential all material non-public information provided to it by
            the Company, and shall not disclose such information to any third
            party, other than such of its employees and advisors as Lehman
            Brothers determines to have a need to know. Lehman Brothers shall
            give the Company prior notice of any disclosure required by law or
            pursuant to an order or subpoena under this paragraph 6.

      7.    Except as required by applicable law, any advice to be provided by
            Lehman Brothers under this Agreement shall not be disclosed publicly
            or made available to third parties without the prior

Acute Therapeutics, Inc.
November 10, 1997
page 4

            approval of Lehman Brothers, and accordingly suck advice shall not
            be relied upon by any person or entity other than the Company.

      8.    The term of Lehman Brothers' engagement hereunder shall extend from
            the date hereof through October 31, 1998, unless terminated earlier
            as set forth below. Subject to the provisions of paragraphs 2
            through 7 and paragraphs 9 through 12, which shall survive any
            termination or expiration of this Agreement, either party may
            terminate Lehman Brothers' engagement hereunder at any time by
            giving the other party at least 10 days' prior written notice. In
            the event that Lehman Brothers' engagement hereunder is terminated
            or expires, Lehman Brothers shall be entitled to fees pursuant to
            paragraph 2(b) only with respect to a transaction of the types
            contemplated to be covered by this agreement that is (i) with a
            party introduced to the Company by Lehman Brothers during the term
            of this agreement and (ii) is consummated within one year after such
            termination or expiration.

      9.    The Company agrees that Lehman Brothers has the right to place
            advertisements in financial and other newspapers and journals at its
            own expense describing its services to the Company hereunder,
            provided that Lehman Brothers will submit a copy of any such
            advertisements to the Company for its approval, which approval shall
            not be unreasonably withheld.

      10.   Nothing in this Agreement, expressed or implied, is intended to
            confer or does confer on any person or entity other than the parties
            hereto or their respective successors and assigns, and to the extent
            expressly set forth herein, the Indemnified Persons, any rights or
            remedies under or by reason of this Agreement or as a result of the
            services to be rendered by Lehman Brothers hereunder. The Company
            further agrees that neither Lehman Brothers nor any of its
            controlling persons, affiliates, directors, officers, employees or
            agents shall have any liability to the Company or any person
            asserting claims on behalf of or in right of the Company for any
            losses, claims, damages, liabilities or expenses arising out of or
            relating to this Agreement or the services to be rendered by Lehman
            Brothers hereunder, unless it is finally judicially determined that
            such losses, claims, damages, liabilities or expenses resulted
            directly from the gross negligence or willful misconduct of Lehman
            Brothers.

      11.   The invalidity or unenforceability of any provision of this
            Agreement shall not affect the validity or enforceability of any
            other provisions of this Agreement, which shall remain in full force
            and effect.

      12.   This Agreement may not be amended or modified except in writing
            signed by each of the parties and shall be governed by and construed
            and enforced in accordance with the laws of the State of New York.
            Any right to trial by jury with respect to any lawsuit, claim or
            other proceeding arising

Acute Therapeutics, Inc.
November 10, 1997
page 5

            out of or relating to this Agreement or the services to be rendered
            by Lehman Brothers hereunder is expressly and irrevocably waived.

            If the foregoing correctly sets forth the understanding and
      agreement between Lehman Brothers and the Company, please so indicate in
      the space provided for that purpose below, whereupon this letter shall
      constitute a binding agreement as of the date hereof.

                                         LEHMAN BROTHERS INC.

                                         By: /s/ [ILLEGIBLE]
                                            ---------------------------------
                                            Vice Chairman

AGREED:

ACUTE THERAPEUTICS, INC.

By: /s/ Robert J. Capetola
   ----------------------------------
Name:

Title:

                                                                    EXHIBIT 21.1

Subsidiaries of Registrant

1.    Acute Therapeutics, Inc.

                        5

                    YEAR
                               DEC-31-1997
                                    DEC-31-1997
                                            6,297,000
                                      4,957,000
                                             0
                                              0
                                               0
                                 11,444,000
                                              222,000
                                       41,000
                                   11,655,000
                               565,000
                                                   0
                             2,039,000
                                           2,000
                                              3,000
                                       21,464,000
                     11,655,000
                                                   0
                                          0
                                                     0
                                     9,877,000
                                          0
                                          0
                                        0
                                  (9,164,000)
                                              0
                                       0
                                            0
                                           0
                                                 0
                                     (9,164,000)
                                         (3.42)
                                         (3.42)

EPS Basic and Diluted is (3.42). The Company calculates Earnings Per Share
pursuant to FASB 128.