LOAN AGREEMENT



      THIS LOAN AGREEMENT (this "Agreement") is dated and entered into as of

December 10, 2001 (the "Effective Date") by and between DISCOVERY LABORATORIES,

INC., a Delaware corporation ("Borrower"), and PHARMABIO DEVELOPMENT INC., a

North Carolina corporation ("Lender").



      WHEREAS, Borrower and Lender are parties to the Common Stock and Warrant

Purchase Agreement dated as of the date hereof (the "Purchase Agreement") and

the Investment and Commission Agreement dated as of the date hereof (the

"Investment and Commission Agreement");



      WHEREAS, Borrower and Quintiles Transnational Corp., an Affiliate of

Lender ("Quintiles"), are parties to a Commercialization Agreement (the

"Commercialization Agreement"), dated as of the date hereof;



      WHEREAS, in connection with the Purchase Agreement, Investment and

Royalty, and Commercialization Agreement, Lender is willing to extend certain

credit facilities to Borrower, subject to and upon the terms and conditions of

this Agreement; and



      NOW, THEREFORE, for good and valuable consideration, the receipt and

sufficiency of which are hereby acknowledged by the parties, the parties hereby

agree as follows:



                                    ARTICLE I

                                   DEFINITIONS



      1.01 Definitions. Capitalized terms used but not defined in the text of

this Agreement shall have the meanings ascribed to them on Exhibit A attached

hereto and incorporated herein by reference.



                                   ARTICLE II

                            Amount and Terms of Loan



      2.01 Advances.



            (a) Subject to and upon the terms and conditions set forth herein,

Lender agrees, at any time and from time to time, from and after the occurrence

of Milestone One (as defined below) and prior to December 10, 2004 (the

"Maturity Date"), to make advances (each an





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"Advance" and collectively the "Advances") to Borrower at such times and in such

amounts as Borrower shall request pursuant to this Agreement, up to an aggregate

principal amount of Eight Million, Five Hundred Thousand Dollars ($8,500,000)

(as adjusted and subject to the satisfaction of certain milestones in accordance

with this Section 2.01, the "Commitment") in lawful money of the United States

of America in immediately available funds. The Commitment shall become available

to Borrower as follows:



                  (i) Upon the occurrence of Milestone One (as defined below),

            one third (1/3) of the Commitment shall be available. "Milestone

            One" shall mean the later to occur of (i) the completion by The

            Lewin Group of a market opportunity assessment and report in

            customary form regarding the Product, which shall include without

            limitation an assessment and report as to pre-launch

            commercialization requirements and sales forecasts, and (ii)

            Borrower shall have obtained a valid and binding extension of the

            deadline for the filing of the NDA referred to in Section 6 of the

            License Agreement until at least October 28, 2003.



                  (ii) Upon the occurrence of Milestone One and Milestone Two

            (as defined below), two thirds (2/3) of the Commitment shall be

            available. "Milestone Two" shall mean the earlier to occur of (i)

            the sale after the date of this Agreement by Borrower of shares of

            its capital stock for cash proceeds with an aggregate purchase price

            of at least $10,000,000 in one or more capital financing

            transactions or pursuant to the exercise of options, warrants or

            rights to purchase its capital stock, and in each case the proceeds

            of which may be used for general corporate purposes or (ii) the

            public disclosure by Borrower of Phase III clinical trial data

            regarding the indication for the Product known as idiopathic

            respiratory distress syndrome ("IRDS"), and the completion by

            Quintiles or an appropriate Affiliate of a written assessment and

            report indicating that such data is favorable and that such data

            substantially enhances the Company's prospects with respect to its

            ability to repay the Commitment as increased by such Milestone Two.



                  (iii) Upon the occurrence of Milestone One, Milestone Two, and

            Milestone Three (as defined below), the full Commitment shall be

            available. "Milestone Three" shall mean the earlier to occur of (i)

            the completion by Quintiles or an appropriate Affiliate of a written

            assessment and report in customary form indicating the

            "approvability" by the FDA of Borrower's NDA for the Product for

            either the IRDS indication or the indication known as meconium

            aspiration syndrome ("MAS"), which shall include without limitation

            an assessment and report as to the quality of the documentation

            comprising such NDA and the clinical data included in such NDA, or

            (ii) the issuance by the FDA of a letter in customary form

            indicating that Borrower's NDA for the Product is "approvable" with

            respect to Borrower's NDA for either the IRDS indication or the MAS

            indication.



            (b) Notwithstanding anything to the contrary in this Agreement, upon

the occurrence of the "First Milestone" (as defined in the Investment and

Commission Agreement),





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Borrower shall prepay Advances as described in Section 2.05(b), and the

Commitment shall be automatically reduced by the amount of such required

prepayment.



            (c) Notwithstanding anything to the contrary in this Agreement, upon

the occurrence of the "Second Milestone" (as defined in the Investment and

Commission Agreement), Borrower shall prepay the aggregate outstanding amount of

all Advances and the Commitment shall be automatically terminated.



            (d) As contemplated by the Commercialization Agreement, the JCC (as

defined therein) may authorize expenditures for pre-Launch Marketing Services in

excess of $8,500,000 up to $10,000,000 (without the consent of Lender). In the

event that the JCC authorizes such expenditures in excess of $8,500,000 (but not

in excess of $10,000,000), (i) the Commitment shall be deemed increased by a

commensurate amount, but in any event not in excess of a maximum Commitment of

$10,000,000 in the aggregate, and (ii) Borrower shall execute a new promissory

note as described in Section 3.02(e).



            (e) In the event that the parties mutually agree to authorize

expenditures for pre-Launch Marketing Services in excess of $10,000,000 (but not

in excess of $15,000,000), (i) the Commitment shall be deemed increased by a

commensurate amount, and (ii) Borrower shall execute a new promissory note as

described in Section 3.02 (e). Notwithstanding anything in this Agreement to the

contrary, any increase in the Commitment in excess of $10,000,000 shall require

the express written agreement of Lender in the sole discretion of Lender, and

this subsection (e) shall not imply that Lender is willing, or obligate Lender

in any manner, to agree to any such increase or to agree to any increase in

Lender's obligations under the Investment and Commission Agreement, with any

such increase in Lender's obligations being required to be set forth in an

express written agreement referring to the Investment and Commission Agreement.



            (f) Borrower may use the Commitment, as in effect from time to time,

on a revolving basis by borrowing, repaying the Advances in whole or in part,

and reborrowing, all in accordance with the terms and conditions of this

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