EMPLOYMENT AGREEMENT

1.    Certain Definitions . Certain definitions used herein shall have the meanings set forth on Exhibit A attached hereto.

2.    Term of the Agreement . The term (“ Term ”) of this Agreement shall commence on the date first above written and shall continue through December 31, 2006; provided, however, that commencing on January 1, 2007, and on each January 1st thereafter, the term of this Agreement shall automatically be extended for one additional year, unless at least 90 days prior to such January 1st date, the Company or the Executive shall have given notice that it does not wish to extend this Agreement. Upon the occurrence of a Change of Control during the term of this Agreement, including any extensions thereof, this Agreement shall automatically be extended until the end of the Effective Period if the end of the Effective Period is after the then current expiration date of the Term. Notwithstanding the foregoing, this Agreement shall terminate prior to the scheduled expiration date of the Term on the Date of Termination.

3.          Executive's Duties and Obligations .

(a)    Duties . The Executive shall serve as the Company's Senior Vice President, Human Resources. The Executive shall be responsible for all duties customarily associated with this title. The Executive shall at all times report directly to the Company’s Chief Executive Officer.

(b)    Location of Employment . The Executive's principal place of business shall be at the Company's headquarters to be located within thirty (30) miles of Warrington, Pennsylvania; provided, that the Executive acknowledges and agrees that the performance by the Executive of her duties shall, from time-to-time, require travel including, without limitation, overseas travel.

4.         Proprietary Information and Inventions Agreement . Upon execution of this Agreement, 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 B . Executive shall comply at all times with the terms and conditions of the Confidentiality Agreement and all other reasonable policies of the Company governing its confidential and proprietary information

5.          Devotion of Time to Company's Business .

(a)    Full-Time Efforts . During her employment with the Company, the Executive shall devote substantially all of her time, attention and efforts to the proper performance of her implicit and explicit duties and obligations hereunder to the reasonable satisfaction of the Company.

(b)    No Other Employment . During her employment with the Company, the Executive shall not, except as otherwise provided herein, 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 Executive Committee or the Board.

(c)    Non-Competition During and After Employment . During the Term and for 12 months from the Date of Termination, the Executive shall not, directly or indirectly, without the prior written consent of the Company, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in any other individual or representative capacity (X) compete with the Company in the business of developing or commercializing pulmonary surfactants or any other category of compounds which forms the basis of the Company's material products or any material products under development on the Date of Termination, or (Y) solicit, encourage, induce or endeavor to entice away from the Company, or otherwise interfere with the relationship of the Company with, any person who is employed or engaged by the Company as an employee, consultant or independent contractor or who was so employed or engaged at any time during the preceding six (6) months; provided , that nothing herein shall prevent the Executive from engaging in discussions regarding employment, or employing, any such employee, consultant or independent contractor (i) if such person shall voluntarily initiate such discussions without any such solicitation, encouragement, enticement or inducement prior thereto on the part of the Executive or (ii) if such discussions shall be held as a result of or employment be the result of the response by any such person to a written employment advertisement placed in a publication of general circulation, general solicitation conducted by executive search firms, employment agencies or other general employment services, not directed specifically at any such employee, consultant or independent contractor. Notwithstanding the foregoing, the 12 month period described in the preceding sentence shall be extended to 24 months in the event of any termination of the Executive’s employment described in Sections 8(a) and (c).

(d)    Injunctive Relief . In the event that the Executive breaches any provisions of Section 4(c) or of the Confidentiality Agreement or there is a threatened breach thereof, then, in addition to any other rights which the Company may have, the Company shall be entitled, without the posting of a bond or other security, to injunctive relief to enforce the restrictions contained therein. In the event that an actual proceeding is brought in equity to enforce the provisions of Section 5(c) or the Confidentiality Agreement, the Executive shall not urge as a defense that there is an adequate remedy at law nor shall the Company be prevented from seeking any other remedies which may be available.

(e)    Reformation . To the extent that the restrictions imposed by Section 5(c) are interpreted by any court to be unreasonable in geographic and/or temporal scope, such restrictions shall be deemed automatically reduced to the extent necessary to coincide with the maximum geographic and/or temporal restrictions deemed by such court not to be unreasonable.

6.         Compensation and Benefits .

(a)    Base Compensation . During the Term, the Company shall pay to the Executive (i) base annual compensation (" Base Salary ") of at least $180,000, payable in accordance with the Company's regular payroll practices and less all required withholdings, and (ii) additional compensation, if any, and benefits as hereinafter set forth in this Section 6. The Base Salary shall be reviewed at least annually at the start of each calendar year for the purposes of determining increases, if any, based on the Executive's performance, the performance of the Company, inflation, the then prevailing salary scales for comparable positions and other relevant factors.

(b)    Bonuses . The Company shall pay to Executive a one-time sign-on bonus of $25,000, payable in accordance with and on the date of the Company’s regular payroll practices on such date first following the date of commencement of this Agreement. Thereafter, during the Term, the Executive shall be eligible for such year-end bonus, which may be paid in either cash or equity, or both, as is awarded solely at the discretion of the Compensation Committee of the Board after consultation with the Company’s Chief Executive Officer, provided , that the Company shall be under no obligation whatsoever to pay such discretionary year-end bonus for any year. Any such equity bonus shall contain such rights and features as are typically afforded to other Company employees of similar level in connection with comparable equity bonuses awarded by the Company.

(c)    Benefits . During the Term, the Executive shall be entitled to participate in all employee benefit plans, programs and arrangements made available generally to the Company's senior executives or to its employees on substantially the same basis that such benefits are provided to such executives or employees (including, without limitation profit-sharing, savings and other retirement plans (e.g., a 401(k) plan) or programs, medical, dental, hospitalization, vision, short-term and long-term disability and life insurance plans or programs, accidental death and dismemberment protection, travel accident insurance, and any other employee welfare benefit plans or programs that may be sponsored by the Company from time to time, including any plans or programs that supplement the above-listed types of plans or programs, whether funded or unfunded); provided , however , that (i) with respect to that period of time beginning with the date of commencement of this Agreement through the date of initiation of Executive’s eligibility for participation in Company-sponsored health-related programs, the Company shall bear the costs of Executive’s COBRA benefits offered by her predecessor employer; and (ii) nothing in this Agreement shall be construed to require the Company to establish or maintain any such plans, programs or arrangements. Anything contained herein to the contrary notwithstanding, throughout the Term, Executive shall be entitled to receive life insurance on behalf of Executive’s named beneficiaries in the amount of Executive’s then current annual salary for the Term of this Agreement at no cost to the Executive, except the Company shall have no liability whatsoever for any taxes (whether based on income or otherwise) imposed upon or incurred by Executive in connection with any such insurance.

(d)    Vacations . During the Term, the Executive shall be entitled to 20 days paid vacation per year, to be earned ratably throughout the year, 5 days of which may be carried over from year to year ( provided , that in no event shall the aggregate number of such vacation days carried over to any succeeding year exceed 10 days).

(e)    Reimbursement of Business Expenses . The Executive is authorized to incur reasonable expenses in carrying out her duties and responsibilities under this Agreement and the Company shall reimburse her for all such expenses, in accordance with reasonable policies of the Company.

(f)    Stock Options. The Company, subject to the approval of the Company’s Board of Directors and its shareholders, as appropriate, shall grant to Executive non qualified stock options under the Company’s Amended and Restated 1998 Stock Incentive Plan (the “Plan”) to purchase 50,000 shares of Common Stock at an   exercise price equal to the fair market value as of the commencement date of this Agreement. Twenty-five percent (25%) of such stock options shall vest upon date of grant and the remainder shall vest in a series of three successive equal annual installments, provided, however that all such vesting shall be subject to the terms and conditions as set forth in the Plan, except as may be otherwise provided for herein.

7.          Change of Control Benefits.

(a)    Bonus . The Executive shall be awarded an annual cash bonus for each fiscal year of the Company ending during the Effective Period at least equal to the Highest Annual Bonus.

(b)    Options . Notwithstanding any provision to the contrary in the Company’s Amended and Restated 1998 Stock Incentive Plan or any stock option agreement between the Company and the Executive, all options to acquire Company stock held by the Executive shall accelerate and become fully vested upon the Change of Control Date and, in the case of any Change of Control in which the Company’s common stockholders receive cash, securities or other consideration in exchange for, or in respect of, their Company common stock, (i) the Executive shall be permitted to exercise her options at a time and in a fashion that will entitle her to receive, in exchange for any shares acquired pursuant to any such exercise, the same per share consideration as is received by the other holders of the Company’s common stock, and (ii) if the Executive shall elect not to exercise all or any portion of such options, any such unexercised options shall terminate and cease to be outstanding following such Change of Control, except to the extent assumed by a successor corporation (or its parent) or otherwise expressly continued in full force and effect pursuant to the terms of such Change of Control.

8.         Termination of Employment .

(a)    Termination by the Company for Cause or Termination by the Executive without Good Reason, Death or Disability .

(i)    In the event of a termination of the Executive’s employment by the Company for Cause, a termination by the Executive without Good Reason, or in the event this Agreement terminates by reason of the death or Disability of the Executive, the Executive shall be entitled to any unpaid compensation accrued through the last day of the Executive's employment, a lump sum payment in respect of all accrued but unused vacation days ( provided , that in no event shall the aggregate number of such accrued vacation days exceed 10 days) at her Base Salary in effect on the date such vacation was earned, and payment of any other amounts owing to the Executive but not yet paid. The Executive shall not be entitled to receive any other compensation or benefits from the Company whatsoever (except as and to the extent the continuation of certain benefits is required by law).

(ii)    In the case of a termination due to death or disability, notwithstanding any provision to the contrary in any stock option agreement between the Company and the Executive, all options to acquire Company stock held by the Executive shall accelerate and become fully vested upon the Date of Termination (and all options shall thereupon become fully exercisable), and all stock options shall continue to be exercisable for one year from the Date of Termination (or, if shorter, until the expiration of their stated terms).

(b)    Termination by the Company without Cause or by the Executive for Good Reason . If (x) the Executive’s employment is terminated by the Company other than for Cause, death or Disability (i.e., without Cause) or (y) the Executive terminates employment with Good Reason, then the Executive shall be entitled to receive the following from the Company:

(i)    The amounts set forth in Section 8(a)(i);

(ii)    Within 10 days after the Date of Termination, a lump sum cash payment equal to the Highest Annual Bonus multiplied by the fraction obtained by dividing the number of days in the year through the Date of Termination by 365;

(iii)    Within 10 days after the Date of Termination, a lump sum cash payment in an amount equal to the sum of (A) the Executive’s Base Salary then in effect (determined without regard to any reduction in such Base Salary constituting Good Reason) and (B) the Highest Annual Bonus;

(iv)    For one year from the Date of Termination, the Company shall either (A) arrange to provide the Executive and her dependents, at the Company’s cost (except to the extent such cost was borne by the Executive prior to the Date of Termination), with life, disability, medical and dental coverage, whether insured or not insured, providing substantially similar benefits to those which the Executive and her dependents were receiving immediately prior to the Date of Termination, or (B) in lieu of providing such coverage, pay to the Executive no less frequently than quarterly in advance an amount which, after taxes, is sufficient for the Executive to purchase equivalent benefits coverage referred to in clause (A); provided , however , that the Company’s obligation under this Section 8(b)(iv) shall be reduced to the extent that substantially similar coverages (determined on a benefit-by-benefit basis) are provided by a subsequent employer;

(v)    Any other additional benefits then due or earned in accordance with applicable plans and programs of the Company; and

(vi)    The Company will provide out-placement counseling assistance in the form of reimbursement of the reasonable expenses incurred for such assistance within the 12-month period following the Date of Termination. Such reimbursement amount shall not exceed $40,000.

(c)    Termination in connection with a Change of Control . If the Executive’s employment is terminated by the Company other than for Cause or by the Executive for Good Reason during the Effective Period, then the Executive shall be entitled to receive the following from the Company:

(i)    All amounts and benefits described in Section 8(a)(i) above;

(ii)    Within 10 days after the Date of Termination, a lump sum cash payment equal to the Highest Annual Bonus multiplied by the fraction obtained by dividing the number of days in the year through the Date of Termination by 365;

(iii)    Within 10 days after the Date of Termination, a lump sum cash payment in an amount equal to the product of two (2) times the sum of (A) the Executive’s Base Salary then in effect (determined without regard to any reduction in such Base Salary constituting Good Reason) and (B) the Highest Annual Bonus;

(iv)    For two years from the Date of Termination, the Company shall either (A) arrange to provide the Executive and her dependents, at the Company’s cost (except to the extent such cost was borne by the Executive prior to the Date of Termination), with life, disability, medical and dental coverage, whether insured or not insured, providing substantially similar benefits to those which the Executive and her dependents were receiving immediately prior to the Date of Termination, or (B) in lieu of providing such coverage, pay to the Executive no less frequently than quarterly in advance an amount which, after taxes, i