No. ____ THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF (THE AMENDED (THE "1933 ACT") OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS PURSUANT TO SEC RULE 144 OR UNLESS THERE IS...

Exhibit 10.3

No. ____

THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF (THE

"SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS

AMENDED (THE "1933 ACT") OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE

SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS PURSUANT TO SEC RULE 144 OR

UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE 1933 ACT AND THE

SECURITIES LAWS OF ANY STATE COVERING SUCH SECURITIES OR THE COMPANY RECEIVES AN

OPINION OF COUNSEL FOR THE HOLDER OF THE SECURITIES REASONABLY SATISFACTORY TO

THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS

EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE 1933

ACT AND APPLICABLE STATE SECURITIES LAWS.

SCOLR, INC.

COMMON STOCK WARRANT

ISSUE DATE: September 30, 2002 750,000 shares of common stock

THIS IS TO CERTIFY THAT FOR GOOD AND VALUABLE CONSIDERATION, Xxxxx Xxxx,

an individual residing in the State of California, whose principal place of

residence is 00000 Xxxxxxx Xx., Xxxxxxxxx, XX 00000 (the "Holder"), is entitled

to subscribe for and purchase from SCOLR, Inc. (the "Company"), Seven Hundred

Fifty Thousand (750,000) shares of the Company's common stock (the "Warrant

Shares") at an exercise price, subject to adjustment as set forth below, of

$0.50 per share (the "Exercise Price"). This Warrant is issued in connection

with that certain Promissory Note dated as of the date hereof (the "Note"),

purchased by the Holder from the Company in the principal amount set forth on

the Note. The Holder is subject to certain restrictions, and is entitled to

certain rights and privileges, set forth in the Note.

ARTICLE 1. EXERCISE OF WARRANT.

1.01. EXERCISE OF WARRANT. This Warrant will expire (the "Expiration

Date"), upon the earliest of (i) ten (10) years from the Issue Date (as defined

in Section 5.01(b) hereof), and (ii) a "Change of Control" (as defined in

Section 5.01(a) hereof). The Holder may exercise this Warrant, in whole or in

part, at any time or from time to time, commencing on the earliest to occur of

June 30, 2003 or immediately prior to a Change of Control (the "Commencement

Date"), and continuing thereafter until the Expiration Date.

1.02. METHOD OF EXERCISE.

(a) At any time on or after the Commencement Date, the Holder

shall exercise this Warrant, in whole or in part, at any time or from time to

time, at or prior to the

Expiration Date, by surrendering it at the offices of the Company at the address

designated for notice purposes under Section 5.03 below, together with either

(i) a duly executed and completed subscription in substantially the form of the

Subscription Notice attached hereto as Exhibit A, and a check payable to the

Company in the amount equal to the aggregate Exercise Price, for the number of

Warrant Shares being purchased, or (ii) a duly executed and completed Conversion

Notice in the form attached hereto as Exhibit B. Upon exercise through a

conversion (subject to Section 3.03 and without payment by the Holder of the

Exercise Price), the Holder shall be entitled to receive that number of Warrant

Shares equal to the quotient obtained by dividing ((A-B) x C) by A, where:

A = The Fair Market Value of one (1) Warrant Share on the

date of exercise of the Warrant;

B = The per share Exercise Price; and

C = The total number of Warrant Shares subject to purchase

upon exercise of the Warrant.

If the above calculation results in a number less than one (1), then no Warrant

Shares shall be issuable or issued pursuant to a conversion.

(b) For purposes of the foregoing, the term "Fair Market Value"

of a Warrant Share shall mean:

(i) The average of the closing bid and asked prices of the

Company's common stock quoted in the Over-The-Counter Market Summary, the last

reported sale price quoted on the Nasdaq National Market or on any exchange on

which the common stock is listed, whichever is applicable, as published in the

Western Edition of the Wall Street Journal for the ten (10) trading days prior

to the date of determination of Fair Market Value; or

(ii) In the event of an exercise in connection with a

Change of Control, the Fair Market Value shall be the value received per share

of common stock by all holders of common stock in such transaction as determined

by the Board of Directors of the Company; or

(iii) In any other instance, the Fair Market Value shall

be as determined in good faith by the Board of Directors of the Company.

Company. In the event of a partial exercise, the Company will forthwith issue

and deliver to the Holder a new Warrant of like tenor for the number of Warrant

Shares represented by the Warrant after giving effect to the partial exercise as

set forth above.

1.03. SHARES ISSUED UPON EXERCISE OF WARRANT. As soon as practicable

after the Warrant has been so exercised, and in any event within twenty (20)

days thereafter, the Company shall issue and deliver, in such name or names as

Holder may direct, a certificate or certificates for the number of Warrant

Shares to which such Holder is entitled. All Warrant Shares shall be

duly authorized, validly issued, fully paid and nonassessable. The Company shall

pay all documentary stamp taxes attributable to the initial issuance of the

Warrant Shares, but shall not be required to pay any tax imposed in connection

with any transfer involved in the issue of the Warrant Shares in a name other

than that of the Holder. Irrespective of the date of issue of certificates for

the Warrant Shares, the Holder shall be deemed to have become the holder of

record of the Warrant Shares represented thereby on the date on which the

Warrant is exercised and payment of the Exercise Price is received by the

Company as provided in Section 1.02.

ARTICLE 2. TRANSFER OF THE WARRANT.

Subject to Section 4.11 hereof, this Warrant may be transferred in whole

or in part, including to any "affiliate" of the Holder, as such term is defined

in Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"), by

presentation of the Warrant to the Company with written instructions for

transfer; provided however, that Holder agrees not to transfer the Warrant or

the Warrant Shares in any manner that would result in a violation of the

registration provisions of the Securities Act or any applicable state securities

laws, and the Company shall not be required to take any action hereunder that

would result in a violation of such provisions. On presentation for transfer,

the Company will execute and deliver a new Warrant in the name of the

transferee.

ARTICLE 3. PROVISIONS FOR PROTECTION OF THE HOLDER.

3.01. LOST, STOLEN OR MUTILATED WARRANT. If this Warrant is lost,

stolen, mutilated or destroyed, the Company will, on such reasonable terms with

respect to indemnity or otherwise as it may in its discretion impose, issue a

new warrant of like denomination, tenor and date as this Warrant. Any such new

warrant shall constitute an original contractual obligation of the Company, and

the lost, stolen, mutilated or destroyed, as applicable, Warrant shall be null

and void.

3.02. HOLDER NOT SHAREHOLDER. This Warrant does not confer upon the

Holder, as such, any rights or liabilities whatsoever as a shareholder of the

Company, whether such rights or liabilities are asserted by the Company or by

its creditors.

3.03. COMPLIANCE WITH SECURITIES LAWS.

(a) Neither this Warrant nor the Warrant Shares have been

registered under the Securities Act or any state securities laws. This Warrant

has been acquired for investment purposes and not with a view to distribution or

resale and may not be pledged, hypothecated, sold or otherwise transferred

without an effective registration statement for such Warrant under the

Securities Act or any applicable state securities laws or an opinion of counsel

or other evidence reasonably satisfactory to the Company that registration is

not required thereunder. Certificates representing the Warrant Shares shall bear

a legend substantially in the following form:

THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED

UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") OR THE

SECURITIES LAWS OF ANY STATE, AND

MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS PURSUANT

TO SEC RULE 144 OR UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT

UNDER THE 1933 ACT AND THE SECURITIES LAWS OF ANY STATE COVERING SUCH

SECURITIES OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER

OF THE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT

SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE

REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE 1933 ACT AND

APPLICABLE STATE SECURITIES LAWS.

(b) The Holder represents and warrants to the Company as

follows:

(i) This Warrant and the Warrant Shares issuable

upon exercise thereof are being acquired for the Holder's own account, for

investment and not with a view to, or for resale in connection with, any

distribution or public offering thereof within the meaning of the Securities

Act. Upon exercise of this Warrant, the Holder shall, if so requested by the

Company, confirm in writing, in a form satisfactory to the Company, that the

securities issuable upon exercise of this Warrant are being acquired for

investment and not with a view toward distribution or resale.

(ii) The Holder understands that the Warrant and

the Warrant Shares have not been registered under the Securities Act by reason

of their issuance in a transaction exempt from the registration and prospectus

delivery requirements of the Securities Act pursuant to Section 4(2) or Section

4(6) thereof, and that they must be held by the Holder indefinitely, and that

the Holder must therefore bear the economic risk of such investment

indefinitely, unless a subsequent disposition thereof is registered under the

Securities Act or is exempted from such registration. The Holder understands

that the Company is under no obligation to register any of the securities sold

hereunder.

(iii) The Holder is an "accredited investor" within

the meaning of Regulation D promulgated under the Securities Act.

3.04. ADJUSTMENT FOR STOCK DIVIDENDS, SPLITS, ETC. If at any time after

the Issue Date of this Warrant the number of shares into which this Warrant is

exercisable is increased by a stock dividend or other distribution thereon

payable or by a subdivision, split-up or reclassification thereof, then

immediately after the record date fixed for the determination of holders of such

stock entitled to receive such stock dividend or the effective date of such

subdivision, split-up or reclassification, as the case may be, the Exercise

Price shall be reduced and the number of Warrant Shares issuable hereunder shall

be increased, in each case appropriately so that the Holder shall be entitled to

receive the number of Warrant Shares thereof that it would have owned

immediately following such action had this Warrant been exercised in full for

cash immediately prior thereto.

3.05. ADJUSTMENT FOR COMBINATION OF WARRANT SHARES. If at any time after

the Issue Date of this Warrant the number of Warrant Shares into which this

Warrant is exercisable is

decreased by a combination or reclassification of such shares, then, immediately

after the effective date of such combination or reclassification, the number of

Warrant Shares shall be decreased appropriately and the Exercise Price shall

increase proportionately, as applicable, so that the Holder shall be entitled to

receive the number of Warrant Shares which it would have owned immediately

following such action had this Warrant been exercised immediately prior thereto.

3.06. ADJUSTMENT FOR CAPITAL REORGANIZATION OR RECLASSIFICATION. If the

Company's common stock is changed into the same or a different number of shares

of any class or classes of stock, whether by capital reorganization,

reclassification or otherwise (other than a subdivision or combination of shares

or stock dividend provided for above), then in each such event, the Holder shall

have the right thereafter to exercise this Warrant into the kind and amount of

shares of stock and other securities and property that would have been

receivable upon such reorganization, reclassification or other change in respect

of the number of such shares into which this Warrant could have been exercised

in full for cash immediately prior to such reorganization, reclassification or

change, all subject to further adjustment as provided herein.

3.07. ADJUSTMENT FOR MERGER OR CONSOLIDATION. If at any time while the

Warrant remains outstanding, any capital reorganization or reclassification of

the Company, or any consolidation or merger of the Company with another

corporation occurs in which the Company is the continuing or surviving

corporation, the Holder shall have the right upon the exercise of this Warrant

to receive the kind and amount of shares or other securities and property

receivable by a holder of shares of common stock upon such reorganization,

reclassification, consolidation, or merger in exchange for the number of shares

that might have been purchased upon exercise of such Warrant, immediately prior

to such reorganization, reclassification, consolidation or merger.

3.08. ANTI-DILUTION ADJUSTMENTS.

(a) FULL RATCHET ANTI-DILUTION. Upon the occurrence of any

issuance or sale of any Additional Stock (as defined below) without

consideration or for a consideration per share less than the Exercise Price then

in effect, as of the close of business on the date of such issuance or sale, the

Exercise Price shall be adjusted to equal the price paid per share for such

Additional Stock.

(b) DEFINITION OF "ADDITIONAL STOCK". For purposes of this

Section 3.08, "Additional Stock" shall mean any shares of common stock issued

other than:

(1) common stock issued pursuant to a transaction

described in Sections 3.04 -- 3.07 hereof;

(2) common stock issuable or issued to employees,

consultants or directors of the Company directly or pursuant to a stock option

plan or restricted stock plan approved by the Company's Board of Directors;

(3) capital stock, or warrants or options to purchase

capital stock, issued to financial institutions or lessors in connection with

commercial credit arrangements, equipment financings or similar transactions;

(4) capital stock issuable upon exercise or conversion of

options, warrants, capital stock or other convertible securities outstanding or

which the Company is obligated to issue as of the date hereof; and

(5) capital stock, or warrants or options to purchase

capital stock, issued in connection with bona fide acquisitions, mergers, joint

venture agreements, distribution agreements, other strategic alliances, or

similar transactions, the terms of which are approved by the Company's Board of

Directors.

Price shall be made in an amount less than one cent per share, provided that any

adjustments which are not required to be made by reason of this sentence shall

be carried forward and shall be either taken into account in any subsequent

adjustment made prior to three (3) years from the date of the event giving rise

to the adjustment being carried forward, or shall be made at the end of three

(3) years from the date of the event giving rise to the adjustment being carried

forward.

(d) DETERMINATION OF CONSIDERATION. In the case of the issuance

of common stock for cash, the consideration shall be deemed to be the amount of

cash paid therefor before deducting any reasonable discounts, commissions or

other expenses allowed, paid or incurred by the Company for any underwriting or

otherwise in connection with the issuance and sale thereof. In the case of the

issuance of common stock for a consideration in whole or in part other than

cash, the consideration other than cash shall be deemed to be the fair value

thereof as determined by the Company's Board of Directors irrespective of any

accounting treatment.

3.09. NOTICE TO HOLDER OF CERTAIN EVENTS. In the event the Company shall

propose to take any action of the type described in Sections 3.04, 3.05, 3.06,

3.07, 3.08 or a Change of Control, the Company shall give notice to the Holder,

which notice shall specify the record date, if any, with respect to any such

action and the approximate date on which such action is to take place. In the

case of any action which would require the fixing of a record date, such notice

shall be given at least ten (10) days prior to the date so fixed, and in case of

all other action, such notice shall be given at least fifteen (15) days prior to

the taking of such proposed action. Failure to give such notice, or any defect

therein, shall not affect the legality or validity of any such action.

3.10. NO IMPAIRMENT. The Company will not, by amendment of its

Certificate of Incorporation or through any reorganization, transfer of assets,

issuance or sale of securities or otherwise, avoid or seek to avoid the

observance or performance of any of the terms of this Article 3 or the other

provisions of this Warrant and will at all times in good faith assist in the

carrying out of all provisions hereof and in the taking of all actions as may be

necessary in order to protect the rights of the Holder hereunder against

impairment.

ARTICLE 4. REGISTRATION RIGHTS.

The Company covenants and agrees as follows:

4.01. DEFINITIONS. For purposes of this Article 4:

(a) The term "FORM S-3" means such form under the Securities Act

as in effect on the date hereof or any registration form under the Securities

Act subsequently adopted by the SEC that permits inclusion or incorporation of

substantial information by reference to other documents filed by the Company

with the SEC.

(b) The term "HOLDER" means any person owning or having the right

to acquire Registrable Securities or any assignee thereof to whom registration

rights under this Warrant are assigned in accordance with Section 4.11 hereof.

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 Securities Act, and the declaration or

ordering of effectiveness of such registration statement or document.

(e) The term "REGISTRABLE SECURITIES" means (i) the Warrant

Shares, and (ii) any common stock of the Company issued as a dividend or other

distribution with respect to, or in exchange for, or in replacement of, the

shares referenced in (i) above; provided, however, that the foregoing definition

shall exclude in all cases any Registrable Securities sold by a person in a

transaction in which his, her or its rights under this Warrant are not assigned.

In addition, Warrant Shares or other securities shall only be treated as

Registrable Securities if and so long as they have not been (A) sold to or

through a broker or dealer or underwriter in a public distribution or a public

securities transaction, including sales made pursuant to Rule 144 promulgated

under the Securities Act or (B) sold in a transaction exempt from the

registration and prospectus delivery requirements of the Securities Act under

Section 4(1) thereof so that all transfer restrictions, and restrictive legends

with respect thereto, if any, are removed upon the consummation of such sale.

The number of shares of "Registrable Securities" outstanding shall be the sum of

the number of shares of common stock outstanding that are Registrable Securities

plus the number of shares of common stock issuable pursuant to then exercisable

or convertible securities that are Registrable Securities.

(f) The term "SEC" shall mean the Securities and Exchange

Commission.

4.02 REQUEST FOR REGISTRATION.

(a) Subject to the conditions of this Section 4.02, if the

Company shall receive at any time after two (2) years after the date of this

Warrant a written request from the Holder that the Company file a registration

statement under the Securities Act covering the registration of Registrable

Securities with an anticipated aggregate offering price of at least $1,000,000

net of underwriter discounts and commissions, then the Company shall, subject to

the limitations of this Section 4.02, use all reasonable efforts to file, within

forty-five days, a registration statement under the Securities Act covering the

Registrable Securities that the Holder requests to be registered, and to use

reasonable efforts to cause such registration statement to become effective

within one hundred twenty days of the Holder's request for registration.

(b) If the Holder intends to distribute the Registrable

Securities covered by the Holder's request by means of an underwriting, the

Holder shall so advise the Company as a part of the request made pursuant to

this Section 4.02.

pursuant to this Section 4.02:

(1) in any particular jurisdiction in which the Company

would be required to execute a general consent to service of process in

effecting such registration, unless the Company is already subject to service in

such jurisdiction and except as may be required under the Securities Act;

(2) after the Company has effected one (1) registration

pursuant to this Section 4.02, and such registrations have been declared or

ordered effective;

(3) during the period starting with the date sixty days

prior to the Company's good faith estimate of the date of the filing of, and

ending on a date one hundred eighty days following the effective date of, a

Company-initiated registration subject to Section 4.03 below, provided that the

Company is actively employing in good faith all reasonable efforts to cause such

registration statement to become effective;

(4) if the Holder proposes to dispose of Registrable

Securities that may be registered on Form S-3 pursuant to Section 4.04 hereof;

(5) if the Company shall furnish to the Holder requesting

a registration statement pursuant to this Section 1.2, a certificate signed by

the Company's Chief Executive Officer or Chairman of the Board stating that in

the good faith judgment of the Board of Directors of the Company, it would be

seriously detrimental to the Company and its stockholders for such registration

statement to be effected at such time, in which event the Company shall have the

right to defer such filing for a period of not more than one hundred twenty days

after receipt of the request of the Holder, provided that such right to delay a

request shall be exercised by the Company not more than once in any twelve-month

period.

1.3 COMPANY REGISTRATION.

(a) If the Company proposes to register (including for this

purpose a registration initiated by the Company for shareholders other than the

Holder) any of its stock or other securities under the Securities Act in

connection with the public offering for cash of such securities (other than a

registration relating solely to the sale of securities to participants in a

Company stock plan, a registration relating to a corporate reorganization or

other transaction under Rule 145 of the Securities Act, a registration on any

form that 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 that are

also being registered), the Company shall, at such time, promptly give the

Holder written notice of such registration. Upon the written request of the

Holder given within twenty days after mailing of such notice by the Company, the

Company shall use all reasonable efforts to cause to be registered under the

Securities Act all of the Registrable Securities that the Holder has requested

to be registered.

(b) RIGHT TO TERMINATE REGISTRATION. The Company shall have the

right to terminate or withdraw any registration initiated by it under this

Section 4.03 prior to the effectiveness of such registration whether or not the

Holder has elected to include securities in such registration. The expenses of

such withdrawn registration shall be borne by the Company in accordance with

Section 4.07 hereof.

involving an underwriting of shares of the Company's capital stock, the Company

shall not be required under this Section 4.03 to include any of the Holder's

securities in such underwriting unless the Holder accepts the terms of the

underwriting as agreed upon between the Company and the underwriters selected by

it (or by other persons entitled to select the underwriters) and enters into an

underwriting agreement in customary form with an underwriter or underwriters

selected by the Company, and then only in such quantity as the underwriters

determine in their sole discretion will not jeopardize the success of the

offering by the Company. If the total amount of securities, including

Registrable Securities, requested by shareholders to be included in such

offering exceeds the amount of securities sold other than by the Company that

the underwriters determine in their sole discretion is compatible with the

success of the offering, then the Company shall be required to include in the

offering only that number of such securities, including Registrable Securities,

that the underwriters determine in their sole discretion will not jeopardize the

success of the offering.

4.04 FORM S-3 REGISTRATION. In case the Company shall receive from the

Holder a written request that the Company effect a registration on Form S-3 and

any related qualification or compliance with respect to all or a part of the

Registrable Securities owned by the Holder, the Company shall use all reasonable

efforts to effect, within forty-five days of the initial request for

registration pursuant to Section 4.04, such registration and all such

qualifications and compliances as may be so requested and as would permit or

facilitate the sale and distribution of all or such portion of the Holder's

Registrable Securities as are specified in such request; provided, however, that

the Company shall not be obligated to effect any such registration,

qualification or compliance, pursuant to this Section 4.04:

(1) if Form S-3 is not available for use by the Company

with respect to such offering by the Holder;

(2) if the Holder, together with the holders of any other

securities of the Company entitled to inclusion in such registration, propose to

sell Registrable Securities and such other securities (if any) at an aggregate

price to the public (net of any underwriters' discounts or commissions) of less

than $500,000;

(3) if the Company shall furnish to the Holder a

certificate signed by the Chief Executive Officer or Chairman of the Board of

the Company stating that in the good faith judgment of the Board of Directors of

the Company, it would be seriously detrimental to the Company and its

shareholders for such Form S-3 Registration to be effected at such time, in

which event the Company shall have the right to defer the filing of the Form S-3

registration statement for a period of not more than one hundred twenty days

after receipt of the request of the Holder under this Section 4.04; provided,

however, that the Company shall not utilize this right more than once in any

twelve month period;

(4) if the Company has already effected one (1)

registration on Form S-3 for the Holder pursuant to this Section 4.04; or

(5) in any particular jurisdiction in which the Company

would be required to qualify to do business or to execute a general consent to

service of process in effecting such registration, qualification or compliance.

4.05. OBLIGATIONS OF THE COMPANY. Whenever required under this Article 4

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 all reasonable efforts to cause

such registration statement to become effective, and, upon the request of the

Holder, keep such registration statement effective for a period of up to one

hundred twenty days or, if earlier, until the distribution contemplated in the

Registration Statement has been completed;

(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

Securities Act with respect to the disposition of all securities covered by such

registration statement;

including a preliminary prospectus, in conformity with the requirements of the

Securities Act, and such other documents as the Holder may reasonably request in

order to facilitate the disposition of Registrable Securities owned by the

Holder;

(d) use reasonable 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 Holder,

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;

(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;

(f) notify the Holder at any time when a prospectus relating

thereto is required to be delivered under the Securities Act or 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 the light of the circumstances

then existing;

(g) cause all such Registrable Securities registered pursuant to

this Warrant to be listed on each securities exchange on which similar

securities issued by the Company are then listed;

(h) provide a transfer agent and registrar for all Registrable

Securities registered pursuant to this Warrant and a CUSIP number for all such

Registrable Securities, in each case not later than the effective date of such

registration; and

(i) use its best efforts to furnish, at the request of the

Holder, on the date that such Registrable Securities are delivered to the

underwriters for sale in connection with a registration pursuant to this Article

4, if such securities are being sold through underwriters, or, if such

securities are not being sold through underwriters, on the date that the

registration statement with respect to such securities becomes effective, (1) an

opinion, dated such date, of the counsel representing the Company for the

purposes of such registration, in form and substance as is customarily given to

underwriters in an underwritten public offering, addressed to the underwriters,

if any, and to the Holder and (2) 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, if any, and to

the Holder.

4.06 INFORMATION FROM HOLDER. It shall be a condition precedent to the

obligations of the Company to take any action pursuant to this Article 4 with

respect to the Registrable Securities of the Holder that the Holder shall

furnish to the Company such information regarding the Holder, the Registrable

Securities held by the Holder, and the intended method of disposition of such

securities as shall be required to effect the registration of the Holder's

Registrable Securities.

4.07 EXPENSES OF REGISTRATION. All expenses other than underwriting

discounts and commissions incurred in connection with registrations, filings or

qualifications pursuant to Sections 4.02, 4.03 and 4.04, including (without

limitation) all registration, filing and qualification fees, printer's and

accounting fees, fees and disbursements of counsel for the Company and fees and

disbursements of one counsel for the Holder (subject to a maximum limit of

$15,000 for registrations pursuant to Sections 4.02 and 4.03 and $10,000 for

registrations pursuant to Section 4.04, shall be borne by the Company.

Notwithstanding the foregoing, the Company shall not be required to pay for any

expenses of any registration proceeding begun pursuant to Section 4.04 if the

registration request is subsequently withdrawn at the request of the Holder (in

which case the Holder shall bear all such expenses).

4.08 DELAY OF REGISTRATION. The Holder shall not 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 Article 4.

4.09 INDEMNIFICATION. In the event any Registrable Securities are

included in a registration statement under this Article 4:

(a) To the extent permitted by law, the Company will indemnify

and hold harmless the Holder, legal counsel and accountants for the Holder, any

underwriter (as defined in the Securities Act) for the Holder and each person,

if any, who controls the underwriter within the meaning of the Securities Act or

the Exchange Act, against any losses, claims, damages or liabilities (joint or

several) to which they may become subject under the Securities Act, the Exchange

Act or any state securities laws, 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 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 Securities Act, the

Exchange Act, any state securities laws or any rule or regulation promulgated

under the Securities Act, the Exchange Act or any state securities laws; and the

Company will reimburse the Holder, underwriter or controlling person for any

legal or other expenses reasonably incurred by any of them in connection with

investigating or defending any such loss, claim, damage, liability or action;

provided, however, that the indemnity agreement contained in this Section

4.09(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 that

occurs in reliance upon and in conformity with written information furnished

expressly for use in connection with such registration by the Holder,

underwriter or controlling person.

(b) To the extent permitted by law, the Holder will severally but

not jointly 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 Securities Act, legal counsel and accountants for the Company,

any underwriter, any other shareholder selling securities in such registration

statement and any controlling person of any such underwriter or other

shareholder, against any losses, claims, damages or liabilities to which any of

the foregoing persons may become subject, under the Securities Act, the Exchange

Act or any state securities laws, 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 the Holder expressly for use in connection with such registration;

and the Holder will reimburse any person intended to be indemnified pursuant to

this Section 4.09(b), for any legal or other expenses reasonably incurred by

such person in connection with investigating or defending any such loss, claim,

damage, liability or action; provided, however, that the indemnity agreement

contained in this Section 4.09(b) 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

Section 4.09(b) exceed the net proceeds from the offering received by the

Holder.

Section 4.09 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 4.09, 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 that 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

4.09, 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 4.09.

(d) If the indemnification provided for in this Section 4.09 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

herein, 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; provided, however, that the Holder will not be obligated to

contribute more than the net proceeds received by the Holder from such offering.

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 an 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 the Holder under this

Section 4.09 shall survive the completion of any offering of Registrable

Securities in a registration statement under this Article 4, and otherwise.

4.10. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to

making available to the Holder the benefits of Rule 144 promulgated under the

Securities Act and any other rule or regulation of the SEC that may at any time

permit the Holder to sell securities of the Company to the public without

registration or pursuant to a registration on Form S-3, the Company agrees to:

(a) make and keep public information available, as those terms

are understood and defined in SEC Rule 144, at all times;

(b) file with the SEC in a timely manner all reports and other

documents required of the Company under the Securities Act and the Exchange Act;

and

statement by the Company that it has complied with the reporting requirements of

SEC Rule 144 (at any time after ninety days after the effective date of the

first registration statement filed by the Company), the Securities Act and the

Exchange Act (at any time after it has become subject to such reporting

requirements), or that it qualifies as a registrant whose securities may be

resold pursuant to Form S-3 (at any time after it so qualifies), (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 requested in availing the Holder of any rule or regulation of the

SEC that permits the selling of any such securities without registration or

pursuant to such form.

4.11. ASSIGNMENT OF REGISTRATION RIGHTS. Subject to Article 2, the

rights to cause the Company to register Registrable Securities pursuant to this

Article 4 may be assigned (but only with all related obligations) by the Holder

to a transferee or assignee of such securities that after such assignment or

transfer, holds all of the shares of Registrable Securities originally issued to

the Holder (subject to appropriate adjustment for stock splits, stock dividends,

combinations and other recapitalizations), 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 Warrant, including without limitation the provisions of

Section 4.12 below; 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 Securities Act.

4.12 TERMINATION OF REGISTRATION RIGHTS. The Holder shall not be

entitled to exercise any right provided for in this Article 4 after such time at

which all Registrable Securities held by the Holder (and any affiliate of the

Holder with whom such Holder must aggregate its sales under Rule 144) can be

sold in any three (3)-month period without registration in compliance with Rule

144 of the Securities Act.

ARTICLE 5. MISCELLANEOUS PROVISIONS.

5.01. DEFINITIONS. As used herein, the following terms shall have the

meanings ascribed below:

(a) "Change of Control" means any of the following events: (i)

consummation of any merger or consolidation of the Company in which the Company

is not the continuing or surviving corporation, or pursuant to which shares of

the Company's common stock are converted into cash, securities, or other

property, if following such merger or consolidation the holders of the Company's

outstanding voting securities immediately prior to such merger or consolidation

own less than 50% of the outstanding voting securities of the surviving

corporation; or (ii) a change in ownership of the Company's capital stock as a

result of which the owners of the Company's outstanding capital stock

immediately prior to the change own less than 50% of the Company's outstanding

capital stock following such change.

(b) "Issue Date" means September 30, 2002.

5.02. GOVERNING LAW; VENUE. This Warrant shall be governed by and

construed in accordance with the laws of the State of Washington, and venue for

any action taken in connection herewith or related hereto shall exclusively

reside in King County, Washington.

5.03. NOTICES. All notices and other communications required or

permitted hereunder shall be in writing and shall be deemed effectively given

upon personal delivery; upon confirmed transmission by telecopy or telex; or

three (3) business days after deposit with the United States Post Office, by

first-class mail, postage prepaid, or otherwise delivered by hand or by

messenger, addressed (a) if to the Company, at 0000 000xx Xxxxxx XX, Xxxxxxx,

Xxxxxxxxxx 00000, to the attention of the President, or at such other address as

the Company shall have furnished to the

Holder, and (b) if to the Holder at the last address shown on the books of the

Company or its transfer agent maintained for the registry and transfer of the

Warrant.

5.04. SUCCESSORS. All covenants and provisions of this Warrant by or for

the benefit of the Company shall bind and inure to the benefit of its respective

successors and assigns.

5.05. BENEFITS OF THIS WARRANT. Nothing in this Warrant shall be

construed to give to any person or corporation other than the Company and the

Holder any legal or equitable right, remedy or claim under this Warrant. This

Warrant shall be for the sole and exclusive benefit of the Company and the

Holder.

5.06. WAIVER AND AMENDMENT. Any provision of this Warrant may be

amended, waived or modified upon the written consent of the Company and Holder.

This Warrant has been executed and delivered as of the date first above written.

SCOLR, INC.

By /s/ Xxxxx X. Xxxxxx

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

Xxxxx X. Xxxxxx

Print Name

Its President & CEO

AGREED AND ACKNOWLEDGED:

/s/ Xxxxx Xxxx

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

XXXXX XXXX

SECURITY AGREEMENT

This Security Agreement, dated as of September 30, 2002, is being

entered into by SCOLR, Inc., a Delaware corporation (the "Company") for the

benefit of Xxxxx Xxxx, an individual residing in the State of California, whose

principal address is 00000 Xxxxxxx Xxxxx, Xxxxxxxxx, Xxxxxxxxxx 00000 (the

"Lender").

RECITALS

WHEREAS, the Lender has agreed to loan the Company funds in

consideration of that certain Promissory Note, dated as of the date hereof,

executed by the Company for the benefit of the Lender (the "Promissory Note");

and

WHEREAS, the Company has previously granted a security interest in some

or all of the Collateral (as defined below) to Access Business Finance LLC (the

"Access Security Interest"), pursuant to that certain Loan and Security

Agreement dated April 30, 2002, by and between the Company and Access Business

Finance LLC.

NOW, THEREFORE, in consideration of the foregoing recitals and the

mutual covenants and agreements set forth below, and for other good and valuable

consideration, the parties hereto agree as follows:

AGREEMENT

1. GRANT OF COLLATERAL. As security for the payment and performance of (i) the

obligations to pay principal of, interest on and all other obligations under the

Promissory Note and (ii) all obligations of the Company under this Agreement

(all of the foregoing in the preceding clauses (i) and (ii), collectively, the

"Secured Obligations"), the Company hereby grants a security interest in favor

of the Lender and the other holders from time to time of the Secured Obligations

in all of the Company's right, title and interest in and to (but none of its

obligations or liabilities with respect to) the items and types of property

described below in this Section 1, whether now owned or hereafter acquired and

whether mentioned once or more than once in the following description:

Accounts, contract rights, leases, documents, instruments, inventory,

equipment, all other goods, intellectual property rights (including, but

not limited to: patents, copyrights, trademarks, tradenames, and domain

names), goodwill, all other general intangibles, stock or other

evidences of ownership, all other investment property, chattel paper,

instruments, leases, cash, cash equivalents, deposit accounts,

letter-of-credit rights, books, records, insurance proceeds, dividends,

all other property, assets and items of value, all supporting

obligations, and all proceeds and products of any and all of the

foregoing (all of the above being included in the term "Collateral"). As

used in this Agreement, the following terms shall have the respective

meanings given such terms in the Uniform Commercial Code as adopted in

the State of Washington as of the date hereof: accounts, documents,

instruments, inventory, equipment, goods, general

intangibles, investment property, chattel paper, instruments, deposit

accounts, letter-of-credit rights, supporting obligations and proceeds.

2. NO VIOLATION. Notwithstanding anything contained in this Agreement to the

contrary, no security interest shall be granted in any item of Collateral to the

extent that the terms of any agreement, including without limitation the

documents and instruments governing the Access Security Interest, or the

provisions of any law applicable thereto would prohibit the grant of such

security interest or to the extent that the grant of such security interest

would create a default under any such agreement or a violation of any such law

(other than to the extent that any such term or provision would be rendered

ineffective pursuant to Section 9-406, Section 9-407 or 9-408 of the Uniform

Commercial Code).

3. PERFECTION OF COLLATERAL. Upon the Lender's reasonable request from time to

time, the Company will execute and deliver, and file and record in the proper

filing and recording places, all such instruments, and take all such other

action as the Lender deems reasonably necessary for perfecting or otherwise

confirming to the Lender his security interest in the Collateral. The Company

hereby authorizes the Lender to file or record Uniform Commercial Code financing

statements in all jurisdictions and with all filing offices as the Lender may

deem necessary or advisable to perfect the security interest guaranteed to the

Lender hereunder. Such financing statements may describe the Collateral in the

same manner as described herein or may contain an indication or description of

the Collateral that describes the Collateral as "all assets" or "all personal

property".

4. INSURANCE. The Company shall at all times maintain comprehensive casualty

insurance on the physical Collateral against such risks, in such amounts, with

such deductibles, and with such insurance companies as is typical in the

industry in which the Company is engaged. All such policies shall name the

Lender as a loss payee and provide that no such policy may be cancelled or

materially amended without providing at least 10 days prior written notice to

the Lender of the impending cancellation or amendment. All insurance proceeds

shall be applied by the Company, if no Event of Default then exists, to either

the repair or replacement of the damaged or destroyed Collateral (if such repair

or replacement is practicable) or the payment of the Secured Obligations,

provided, that, if an Event of Default exists, the Lender shall have the right

to direct whether the insurance proceeds are applied to such repair or

replacement or to such payment.

5. GENERAL. The Company hereby acknowledges that the Lender is relying on this

Agreement in making the loans evidenced by the Promissory Note. This Agreement

shall bind and inure to the benefit of the parties hereto and their respective

successors and assigns but no assignment shall release the Company of its

obligations hereunder. Notices shall be furnished in writing to each party at

its address appearing below or as it may otherwise direct in a writing actually

received by the other party. The invalidity or unenforceability of any provision

hereof shall not affect the validity or enforceability of any other provision

hereof, and any invalid or unenforceable provision shall be modified so as to be

enforceable to the maximum extent of its validity or enforceability. The

headings in this Agreement are for convenience of reference only and shall not

limit, alter or otherwise affect the meaning hereof. This Agreement constitutes

the entire understanding of the parties with respect to the subject matter

hereof and supersedes all prior and current understandings and agreements,

whether written or oral. This Agreement shall

be governed by and construed in accordance with the laws (other than the

conflict of laws rules) of the State of Washington, except as may be required by

the Uniform Commercial Code of other jurisdictions with respect to matters

involving the perfection of the Lender's lien on the Collateral.

Each of the undersigned has caused this Agreement to be executed and

delivered as of the date first written above.

SCOLR, INC.

By: /s/ Xxxxx X. Xxxxxx

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

Name: Xxxxx X. Xxxxxx

Title: President and Chief Executive Officer

Address: 0000 000xx Xxxxxx XX

Xxxxxxx, Xxxxxxxxxx 00000

Acknowledged and Agreed to:

XXXXX XXXX

/s/ Xxxxx Xxxx

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

Address: 00000 Xxxxxxx Xxxxx

Xxxxxxxxx, Xxxxxxxxxx 00000

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No. ____ THIS WARRANT AND THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF (THE AMENDED (THE "1933 ACT") OR THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS PURSUANT TO SEC RULE 144 OR UNLESS THERE IS...

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