Case7:04-cv-00027-D Document151 Filed 03/08/2007 Page 1...

Case 7:04-cv-00027-D Document 151 Filed 03/08/2007 Page 1 of 28

UNITED STATES DISTRICT COURTEASTERN DISTRICT OF NORTH CAROLINA

SOUTHERN DIVISION

In re AAIPHARMA INC. SECURITIESLITIGATION

Consolidated Civil Action No.7:04-CV-27-D

This Document Relates To:

ALL ACTIONS.

CLASS ACTION

STIPULATION OF PARTIAL SETTLEMENT


This Stipulation of Partial Settlement dated as of February 23, 2007 (the "Stipulation "), is made and

entered into by and among the following Settling Parties (as defined further in Section IV hereof) to the

above-entitled Litigation: (i) the Lead Plaintiff (on behalf of itself and each of the Class Members), by and

through their respective counsel ofrecord in the Litigation; and (ii) Frederick D. Sancilio, William L. Ginna,

Jr., Philip S. Tabbiner (the "D&O Group"), and David M. Hurley ("Hurley"), by and through their counsel of

record in the Litigation. The D&O Group and Hurley are collectively referred to as the "Settling

Defendants"). The Stipulation is intended by the Settling Parties to fully, finally and forever resolve,

discharge and settle the Released Claims, upon and subject to the terms and conditions hereof. This

Stipulation does not release any claims ofthe Class against the Non-Settling Defendant, Ernst & Young LLP.

1. THE LITIGATION

On and after February 12, 2004, several securities class actions were filed in the United States District

Court for the Eastern District of North Carolina, Southern Division (the "Court") on behalf of a class of

purchasers of the securities of aaiPharma, Inc. ("aaiPharma" or the "Company"). On April 16, 2004, the

Court entered an Order consolidating all of these cases under the caption entitled In re aaiPharma Inc.

Securities Litigation , Consolidated Civil Action No. 7:04-CV-27-D (the "Litigation").

On October 14, 2004, the Court entered an Order appointing the SEIU Pension Plans Master Trust as

Lead Plaintiff pursuant to §2 1 D(a)(3)(B) of the Securities Exchange Act of 1934 (the "Exchange Act") and

approved their selection of Lerach Coughlin Stoia Geller Rudman & Robbins LLP as "Lead Counsel" and

McDaniel & Anderson, L.L.P. as Liaison Counsel , pursuant to §21D(a)(3)(B)(v) of the Exchange Act.

The operative complaint in the Litigation is Plaintiffs' Consolidated Complaint filed February 11,

2005 (the "Complaint"). The Complaint alleges violations of § § 10(b) and 20(a) and Rule I Ob-5 promulgated

thereunder on behalf of a class of purchasers of all persons who purchased or otherwise acquired aaiPharma

securities during the period April 24, 2002 through June 15, 2004 ("Class Period") against Frederick D.

Sancilio, William L. Ginna, Jr., Philip S. Tabbiner and David M. Hurley (the "Settling Defendants") and Ernst

& Young LLP who is not a party to this Stipulation. On or after December 9, 2005, all Defendants (other

than aaiPharma) filed motions to dismiss the Complaint. The parties agreed to stay briefing ofthe motions to

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dismiss to pursue mediation. On May 22, 2006, the parties participated in mediation with the Honorable

Howard B. Wiener (Ret.). Although no agreement was reached the parties made progress towards a

settlement. After approximately five months ofadditional settlement discussions among the parties and Judge

Wiener, and an additional mediation session on October 18, 2006, in November 2006, the Lead Plaintiff and

the Settling Defendants reached an agreement-in-principle to settle the action.'

II. THE D&O GROUP'S DENIALS OF WRONGDOING AND LIABILITY

The D&O Group expressly have denied and continue to deny all charges of wrongdoing or liability

against them arising out of any ofthe conduct, statements, acts or omissions alleged, or that could have been

alleged, in the Litigation; continue to believe the claims asserted against them in the Complaint are without

merit; and have agreed to enter into the settlement solely to avoid the expense, distraction, time, and

uncertainty associated with continuing the Litigation.

The D&O Group and Hurley have concluded that further conduct of the Litigation would be

protracted and expensive and that it is desirable that the Litigation be fully and finally settled in the manner

and upon the terms and conditions set forth in this Stipulation. They also have taken into account the

uncertainty and risks inherent in any litigation, especially in complex cases such as this Litigation and have,

therefore, determined that it is desirable and beneficial to them that the Litigation be settled in the manner and

upon the terms and conditions set forth in this Stipulation.

III. CLAIMS OF THE LEAD PLAINTIFF AND BENEFITS OF SETTLEMENT

Lead Plaintiff believes that the claims asserted in the Litigation have merit and that the evidence

developed to date supports those claims. However, the Lead Plaintiff recognizes and acknowledges the

expense and length of continued proceedings necessary to prosecute the Litigation against the Settling

Defendants through trial and through appeals. The Lead Plaintiff also has taken into account the uncertain

' On May 10, 2005, aaiPharma filed for bankruptcy in the United States Bankruptcy Court for theDistrict of Delaware ("Bankruptcy Court"), pursuant to Chapter 11 ofthe Bankruptcy Code. Lead Plaintiff'sand the Class' s claims against aaiPharma were extinguished in the Company's bankruptcy proceedings.

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outcome and the risk of any litigation, especially in complex actions such as this Litigation, as well as the

difficulties and delays inherent in such litigation. Lead Plaintiff is also mindful ofthe inherent difficulties of

proof under and possible defenses to the securities law violations asserted in the Litigation. Finally, the Lead

Plaintiff has also weighed the benefits of a settlement in light ofthe bankruptcy discharge of aaiPharma, Inc.,

the disputed coverage under the various policies of directors and officers insurance and the limited resources

ofthose of Hurley, as well. The Lead Plaintiff believes that the settlement set forth in the Stipulation confers

substantial benefits upon the Class. Based on their evaluation, Lead Plaintiff and Lead Counsel have

determined that the settlement set forth in this Stipulation is in the best interests of Lead Plaintiff and the

Class.

IV. TERMS OF STIPULATION AND AGREEMENT OF SETTLEMENT

NOW, THEREFORE, IT IS HEREBY STIPULATED AND AGREED by and among Lead Plaintiff

(for itself and each of the respective Class Members) and the Settling Defendants, by and through their

respective counsel or attorneys of record, that, subject to the approval of the Court, the Litigation and the

Released Claims shall be finally and fully compromised, settled and released, and the Litigation shall be

dismissed with prejudice, as to all Settling Parties, upon and subject to the terms and conditions of the

Stipulation, as follows.

1. Definitions

As used in the Stipulation the following terms have the meanings specified below:

1.1 "aaiPharma" means aaiPharma, Inc. and its subsidiaries, divisions, affiliates, predecessors,

and successors.

1.2 "aaiPharma Publicly Traded Securities" means aaiPharma common stock, 11% Senior

Subordinated Notes Due 2010 (" 11 % Notes") and Put and Call Options.

1.3 "Authorized Claimant" means any Class Member whose claim for recovery has been allowed

pursuant to the terms of the Stipulation.

1.4 "Claims Administrator" means the firm of Gilardi & Co. LLC.

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1.5 "Class" means all Persons who purchased or otherwise acquired aaiPharma Publicly Traded

Securities between April 24, 2002 and June 15, 2004, inclusive. Excluded from the Class are the Settling

Defendants, members ofthe immediate families ofthe Defendants, the former and current directors, officers,

subsidiaries and affiliates of aaiPharma, as well as any person, firm, trust, corporation, officer, director or

other individual or entity in which any Defendant has a controlling interest and the legal representatives,

affiliates, heirs, successors-in-interest, or assigns of any such excluded party. Also excluded from the Class

are those Persons who timely and validly request exclusion from the Class pursuant to the Notice ofPendency

and Proposed Partial Settlement of Class Action.

1.6 "Class Member" or "Class Members" mean any Person who falls within the definition ofthe

Class as set forth in ¶1.5 of the Stipulation.

1.7 "Defendants" means the Settling Defendants and the Non-Settling Defendant.

1.8 "Effective Date" means the first date by which all of the events and conditions specified in

¶7.1 of the Stipulation have been met and have occurred.

1.9 "Escrow Agent" means Lerach Coughlin Stoia Geller Rudman & Robbins LLP or its

successor(s).

1.10 "Final" means when the last of the following with respect to the Judgment approving the

Stipulation, substantially in the form of Exhibit B attached hereto, shall occur: (i) the expiration of three (3)

business days after the time to file a motion to alter or amend the Judgment under Federal Rule of Civil

Procedure 59(e) has passed without any such motion having been filed; (ii) the expiration ofthree (3) business

days after the time in which to appeal the Judgment has passed without any appeal having been taken (which

date shall be deemed to be thirty-three (33) days following the entry of the Judgment, unless the date to take

such an appeal shall have been extended by Court order or otherwise, or unless the thirty-third (33rd) day falls

on a weekend or a Court holiday, in which case the date for purposes of this Stipulation shall be deemed to be

the next business day after such thirty-third (33rd) day); and (iii) if such motion to alter or amend is filed or if

an appeal is taken, three (3) business days after the determination of that motion or appeal (including any

petition for writ of certiorari) in such a manner as to permit the consummation ofthe settlement substantially

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in accordance with the terms and conditions of this Stipulation. For purposes of this paragraph, an "appeal"

shall not include any appeal that concerns only the issue of attorneys' fees and reimbursement of expenses or

the Plan ofAllocation ofthe Settlement Fund. Any proceeding or order, or any appeal or petition for a writ of

certiorari pertaining solely to any plan of distribution and/or application for attorneys' fees, costs or expenses,

shall not in any way delay or preclude the Judgment from becoming Final.

1.11 "Judgment" means the judgment to be rendered by the Court, substantially in the form

attached hereto as Exhibit B.

1.12 "Lead Plaintiff' means SEIU Pension Plans Master Trust.

1.13 "Non-Settling Defendant" means Ernst & Young, LLP.

1.14 "Notice Order" means the order described in ¶3.1 hereof.

1.15 "Person" means an individual, corporation, partnership, limited partnership, limited liability

company, association, joint stock company, estate, legal representative, trust, unincorporated association,

government or any political subdivision or agency thereof, and any business or legal entity and their spouses,

heirs, predecessors, successors, representatives, or assignees.

1.16 "Plaintiffs' Counsel" means any counsel who have appeared for any plaintiff in the

Litigation.

1.17 "Plan of Allocation" means a plan or formula of allocation of the Settlement Fund whereby

the Settlement Fund shall be distributed to Authorized Claimants after payment of expenses of notice and

administration of the settlement, Taxes and Tax Expenses, and such attorneys' fees, costs, expenses and

interest as may be awarded by the Court. Any Plan of Allocation is not part of the Stipulation, and Settling

Defendants and their Related Parties shall have no responsibility therefor or liability with respect thereto.

1.18 "Related Parties" means, with respect to each Settling Defendant, the immediate family

members, heirs, executors, administrators, successors, assigns, present and former employees, officers,

directors, attorneys, assigns, legal representatives, insurers, reinsurers, and agents of each of them, and any

person or entity which is or was related to or affiliated with any Settling Defendant or in which any Settling

Defendant has or had a controlling interest and the present and former parents, subsidiaries, divisions,

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affiliates, predecessors, successors, employees, officers, directors, attorneys, assigns, legal representatives,

insurers , reinsurers, and agents of each ofthem. Notwithstanding anything in this paragraph, Related Parties

shall not include the Non-Settling Defendant.

1.19 "Released Claims" means all rights, demands, claims (including "Unknown Claims" as

defined in T I.26) and causes of action of every nature and description, in law or equity, accrued or unaccrued,

and whether known or unknown, and whether arising under federal, state, common or foreign law, that Lead

Plaintiff or any member ofthe Class asserted, or could have asserted, arising out of, or relating to, directly or

indirectly, the purchase or acquisition of aaiPharma Publicly Traded Securities during the Class Period, and

the facts, matters, allegations, transactions, events, disclosures, statements, acts or omissions which were

alleged or that could have been alleged in the Complaint.

1.20 "Released Persons" means each and all of the Settling Defendants and each and all of their

Related Parties.

1.21 "Settlement Fund" means the principal amount of Seven Million and Five Hundred Fifty

Thousand Dollars ($7,550,000.00) in cash, to be paid pursuant to ¶2.1 of this Stipulation, plus all interest

earned thereon.

1.22 "Settling Defendants" means Frederick D. Sancilio, William L. Ginna, Jr., Philip S. Tabbiner

and David M. Hurley.

1.23 "Settling Parties" means, collectively, each ofthe Settling Defendants and the Lead Plaintiff

on behalf of itself and each of the Class Members.

1.24 "Lead Counsel" means Lerach Coughlin Stoia Geller Rudman & Robbins LLP, Darren J.

Robbins, Jeffrey D. Light, Kathleen A. Herkenhoff, Amber L. Eck, 655 West Broadway, Suite 1900, San

Diego, CA 92101.

1.25 "Liaison Counsel " means McDaniel & Anderson, L.L.P., L. Bruce McDaniel and William E.

Anderson, Lafayette Square, 4942 Windy Hill Drive, Raleigh , NC 27609.

1.26 "Unknown Claims" means all claims , demands, rights, liabilities, and causes of action of

every nature and description which the Lead Plaintiff or any Class Member do not know or suspect to exist in

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his, her or its favor at the time ofthe release ofthe Released Persons which, if known by him, her or it, might

have affected his, her or its settlement with and release of the Released Persons, or might have affected his,

her or its decision not to object to this settlement. With respect to any and all Released Claims, the Settling

Parties stipulate and agree that, upon the Effective Date, the Lead Plaintiff shall expressly waive, and each of

the Class Members shall be deemed to have waived, and by operation ofthe Judgment shall have waived, the

provisions, rights and benefits of California Civil Code § 1542, which provides:

A general release does not extend to claims which the creditor does not know or

suspect to exist in his or her favor at the time of executing the release , which if known

by him or her must have materially affected his or her settlement with the debtor.

The Lead Plaintiff shall expressly waive and each ofthe Class Members shall be deemed to have waived, and

by operation of the Judgment shall have expressly waived, any and all provisions, rights and benefits

conferred by any law of any state or territory of the United States, or principle of common law, which is

similar, comparable or equivalent to California Civil Code § 1542. The Lead Plaintiff and Class Members

may hereafter discover facts in addition to or different from those which he, she or it now knows or believes

to be true with respect to the subject matter of the Released Claims, but the Lead Plaintiff shall expressly

fully, finally and forever settle and release, and each Class Member, upon the Effective Date, shall be deemed

to have, and by operation ofthe Judgment shall have, fully, finally, and forever settled and released, any and

all Released Claims, known or unknown, suspected or unsuspected, contingent or non-contingent, whether or

not concealed or hidden, which now exist, or heretofore have existed, upon any theory of law or equity now

existing or coming into existence in the future, including, but not limited to, conduct which is negligent,

intentional, with or without malice, or a breach of any duty, law or rule, without regard to the subsequent

discovery or existence of such different or additional facts. The Lead Plaintiff acknowledges, and the Class

Members shall be deemed by operation ofthe Judgment to have acknowledged, that the foregoing waiver was

separately bargained for and a key element of the settlement of which this release is a part.

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Case 7:04-cv-00027-D Document 151

2. The Settlement

a. The Settlement Fund

Filed 03/08/2007 Page 9 of 28

2.1 The Settling Parties acknowledge that $7,550,000.00 has been transferred to an escrow

account under the control of one or more of the D&O insurance companies of the Settling Defendants. This

principal amount of $7,550,000.00 in cash, plus any interest accrued thereon since December 1, 2006, shall

constitute the Settlement Fund, and shall be transferred by the insurers of the Settling Defendants to the

Escrow Agent on or before five (5) business days after entry of the Notice Order.

b. Other Settlement Consideration

2.2 (a) Settling Defendants Frederick D. Sancilio , William L. Ginna, Jr., and Philip S.

Tabbiner agree to be governed by the Corporate Governance Provisions set forth in Exhibit C. These Settling

Defendants also agree to certain cooperation provisions as set forth in Exhibit D.

c. The Escrow Agent

2.3 The Escrow Agent may invest the Settlement Fund deposited pursuant to ¶2.1 in instruments

backed by the full faith and credit of the United States Government or fully insured by the United States

Government or an agency thereof and shall reinvest the proceeds of these instruments as they mature in

similar instruments at their then-current market rates. The Settlement Fund shall bear all risks related to

investment of the Settlement Fund.

2.4 The Escrow Agent shall not disburse the Settlement Fund except as provided in the

Stipulation, by an order of the Court, or with the written agreement of counsel for Settling Defendants.

2.5 Subject to further order and/or direction as may be made by the Court, the Escrow Agent is

authorized to execute such transactions on behalf of the Class as are consistent with the terms of the

Stipulation.

2.6 All funds held by the Escrow Agent shall be deemed and considered to be in custodia legis of

the Court, and shall remain subject to the jurisdiction of the Court , until such time as such funds shall be

distributed pursuant to the Stipulation and/or further order(s) of the Court.

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2.7 Within five (5) days after payment of the Settlement Fund to the Escrow Agent pursuant to

¶2.1 hereof, the Escrow Agent may establish a "Notice and Administration Fund," and may deposit up to

$200,000 from the Settlement Fund in it. The Notice and Administration Fund may be used by the Escrow

Agent without further consent of the Settling Defendants or order of the Court to pay costs and expenses

reasonably and actually incurred in connection with providing notice to Class, locating Class Members,

soliciting claims, assisting with the filing of claims, administering and distributing the Settlement Fund to

Authorized Claimants, processing Proof of Claim and Release forms, and paying escrow fees and costs, if

any. The Notice and Administration Fund may also be invested and earn interest as provided for in ¶2.3 of

this Stipulation.

d. Taxes

2.8 (a) The Settling Parties and the Escrow Agent agree to treat the Settlement Fund as being

at all times a "qualified settlement fund" within the meaning of Treas. Reg. § 1.468B-1. In addition, the

Escrow Agent shall timely make such elections as necessary or advisable to carry out the provisions of this

¶2.8, including, if necessary, the "relation-back election" (as defined in Treas. Reg. § 1.468B-1(j)(2)) back to

the earliest permitted date. Such elections shall be made in compliance with the procedures and requirements

contained in such Treasury regulations promulgated under § 1.468B of the Internal Revenue Code of 1986, as

amended (the "Code"). It shall be the responsibility ofthe Escrow Agent to timely and properly prepare and

deliver the necessary documentation for signature by all necessary parties, and thereafter to cause the

appropriate filing to occur.

(b) For the purpose of § 1.468B ofthe Code and the Treasury regulations thereunder, the

Escrow Agent shall be designated as the "administrator" of the Settlement Fund. The Escrow Agent shall

timely and properly file all informational and other tax returns necessary or advisable with respect to the

Settlement Fund (including, without limitation, the returns described in Treas. Reg. § 1.468B-2(k)). Such

returns (as well as the election described in ¶2.8(a) hereof) shall be consistent with this ¶2.8 and in all events

shall reflect that all Taxes (including any estimated Taxes, interest or penalties) on the income earned by the

Settlement Fund shall be paid out of the Settlement Fund as provided in ¶2.8(c) hereof.

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(c) All: (a) Taxes (including any estimated Taxes, interest or penalties) arising with

respect to the income earned by the Settlement Fund, including any Taxes or tax detriments that may be

imposed upon Settling Defendants or their Related Parties with respect to any income earned by the

Settlement Fund for any period during which the Settlement Fund does not qualify as a "qualified settlement

fund" for federal or state income tax purposes ("Taxes"); and (b) expenses and costs incurred in connection

with the operation and implementation of this ¶2.8 (including, without limitation, expenses of tax attorneys

and/or accountants and mailing and distribution costs and expenses relating to filing (or failing to file) the

returns described in this ¶2.8) ("Tax Expenses"), shall be paid out of the Settlement Fund. In no event shall

Settling Defendants or their Related Parties have any responsibility for or liability with respect to the Taxes or

the Tax Expenses. The Settlement Fund shall indemnify and hold each of the Settling Defendants and their

Related Parties harmless for Taxes and Tax Expenses (including, without limitation, Taxes payable by reason

of any such indemnification). Further, Taxes and Tax Expenses shall be treated as, and considered to be, a

cost of administration of the Settlement Fund and shall be timely paid by the Escrow Agent out of the

Settlement Fund without further consent of the Settling Defendants, or prior order from the Court, and the

Escrow Agent shall be obligated (notwithstanding anything herein to the contrary) to withhold from

distribution to Authorized Claimants any funds necessary to pay such amount, including the establishment of

adequate reserves for any Taxes and Tax Expenses (as well as any amounts that may be required to be

withheld under Treas. Reg. §1.468B-2(1)(2)); neither Settling Defendants nor their Related Parties are

responsible therefor nor shall they have any liability with respect thereto. The parties hereto agree to

cooperate with the Escrow Agent, each other, and their tax attorneys and accountants to the extent reasonably

necessary to carry out the provisions of this ¶2.8.

(d) For the purpose ofthis ¶2.8, references to the Settlement Fund shall include both the

Settlement Fund and the Notice and Administration Fund and shall also include any earnings thereon.

e. Termination of Settlement

2.9 In the event that the Stipulation is not approved, or is terminated, canceled, or fails to become

effective for any reason, the Settlement Fund (including accrued interest), plus any amount then remaining in

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the Notice and Administration Fund (including accrued interest), less expenses and Taxes and Tax Expenses

incurred or due and owing in connection with the settlement provided for herein shall be refunded to the D&O

insurance companies as provided in ¶7.3 below.

3. Notice Order and Settlement Hearing

3.1 As soon as practicable after execution ofthe Stipulation, the Settling Parties shall submit the

Stipulation together with its exhibits to the Court and shall apply for entry of the Notice Order, substantially

in the form of Exhibit A attached hereto, requesting, inter alia, the preliminary approval ofthe settlement set

forth in the Stipulation, certification of the Class for settlement purposes only and approval for mailing the

Notice of Pendency and Proposed Partial Settlement of Class Action (the "Notice") substantially in the form

of Exhibit A-1 attached hereto and publication of a Summary Notice substantially in the form of Exhibit A-3

attached hereto. The Notice shall include the general terms of the settlement set forth in the Stipulation and

the date of the Settlement Hearing.

3.2 Lead Counsel shall request that after notice is given, the Court hold a hearing (the

"Settlement Hearing") and finally approve the settlement of the Litigation as set forth herein. At or after the

Settlement Hearing, Lead Counsel also will request that the Court approve the proposed Plan of Allocation

and the Fee and Expense Application.

4. Releases , Judgment Credit and Covenant Not to Sue

4.1 Upon the Effective Date, as defined in ¶1.8 hereof, the Class Members shall be deemed to

have, and by operation of the Judgment shall have, fully, finally, and forever released, relinquished and

discharged all Released Claims against the Released Persons, whether or not such Class Member executes and

delivers a Proof of Claim and Release form.

4.2 The Proof of Claim and Release to be executed by Class Members shall release all Released

Claims against the Released Persons.

4.3 Upon the Effective Date, as defined in ¶1.8 hereof, each of the Released Persons shall be

deemed to have, and by operation of the Judgment shall have, fully, finally, and forever released,

relinquished, and discharged the Lead Plaintiff each and all of the Class Members and Plaintiffs' Counsel

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from all claims (including Unknown Claims) arising out of, relating to, or in connection with the institution,

prosecution, assertion, settlement or resolution of the Litigation or the Released Claims.

4.4 The Lead Plaintiff and each of the Class Members agree and covenant not to file or pursue

any claim against the Settling Defendants between the date of this Stipulation and the Effective Date. The

parties agree that, if the settlement does not become Final, the period of time between the date of this

Stipulation and the Effective Date shall not be counted for purposes of any defense based on passage oftime.

4.5 Lead Plaintiff and Lead Counsel agree that, as a condition of any settlement ofthe Litigation

with the Non-Settling Defendant, they will obtain a release and/or waiver of any rights as to indemnification

and/or contribution as against the Settling Defendants that might otherwise be available to the Non-Settling

Defendant at the time of such settlement in connection with, or arising out of, directly or indirectly, the claims

asserted against the Non-Settling Defendant in the Litigation.

5. Administration and Calculation of Claims, Final Awards and Supervisionand Distribution of Settlement Fund

5.1 The Claims Administrator shall administer and calculate the claims submitted by Class

Members.

5.2 The Settlement Fund shall be applied as follows:

(a) to pay Plaintiffs' Counsel's attorneys' fees and expenses with interest thereon (the

"Fee and Expense Award"), and Lead Plaintiff's expenses when, if and to the extent allowed by the Court;

(b) to pay all the costs and expenses reasonably and actually incurred in connection with

providing notice, locating Class Members, soliciting Class claims, assisting with the filing of claims,

administering and distributing the Net Settlement Fund to Authorized Claimants, processing Proof of Claim

and Release forms, and paying escrow fees and costs, if any;

(c) to pay the Taxes and Tax Expenses described in ¶2.8 hereof; and

(d) to distribute the balance of the Settlement Fund (the "Net Settlement Fund") to

Authorized Claimants as allowed by the Stipulation, the Plan of Allocation, or the Court.

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5.3 Upon the Effective Date and thereafter, and in accordance with the terms ofthe Stipulation,

the Plan of Allocation, or such further approval and further order(s) of the Court as may be necessary or as

circumstances may require, the Net Settlement Fund shall be distributed to Authorized Claimants, subject to

and in accordance with the terms of this Stipulation.

5.4 Within ninety (90) days after such time as set by the Court to mail notice to the Class, each

Person claiming to be an Authorized Claimant shall be required to submit to the Claims Administrator a

completed Proof of Claim and Release form, substantially in a form approved by the Court, signed under

penalty of perjury and supported by such documents as are specified in the Proof ofClaim and Release form

and as are reasonably available to the Authorized Claimant.

5.5 Except as otherwise ordered by the Court, all Class Members who fail to timely submit a

Proof of Claim and Release form within such period, or such other period as may be ordered by the Court, or

otherwise allowed, shall be forever barred from receiving any payments pursuant to the Stipulation and the

settlement set forth herein, but will in all other respects be subject to and bound by the provisions of the

Stipulation, the releases contained herein, and the Judgment. Notwithstanding the foregoing, Lead Counsel

may, in their discretion, accept for processing late submitted claims so long as the distribution of the Net

Settlement Fund to Authorized Claimants is not materially delayed.

5.6 The Net Settlement Fund shall be distributed to the Authorized Claimants substantially in

accordance with a Plan ofAllocation to be described in the Notice and approved by the Court. Ifthere is any

balance remaining in the Net Settlement Fund after six (6) months from the date of distribution of the Net

Settlement Fund (whether by reason of tax refunds, uncashed checks or otherwise), Lead Counsel shall, if

feasible, reallocate such balance among Authorized Claimants who deposited the checks sent in the initial

distribution in an equitable and economic fashion. Thereafter, any balance which still remains in the Net

Settlement Fund shall be donated to an appropriate non-profit organization designated by Lead Counsel.

5.7 This is not a claims-made settlement. Accordingly, once all conditions ofthe Stipulation are

satisfied and the settlement becomes Final, no portion of the Settlement Fund will be returned to the Settling

Defendants or their insurers. Settling Defendants and their Related Parties shall have no responsibility for,

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interest in, or liability whatsoever with respect to the distribution of the Settlement Fund, the Plan of

Allocation, the determination, administration, or calculation of claims, the payment or withholding of Taxes

or Tax Expenses, or any losses incurred in connection therewith.

5.8 No Person shall have any claim against Lead Plaintiff, the Escrow Agent, Plaintiffs' Counsel,

the Settling Defendants, the Claims Administrator or other entity designated by Lead Counsel based on

distributions made substantially in accordance with the Stipulation and the settlement contained herein, a

Court-approved Plan of Allocation, or further order(s) of the Court.

5.9 It is understood and agreed by the Settling Parties that any proposed Plan ofAllocation ofthe

Net Settlement Fund including, but not limited to, any adjustments to an Authorized Claimant's claim set

forth therein, is not a part of the Stipulation and is to be considered by the Court separately from the Court's

consideration of the fairness, reasonableness and adequacy of the settlement set forth in the Stipulation, and

any order or proceeding relating to the Plan of Allocation shall not operate to terminate or cancel the

Stipulation or affect the finality ofthe Court's Judgment approving the Stipulation and the settlement set forth

therein, or any other orders entered pursuant to the Stipulation.

6. Plaintiffs ' Counsel ' s Attorneys' Fees and Reimbursement of Expenses

6.1 Lead Counsel may submit an application or applications (the "Fee and Expense Application")

for distributions to them from the Settlement Fund for: (a) an award of reasonable attorneys' fees from the

Settlement Fund; plus (b) reimbursement of actual expenses, including the fees of any experts or consultants,

incurred in connection with prosecuting the Litigation, plus any interest on such attorneys' fees and expenses

at the same rate and for the same periods as earned by the Settlement Fund (until paid); and (c) reimbursement

for the expenses ofLead Plaintiff pursuant to § 78u-4(a)(4). Lead Counsel reserve the right to make additional

applications for fees and expenses incurred.

6.2 The attorneys' fees and expenses, as awarded by the Court, shall be paid to Lead Counsel

from the Settlement Fund, as ordered, immediately after the Court executes an order awarding such fees and

expenses. Lead Counsel shall thereafter allocate the attorneys' fees in a manner in which they in good faith

believe reflects the contributions of Plaintiffs' Counsel to the prosecution and settlement ofthe Litigation. In

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the event that the Effective Date does not occur, or the Judgment or the order making the Fee and Expense

Award is reversed or modified, or the Stipulation is canceled or terminated for any other reason, and in the

event that the Fee and Expense Award has been paid to any extent, then Plaintiffs' Counsel shall within five

(5) business days from receiving notice from Settling Defendants' counsel or from a court of appropriate

jurisdiction, refund to the Settlement Fund the fees and expenses previously paid to them from the Settlement

Fund plus interest thereon in an amount consistent with such reversal or modification. Each such Plaintiffs'

Counsel's law firm, as a condition of receiving such fees and expenses, on behalf of itself and each partner

and/or shareholder of it, agrees that the law firm and its partners and/or shareholders are subject to the

jurisdiction of the Court for the purpose of enforcing the provisions of this paragraph.

6.3 The procedure for and the allowance or disallowance by the Court of any applications by

Lead Counsel for attorneys' fees and expenses, including the fees of experts and consultants, to be paid out of

the Settlement Fund, are not part ofthe settlement set forth in the Stipulation, and are to be considered by the

Court separately from the Court's consideration of the fairness, reasonableness, and adequacy of the

settlement set forth in the Stipulation, and any order or proceeding relating to the Fee and Expense

Application, or any appeal from any order relating thereto or reversal or modification thereof, shall not

operate to terminate or cancel the Stipulation, or affect or delay the finality of the Judgment approving the

Stipulation and the settlement of the Litigation set forth therein.

6.4 Settling Defendants and their Related Parties shall have no responsibility for or liability with

respect to any payment of attorneys' fees and expenses to Plaintiffs' Counsel over and above payment from

the Settlement Fund.

6.5 Settling Defendants and their Related Parties shall have no responsibility for or liability with

respect to the allocation among Plaintiffs' Counsel, and/or any other Person who may assert some claim

thereto, of any Fee and Expense Award that the Court may make in the Litigation, and Settling Defendants

and their respective Related Parties take no position with respect to such matters.

- 15 -


7. Conditions of Settlement, Effect of Disapproval, Cancellation orTermination

7.1 The Effective Date of the Stipulation shall be conditioned on the occurrence of all of the

following events:

(a) the contribution to the Settlement Fund as required by ¶2.1 hereof;

(b) the Settling Defendants have not exercised their option to terminate the Stipulation

pursuant to ¶7.6 hereof;

(c) the Court has entered the Notice Order, as required by ¶3.1 hereof;

(d) the Court has entered the Judgment, or a judgment substantially in the form of

Exhibit B attached hereto; and

(e) the Judgment has become Final, as defined in ¶1.10 hereof.

7.2 Upon the occurrence of all of the events referenced in ¶7.1 hereof, any and all remaining

interest or right of Settling Defendants in or to the Settlement Fund, if any, shall be absolutely and forever

extinguished. If all of the conditions specified in ¶7.1 hereof are not met, then the Stipulation shall be

canceled and terminated subject to ¶7.4 hereof unless Lead Counsel and counsel for Settling Defendants

mutually agree in writing to proceed with the Stipulation.

7.3 Unless otherwise ordered by the Court, in the event the Stipulation shall terminate, or be

canceled, or shall not become effective for any reason, within five (5) business days after written notification

of such event is sent by counsel for Settling Defendants or Lead Counsel to the Escrow Agent, subject to the

terms of¶2.9 hereof, the Settlement Fund (including accrued interest), plus any amount then remaining in the

Notice and Administration Fund (including accrued interest), less expenses and any costs which have either

been disbursed pursuant to ¶2.7 hereof or are determined to be chargeable to the Notice and Administration

Fund including Taxes and Tax Expenses, shall be refunded by the Escrow Agent to the Settling Defendants'

D&O insurance companies based upon the amounts initially contributed by each except that any expenses

properly incurred or accrued by the Notice and Administration Fund shall be deducted from the share of the

Settling Defendants' primary layer D&O company. At the request of counsel for Settling Defendants, the

-16-


Escrow Agent or its designee shall apply for any tax refund owed on the Settlement Fund and pay the

proceeds, after deduction ofany fees or expenses incurred in connection with such application(s) for refund,

to the Settling Defendants D&O insurance companies.

7.4 In the event that the Stipulation is not approved by the Court or the settlement set forth in the

Stipulation is terminated or fails to become effective in accordance with its terms, the Settling Parties shall be

restored to their respective positions in the Litigation as ofNovember 6, 2006. In such event, the terms and

provisions ofthe Stipulation, with the exception of¶¶2.8, 2.9, 7.3-7.5 hereof, shall have no further force and

effect with respect to the Settling Parties and shall not be used in the Litigation or in any other proceeding for

any purpose, and any judgment or order entered by the Court in accordance with the terms of the Stipulation

shall be treated as vacated, nunc pro tunc. No order ofthe Court or modification or reversal on appeal ofany

order ofthe Court concerning the Plan ofAllocation or the amount ofany attorneys' fees, costs, expenses and

interest awarded by the Court to Lead Counsel shall constitute grounds for cancellation or termination ofthe

Stipulation.

7.5 Ifthe Effective Date does not occur, or if the Stipulation is terminated pursuant to its terms,

neither the Lead Plaintiff nor Plaintiffs' Counsel shall have any obligation to repay any amounts actually and

properly disbursed from the Notice and Administration Fund. In addition, any expenses already incurred and

properly chargeable to the Notice and Administration Fund pursuant to ¶2.7 hereof at the time of such

termination or cancellation, but which have not been paid, shall be paid by the Escrow Agent in accordance

with the terms ofthe Stipulation prior to the balance being refunded in accordance with ¶¶2.9 and 7.3 hereof.

7.6 If prior to the Settlement Hearing, the aggregate number of shares of aaiPharma common

stock purchased or acquired by Persons who would otherwise be members of the Class, but who request

exclusion from that Class, exceeds the sum specified in a separate supplemental agreement between the Lead

Plaintiff and the Settling Defendants (the "Supplemental Agreement"), the Settling Defendants shall have, in

their sole and absolute discretion (which must be unanimously exercised), the option to terminate this

Stipulation in accordance with the procedures set forth in the Supplemental Agreement. The Supplemental

-17-


Agreement will not be filed with the Court unless required by court rule or unless and until a dispute as

between the Lead Plaintiff and the Settling Defendants concerning its interpretation or application arises.

8. Class Certification

8.1 For purposes of this Stipulation only, the Settling Parties will stipulate to certification ofthe

Class, as defined herein and the appointment of the Lead Plaintiff as class representative of the Class.

Settling Defendants expressly reserve the right to contest class certification in the event this Settlement does

not become effective for any reason.

9. No Admission of Wrongdoing

9.1 This Stipulation, whether or not consummated, and any negotiations, discussions or

proceedings in connection herewith shall not be:

(a) offered or received against any Settling Defendant as evidence of or construed as or

deemed to be evidence ofany presumption, concession, or admission by any Settling Defendant ofthe truth of

any fact alleged by the Class Members or the validity of any claim that has been or could have been asserted

in the Litigation, or the deficiency of any defense that has been or could have been asserted in the Litigation,

or of any liability, negligence, fault, or wrongdoing of Settling Defendants;

(b) offered or received against any Settling Defendant as evidence of a presumption,

concession, admission of any fault, misrepresentation or omission with respect to any statement or written

document approved or made by any Settling Defendant, or against the Lead Plaintiff or any Class Member as

evidence of any infirmity in the claims of the Lead Plaintiff and the Class;

(c) offered or received against any Settling Defendant as evidence of a presumption,

concession, or admission of any liability, negligence, fault or wrongdoing, or in any way referred to for any

other reason as against any of the parties to this Stipulation, in any other civil, criminal or administrative

action or proceeding, other than such proceedings as may be necessary to effectuate the provisions of this

Stipulation; provided, however, that ifthis Stipulation is approved by the Court, Settling Defendants and their

Related Parties may refer to it to effectuate the release granted them hereunder;

-18-


(d) construed against Settling Defendants, Lead Plaintiff or the Class as an admission or

concession that the consideration to be given hereunder represents the amount which could be or would have

been recovered after trial.

10. Miscellaneous Provisions

10.1 The Settling Parties (a) acknowledge that it is their intent to consummate this agreement; and

(b) agree to cooperate to the extent reasonably necessary to effectuate and implement all terms and conditions

of the Stipulation and to exercise their reasonable best efforts to accomplish the foregoing terms and

conditions of the Stipulation.

10.2 This Stipulation, the exhibits attached hereto and the Supplemental Agreement constitutes the

entire agreement between the Settling Parties as to the subject matter hereof and supersedes any prior or

contemporaneous written or oral agreements or understandings between the Settling Parties.

10.3 No modification or amendment of this Stipulation shall be valid unless made in writing and

signed by or on behalf of each party hereto. No representations, warranties or inducements have been made

to any party concerning the Stipulation, its exhibits or the Supplemental Agreement other than the

representations, warranties and covenants contained and memorialized in such documents. Except as

otherwise provided for herein, each party shall bear his, her or its own costs.

10.4 The settlement compromises claims that are contested and shall not be deemed an admission

by any Settling Party as to the merits of any claim or defense. The Judgment will contain a statement that

during the course of the Litigation, the parties and their respective counsel at all times complied with the

requirements of Federal Rule of Civil Procedure 11. The Settling Parties agree that the amount paid to the

Settlement Fund and the other terms ofthe settlement were negotiated in good faith by the Settling Parties and

reflect a settlement that was reached voluntarily after consultation with competent legal counsel. The Settling

Parties reserve their right to rebut, in a manner that such party determines to be appropriate, any contention

made in any public forum that the Litigation was brought or defended in bad faith or without a reasonable

basis.

-19-


10.5 Settling Defendants and/or their Related Parties may file the Stipulation and/or the Judgment

in any action that may be brought against them in order to support a defense, claim or counterclaim based on

principles ofresjudicata, collateral estoppel, release, good faith settlement, judgment bar or reduction, or any

other theory of claim preclusion or issue preclusion or similar defense or counterclaim.

10.6 All agreements made and orders entered during the course of the Litigation relating to the

confidentiality of information shall survive this Stipulation.

10.7 All of the exhibits to the Stipulation are material and integral parts hereof and are fully

incorporated herein by this reference.

10.8 The Stipulation may be amended or modified only by a written instrument signed by or on

behalf of all Settling Parties or their respective successors-in-interest.

10.9 Lead counsel, on behalf ofthe Class, are expressly authorized by the Lead Plaintiff to take all

appropriate action required or permitted to be taken by the Class pursuant to the Stipulation to effectuate its

terms and also are expressly authorized to enter into any modifications or amendments to the Stipulation on

behalf of the Class which they deem appropriate.

10.10 Each counselor other Person executing the Stipulation or any of its exhibits on behalf ofany

party hereto hereby warrants that such Person has the full authority to do so.

10.11 The Stipulation may be executed in one or more counterparts. All executed counterparts and

each of them shall be deemed to be one and the same instrument. A complete set of original executed

counterparts shall be filed with the Court.

10.12 The Stipulation shall be binding upon, and inure to the benefit of, the successors and assigns

of the parties hereto.

10.13 The Court shall retain jurisdiction with respect to implementation and enforcement of the

terms of the Stipulation, and all parties hereto submit to the jurisdiction of the Court for purposes of

implementing and enforcing the settlement embodied in the Stipulation.

10.14 The waiver by one party of any breach of this Stipulation by any other party shall not be

deemed a waiver by any other party or a waiver of any other prior or subsequent breach of this Stipulation.

-20-


10.15 If a case is commenced with respect to any Settling Defendant under Title 11 of the United

States Code (Bankruptcy), or a trustee, receiver or conservator is appointed under any similar law, and in the

event ofthe entry of a final order of a court of competent jurisdiction determining the transfer ofmoney to the

Settlement Fund or any portion thereof by or on behalf ofthe Settling Defendant to be a preference, voidable

transfer, fraudulent transfer or similar transaction, and any portion thereof is required to be returned, and such

amount is not promptly deposited to the Settlement Fund by others, then, at the election ofLead Counsel, the

parties shall jointly move the Court to vacate and set aside the releases given and the Judgment entered in

favor of such Settling Defendant pursuant to this Stipulation, which releases and the Judgment shall be null

and void, and the parties so affected shall be restored to their respective positions in the Litigation as of

November 6, 2006, and any other cash amounts in the Settlement Fund paid by or on behalf of such affected

Settling Defendant shall be returned as provided herein.

10.16 The Stipulation and the exhibits hereto shall be considered to have been negotiated, executed

and delivered, and to be wholly performed, in the State of North Carolina, and the rights and obligations of

the parties to the Stipulation shall be construed and enforced in accordance with, and governed by, the

internal, substantive laws of the State of North Carolina without giving effect to that state's choice-of-law

principles.

IN WITNESS WHEREOF, the parties hereto have caused the Stipulation to be executed , by their

duly authorized attorneys dated as of February 23, 2007.

McDANIEL & ANDERSON, L.L.P.L. BRUCE McDANIEL (N.C. State Bar #5025)WILLIAM E. ANDERSON (N.C. State Bar #098)

s/ L. BRUCE McDANIEL

L. BRUCE McDANIEL

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Lafayette Square4942 Windy Hill DriveRaleigh, NC 27609Telephone: 919/872-3000919/790-9273 (fax)

Liaison Counsel

LERACH COUGHLIN STOIA GELLERRUDMAN & ROBBINS LLP

WILLIAM S. LERACHDARREN J. ROBBINSJEFFREY D. LIGHTKATHLEEN A. HERKENHOFFAMBER L. ECKRYAN A. LLORENS655 West Broadway, Suite 1900San Diego, CA 92101Telephone; 619/231-1058619/231-7423 (fax)


PAUL J. GELLERJACK REISE120 East Palmetto Park Road, Suite 500Boca Raton, FL 33432Telephone : 561 /750-3000561/750-3364 (fax)

Lead Counsel for Plaintiffs

STEVENS, McGHEE, MORGAN,LENNON & TOLL, LLPALAN E. TOLL602 Market StreetP.O. Drawer 59Wilmington, 28402Telephone: 10/763 -3 66910/251-95 2 (fax)

ALSTON BIRD,PETER Q. SSE;

Q. BASSETT

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One Atlantic Center1201 West Peachtree StreetAtlanta , GA, 30309-3424Telephone : 404/881-7000404/881 -7777 (fax)

Counsel for Settling Defendants Frederick D. Sancilio,William L. Ginna Jr., and Philip S. Tabbiner

JOHN G. DESPRIETJAMES E. CONNELLYRACHEL KINGSuite 3100, Promenade II1230 Peachtree Street, N.E.Atlanta, GA 30309-3592Telephone: 404/815-3500404/815-3509 (fax)

Counsel for Settling Defendant David M. Hurley

S:\Settlement\aaiPharma.set\STP00036682.doc

-23-

Case 7:04-cv-00027-D Document 151

Stipulation of Partial SettlementIn re aaiPharma Securities Litigation

Filed 03/08/2007 Page 25 of 28

SMITH, ANDERSON, BLOUNT, DORSETT,MITCHELL & JERNIGAN, LLP

SUSAN H. HARGROVE2500 Wachovia Capitol CenterPO Box 2611Raleigh , NC 27602-2611Telephone: (919) 821-1200Facsimile : (919) 821-6800

SMITH , GAMBRELL & RUSSELL, LLP

OHN G. SPR

1230 Peachtree Street, N.E.Promenade II, Suite 3100Atlanta, GA 30309Telephone: (404) 815-3500Facsimile: (404) 685-7030

Counsel for Settling Defendant David M. Hurley


CERTIFICATE OF SERVICE

I hereby certify that on March 8, 2007, I electronically filed the foregoing with the Clerk of

the Court using the CM/ECF system which will send notification of such filing to the e-mail

addresses denoted on the attached Electronic Mail Notice List, and I hereby certify that I have

mailed the foregoing document or paper via the United States Postal Service to the non-CM/ECF

participants indicated on the attached Manual Notice List.

s/ L. BRUCE McDANIELL. BRUCE McDANIEL

McDANIEL & ANDERSON, L.L.P.Lafayette Square4942 Windy Hill DriveRaleigh , NC 27609Telephone : 919/872-3000919/790-9273 (fax)E-mail : [email protected]

CM/ECFse i :04-cv-00027-D Document 151 Filed 03/08/2007 Page 27 ofPe

1 of 1

Mailing Information for a Case 7:04-cv-00027-D

Electronic Mail Notice List

The following are those who are currently on the list to receive e-mail notices for this case.

• Daniel Francis [email protected]

• Melanie Black [email protected]

• Susan H. Hargroveshargrove@smithlaw. com [email protected]

• L. Bruce [email protected] [email protected]

• Carl N. Patterson, [email protected]

• Charles E. Raynal, [email protected]

• Robert W. [email protected] [email protected]

• Alan E. [email protected]@yahoo.com,[email protected],focusonmeI [email protected]

• David C. Wright, [email protected] [email protected];[email protected]

Manual Notice List

The following is the list of attorneys who are not on the list to receive e-mail notices for this case (whotherefore require manual noticing). You may wish to use your mouse to select and copy this list intoyour word processing program in order to create notices or labels for these recipients.

• (No manual recipients)

https://ecf.nced .uscourts . gov/cgi-bin/MailList.pl?169618804176356-L_701_0-1 3/8/2007


Manual Notice List

Peter Q. Bassett Bruce CormierH. Douglas Hinson Ernst & Young LLPLeslie M. Mathis 1225 Connecticut Avenue, NWAlston & Bird, LLP1201 W. Peachtree StreetAtlanta, GA 30309-3424

404/881-7000404/881-7777(Fax)

Washington, DC 20036202/327-6000202/327-6200(Fax)

William A. BarrettErnst & Young LLP5 Times Square , 36th FloorNew York, NY 10036

212/773-9177212/773-2333(Fax)

William Michael, Jr.Edward J. WegersonLindquist & Vennum, P.L.L.P.80 South Eighth Street , 4200 IDS CenterMinneapolis , MN 55402

612/371-3211612/371-3207(Fax)

M. Robert ThorntonMichael R. SmithKing & Spalding LLP1180 Peachtree Street, N.E.Atlanta, GA 30309

404/572-4600404/572-5100(Fax)

John G. DesprietJames E. ConnellyRachel KingSmith, Gambrell & Russell, LLPSuite 3100, Promenade II1230 Peachtree Street, N.E.Atlanta, GA 30309-3592

404/815-3500404/815-3509(Fax)

Case 7:04-cv-00027-D Document 151-2 Filed 03/08/2007 Page 1 of 9

EXHIBIT A



SOUTHERN DIVISION




ALL ACTIONS.

CLASS ACTION

[PROPOSED] ORDER PRELIMINARILY APPROVING PARTIAL SETTLEMENTAND PROVIDING FOR NOTICE

EXHIBIT A


WHEREAS, a consolidated securities class action is pending before the Court entitled In re

aaiPharma Inc. Securities Litigation, Consolidated Civil Action No. 7:04-CV-27-D;

WHEREAS, the Court has received the Stipulation of Partial Settlement dated as of February 23,

2007 (the "Stipulation"), that has been entered into by Lead Plaintiff and the Settling Defendants, and the

Court has reviewed the Stipulation and its attached Exhibits; and

WHEREAS, the parties having made application, pursuant to Federal Rule of Civil Procedure 23(e),

for an order preliminarily approving the settlement ofthe Litigation , in accordance with the Stipulation which,

together with the Exhibits annexed thereto sets forth the terms and conditions for a proposed settlement ofthe

Litigation and for dismissal of the Litigation with prejudice upon the terms and conditions set forth therein;

and the Court having read and considered the Stipulation and the Exhibits annexed thereto; and

WHEREAS, all defined terms contained herein shall have the same meanings as set forth in the

Stipulation;

NOW, THEREFORE, IT IS HEREBY ORDERED:

1. The Court hereby certifies the following class for settlement purposes only:

All Persons who purchased or otherwise acquired aaiPharma Publicly Traded Securitiesbetween April 24, 2002 and June 15, 2004, inclusive. Excluded from the Class are theSettling Defendants, members of the immediate families of the Defendants, the former andcurrent directors, officers, subsidiaries and affiliates of aaiPharma, as well as any person,firm, trust, corporation, officer, director or other individual or entity in which any Defendanthas a controlling interest and the legal representatives, affiliates, heirs, successors-in-interest,or assigns of any such excluded party. Also excluded from the Class are those Persons whotimely and validly request exclusion from the Class pursuant to the Notice of Pendency andProposed Partial Settlement of Class Action.

2. With respect to the Class, this Court finds that : (a) the members ofthe Class are so numerous

that joinder of all Class Members is impracticable; (b) there are questions of law and fact common to

members of the Class which predominate over any individual question; (c) the claims of Lead Plaintiff are

typical ofthe claims ofthe Class; (d) the Lead Plaintiff and its counsel have fairly and adequately represented

and protected the interests of the respective members of the Class; and (e) a class action is superior to other

available methods for the fair and efficient adjudication ofthe controversy considering: (i) the interests ofthe

members of the Class in individually controlling the prosecution of the separate actions; (ii) the extent and

-1-


nature of any litigation concerning the controversy already commenced by members of the Class; (iii) the

desirability or undesirability of concentrating the litigation of these claims in this particular forum; and (iv)

the difficulties likely to be encountered in the management of the class action.

3. Pursuant to Rule 23 of the Federal Rules of Civil Procedure, and for the purposes of

settlement only, the Court certifies SEIU Pension Plans Master Trust as Class Representatives for the Class.

4. The Court does hereby preliminarily approve the Stipulation and the settlement set forth

therein, subject to further consideration at the Settlement Hearing described below.

5. A hearing (the "Settlement Hearing") shall be held before this Court on , 2007, at

_.m., at the Alton Lennon Federal Building, Two Princess Street, Wilmington, North Carolina to

determine whether the proposed settlement of the Litigation on the terms and conditions provided for in the

Stipulation is fair, reasonable and adequate to the Class and should be approved by the Court; whether a

Judgment as provided in ¶1.11 of the Stipulation should be entered herein; whether the proposed Plan of

Allocation should be approved by the Court; to determine the amount of attorneys' fees and expenses that

should be awarded to Lead Counsel; and whether the expenses of the Lead Plaintiff should be reimbursed.

The Court may adjourn the Settlement Hearing without further notice to members of the Class.

6. The Court approves, as to form and content, the Notice of Pendency and Proposed Partial

Settlement of Class Action (the "Notice"), and Summary Notice for publication annexed as Exhibits A-1 and

A-3 hereto and finds that the mailing and distribution of the Notice and publishing of the Summary Notice

substantially in the manner and form set forth in ¶7 of this Order meet the requirements of Federal Rule of

Civil Procedure 23, §21 D(a)(7) of the Exchange Act, 15 U.S.C. §78u-4(a)(7), as amended including by the

Private Securities Litigation Reform Act of 1995, and due process, and is the best notice practicable under

the circumstances and shall constitute due and sufficient notice to all Persons entitled thereto.

7. The firm of Gilardi & Co. LLC ("Claims Administrator") is hereby appointed to supervise

and administer the notice procedure as well as the processing of claims as more fully set forth below:

-2-


(a) The Settling Defendants shall cooperate in making aaiPharma transfer records and

shareholder information available to the Claims Administrator no later than seven (7) days following entry of

this Order for the purpose of identifying and giving notice to the Class.

(b) The Claims Administrator shall make reasonable efforts to identify all Persons who

are members of the Class, and not later than , 2007 (the "Notice Date"), the Claims Administrator

shall cause a copy ofthe Notice substantially in the form annexed as Exhibit A-1 hereto, to be mailed by first

class mail to all Class Members who can be identified with reasonable effort;

(c) Not later than , 2007, the Claims Administrator shall cause the Summary

Notice to be published once in the national edition of Investor's Business Daily and once over the PR

Newswire; and

(d) At least seven (7) calendar days prior to the Settlement Hearing, Lead Counsel shall

cause to be served on Settling Defendants ' counsel and filed with the Court proof, by affidavit or declaration,

of such mailing and publishing.

8. Nominees who purchased or acquired aaiPharma Publicly Traded Securities for the beneficial

ownership of Class Members during the Class Period shall send the Notice to all beneficial owners of such

securities within ten (10) days after receipt thereof, or send a list of the names and addresses of such

beneficial owners to the Claims Administrator within ten (10) days of receipt thereof, in which event the

Claims Administrator shall promptly mail the Notice to such beneficial owners. Lead Counsel shall, if

requested, reimburse banks, brokerage houses or other nominees solely for their reasonable out-of-pocket

expenses incurred in providing notice to beneficial owners who are Class Members out of the Settlement

Fund, which expenses would not have been incurred except for the sending of such Notice, subject to further

order of this Court with respect to any dispute concerning such compensation.

9. All members of the Class shall be bound by all determinations and judgments in the

Litigation concerning the settlement, whether favorable or unfavorable to the Class.

-3-


10. Pending final determination of whether the Stipulation should be approved, Plaintiffs'

Counsel, Lead Plaintiff, and any Class Member are barred and enjoined from commencing or prosecuting any

action asserting any Released Claims against any Released Parties.

11. Class Members who do not timely and validly effect their exclusion from the Class may

complete and submit Proof of Claim forms in accordance with the instructions contained therein. Unless the

Court orders otherwise, all ProofofClaim forms must be postmarked no later than ninety (90) days from the

Notice Date. Any Class Member who does not submit a Proof ofClaim within the time provided for shall be

barred from sharing in the distribution of the proceeds of the Settlement Fund, unless otherwise ordered by

the Court. Notwithstanding the foregoing, Lead Counsel shall have discretion to accept late-submitted claims

for processing by the Claims Administrator so long as the distribution ofthe Settlement Fund is not materially

delayed thereby.

12. Any member of the Class may enter an appearance in the Litigation, at their own expense,

individually or through counsel of their own choice, in which case such counsel must file with the Clerk of

the Court and deliver to Lead Counsel and Settling Defendants' counsel a notice of such appearance. If they

do not enter an appearance , they will be represented by Lead Counsel.

13. All papers in support ofthe settlement, Plan ofAllocation and any application by counsel for

plaintiffs for attorneys' fees and expenses shall be filed and served no later than seven (7) calendar days prior

to the Settlement Hearing.

14. Any Person falling within the definition ofthe Class may, upon request, be excluded from the

Class. Any such Person must submit to the Claims Administrator a request for exclusion ("Request for

Exclusion"), received no later than , 2007. A Request for Exclusion must state: (a) the name,

address, and telephone number of the Person requesting exclusion; (b) each of the Person's purchases,

acquisitions and sales of aaiPharma Publicly Traded Securities made during the Class Period, including the

dates of purchase or sale, the number of shares, notes and/or options purchased, acquired and/or sold, and the

price paid or received for each such purchase, acquisition or sale; and (c) that the Person wishes to be

excluded from the Class. All Persons who submit valid and timely Requests for Exclusion in the manner set

-4-


forth in this paragraph shall have no rights under the Stipulation, shall not share in the distribution ofthe Net

Settlement Fund, and shall not be bound by the Stipulation or the Judgment entered in the Litigation.

15. Any member of the Class may appear and show cause, if he, she or it has any, why the

proposed settlement of the Litigation should or should not be approved as fair, reasonable and adequate, or

why ajudgment should or should not be entered thereon, why the Plan of Allocation should or should not be

approved, why attorneys' fees and expenses should or should not be awarded to Lead Counsel or the expenses

of Lead Plaintiff reimbursed; provided, however, that no Class Member shall be heard or entitled to contest

such matters, unless that Class Member has delivered by hand or sent by first class mail written objections

and copies of any papers and briefs such that they are received on or before , 2007 by Lerach

Coughlin Stoia Geller Rudman & Robbins LLP, Jeffrey D. Light, 655 W. Broadway, Suite 1900, San Diego,

CA, 92101; Alston & Bird, LLP, Peter Bassett, One Atlantic Center, 1201 West Peachtree Street, Atlanta,

GA, 30309-3424 and filed said objections, papers and briefs with the Clerk ofthe United States District Court

for the Eastern District of North Carolina, Southern Division, on or before , 2007. Any Person

who does not make his, her or its objection in the manner provided shall be deemed to have waived such

objection and shall forever be foreclosed from making any objection to the fairness or adequacy of the

proposed settlement as set forth in the Stipulation, to the Plan of Allocation and to the award of attorneys'

fees and reimbursement of expenses to counsel for the plaintiffs or the expenses of Lead Plaintiff unless

otherwise ordered by the Court.

16. All funds held by the Escrow Agent shall be deemed and considered to be in custodia legis of

the Court, and shall remain subject to the jurisdiction of the Court, until such time as such funds shall be

distributed pursuant to the Stipulation and/or further order(s) of the Court.

17. Neither the Settling Defendants and their Related Parties nor Settling Defendants' counsel

shall have any responsibility for any Plan of Allocation or any application for attorneys' fees or

reimbursement of expenses submitted by Lead Counsel or the Lead Plaintiff, and such matters will be

considered separately from the fairness, reasonableness and adequacy of the settlement.

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18. All reasonable expenses incurred in identifying and notifying Class Members, as well as

administering the Settlement Fund, shall be paid as set forth in the Stipulation. In the event the settlement is

not approved by the Court, or otherwise fails to become effective, neither the Lead Plaintiff nor any of its

counsel shall have any obligation to repay any amounts incurred or properly disbursed pursuant to ¶¶2.7 or

2.8 of the Stipulation.

19. Neither the Stipulation, nor any of its terms or provisions , nor any of the negotiations or

proceedings connected with it, shall be construed as an admission or concession by the Settling Defendants of

the truth of any of the allegations in the Litigation, or of any liability, fault, or wrongdoing of any kind.

20. The Court reserves the right to adjourn the date of the Settlement Hearing without further

notice to the members ofthe Class, and retains jurisdiction to consider all further applications arising out ofor

connected with the proposed settlement . The Court may approve the settlement , with such modifications as

may be agreed to by the Settling Parties, if appropriate, without further notice to the Class.

IT IS SO ORDERED.

DATED:

THE HONORABLE JAMES C. DEVER IIIUNITED STATES DISTRICT JUDGE

Submitted by,

McDANIEL & ANDERSON, L.L.P.L. BRUCE McDANIEL (N.C. State Bar #5025)WILLIAM E. ANDERSON (N.C. State Bar#098)

L. BRUCE McDANIEL

Lafayette Square4942 Windy Hill DriveRaleigh, NC 27609 "Telephone: 919/872-3000919/790-9273 (fax)

Liaison Counsel

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WILLIAM S. LERACHDARREN J. ROBBINSKATHLEEN A. HERKENHOFFAMBER L. ECKRYAN A. LLORENS655 West Broadway, Suite 1900San Diego, CA 92101Telephone : 619/231-1058619/231-7423 (fax)


PAUL J. GELLERJACK REISE120 East Palmetto Park Road, Suite 500Boca Raton , FL 33432Telephone : 561/750-3000561/750-3364 (fax)


S:\Settlement\aaiPharma .set\EA-00036784.doc

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EXHIBIT A-i



SOUTHERN DIVISION



CLASS ACTION


ALL ACTIONS.

NOTICE OF PENDENCY AND PROPOSED PARTIAL SETTLEMENT OF CLASS ACTION

EXHIBIT A-1


TO: ALL PERSONS WHO PURCHASED OR OTHERWISE ACQUIRED AAIPHARMA, INC.'S("AAIPHARMA" OR THE "COMPANY") COMMON STOCK, 11% SENIOR SUBORDINATEDNOTES DUE 2010 ("11% NOTES") AND/ORAAIPHARMA PUT OR CALL OPTIONS DURINGTHE PERIOD BETWEEN APRIL 24, 2002 THROUGH AND INCLUDING JUNE 15, 2004,INCLUSIVE ("CLASS PERIOD")

PLEASE READ THIS NOTICE CAREFULLY AND IN ITS ENTIRETY. YOUR RIGHTS MAY

BE AFFECTED BY PROCEEDINGS IN THIS LITIGATION. PLEASE NOTE THAT IF YOU ARE A

CLASS MEMBER, YOU MAY BE ENTITLED TO SHARE IN THE PROCEEDS OF THE SETTLEMENT

DESCRIBED IN THIS NOTICE. TO CLAIM YOUR SHARE OF THIS FUND, YOU MUST SUBMIT A

VALID PROOF OF CLAIM POSTMARKED ON OR BEFORE 2007.

This Notice has been sent to you pursuant to Rule 23 ofthe Federal Rules of Civil Procedure and an

Order of the United States District Court for the Eastern District of North Carolina, Southern Division (the

"Court"). The purpose of this Notice is to inform you of the proposed partial settlement of this class action

litigation and ofthe hearing to be held by the Court to consider the fairness, reasonableness, and adequacy of

the settlement. The partial settlement resolves the claims against Frederick D. Sancilio, William L. Ginna, Jr.,

Philip S. Tabbiner (collectively the "D&O Group") and David M. Hurley ("Hurley") but does not resolve the

claims against Ernst & Young LLP who is not a party to the settlement. This Notice describes the rights you

may have in connection with the settlement and what steps you may take in relation to the settlement and this

class action litigation.'

The proposed settlement creates a fund in the amount of $7,550,000 in cash and will include interest

that accrues on the fund prior to distribution. In addition, the D&O Group have agreed to corporate

governance terms described in the Stipulation of Partial Settlement ("Stipulation"). Based on Lead Counsel's

estimate of the number of securities entitled to participate in the settlement and the anticipated number of

claims to be submitted by Class Members, the average distribution per share to Class Members who

purchased aaiPharma common stock would be approximately $0.39 before deduction ofCourt-approved fees

and expenses. For all types of securities, your actual recovery from this fund will depend on a number of

variables, including the number of claimants and the types and amounts of securities they purchased, the type

and number of aaiPharma securities you purchased, the expense of administering the claims process, and the

-1-


timing ofyour purchases and sales, if any (see the Plan ofAllocation below for a more detailed description of

how the settlement proceeds will be allocated to the different types of aaiPharma securities).

Lead Plaintiff and the Settling Defendants do not agree on the average amount of damages per share

that would be recoverable if Lead Plaintiff were to have prevailed on each claim asserted. The issues on

which the parties disagree include: (1) whether the statements made or facts allegedly omitted were false,

material or otherwise actionable under the federal securities laws; (2) the extent to which the various matters

that the Lead Plaintiff alleged were materially false or misleading influenced (if at all) the trading price of

aaiPharma securities at various times during the Class Period; (3) the extent to which the various allegedly

adverse material facts that the Lead Plaintiff alleged were omitted influenced (if at all) the trading price of

aaiPharma securities at various times during the Class Period; (4) the extent to which external factors, such as

general market conditions, influenced the trading price of aaiPharma securities at various times during the

Class Period; (5) the effect of various market forces influencing the trading price of aaiPharma securities at

various times during the Class Period; (6) the amount by which aaiPharma securities was allegedly artificially

inflated (if at all) during the Class Period; and (7) the appropriate economic model for determining the amount

by which aaiPharma securities was allegedly artificially inflated (if at all) during the Class Period.

The Lead Plaintiff believes that the proposed settlement is a good recovery and is in the best interests

of the Class. Because of the risks associated with continuing to litigate and proceeding to trial, there was a

danger that Lead Plaintiff would not have prevailed on any of its claims, in which case the Class would

receive nothing. For example, the Lead Plaintiff faced the possibility that all or many of the claims in this

case could have been dismissed at the pleading stage in response to the Settling Defendants' motions to

dismiss or at summary judgment or trial. In addition, the amount of damages recoverable by the Class was

and is challenged by the Settling Defendants. Recoverable damages in this case are limited to losses caused

by conduct actionable under applicable law and, had the Litigation gone to trial, the Settling Defendants

intended to assert that all of the losses of Class Members were caused by non-actionable market, industry, or

general economic factors. Settling Defendants would also assert that throughout the Class Period the

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uncertainties and risks associated with aaiPharma's business and financial condition were fully and

adequately disclosed.

Plaintiffs' Counsel have not received any payment for their services in conducting this Litigation on

behalf of the Lead Plaintiff and the members of the Class, nor have they been reimbursed for their out-of-

pocket expenditures. If the settlement is approved by the Court, Lead Counsel will apply to the Court for

attorneys' fees of30% ofthe settlement proceeds and reimbursement ofout-of-pocket expenses not to exceed

$325,000.00, both to be paid from the Settlement Fund. If the amount requested by counsel is approved by

the Court, the average cost per share would be approximately $0.13.

This Notice is not an expression of any opinion by the Court about the merits of any ofthe claims or

defenses asserted by any party in this Litigation or the fairness or adequacy of the proposed settlement.

For further information regarding this settlement you may contact: Rick Nelson, Lerach Coughlin

Stoia Geller Rudman & Robbins LLP, 655 West Broadway, Suite 1900, San Diego, California 92101,

Telephone: 800/449-4900. Please do not call any representative of the Settling Defendants or the Court.

1. NOTICE OF HEARING ON PROPOSED SETTLEMENT

A settlement hearing (the "Settlement Hearing") will be held on , 2007, at_:__.m.,

before the Honorable James C. Dever III, United States District Judge, at the Eastern District of North

Carolina, Southern Division, Alton Lennon Federal Building, Two Princess Street, Wilmington, North

Carolina. The purpose of the Settlement Hearing will be to determine: (1) whether the partial settlement

consisting of $7,550,000 in cash plus accrued interest should be approved as fair, just, reasonable, and

adequate to each of the Settling Parties; (2) whether the proposed plan to distribute the settlement proceeds

(the "Plan ofAllocation") is fair, just, reasonable, and adequate; (3) whether the application by Lead Counsel

for an award of attorneys' fees and reimbursement of expenses should be approved and the expenses of the

Lead Plaintiff reimbursed; and (4) whether the Litigation should be dismissed with prejudice. The Court may

adjourn or continue the Settlement Hearing without further notice to the Class.

-3-


II. DEFINITIONS USED IN THIS NOTICE

"aaiPharma Publicly Traded Securities " means aaiPharma common stock, 11% Senior

Subordinated Notes Due 2010 and Put and Call Options.

2. "Authorized Claimant" means any Class Member whose claim for recovery has been allowed

pursuant to the terms of the Stipulation.

3. "Claims Administrator" means the firm of Gilardi & Co. LLC.

4. "Class" means all Persons who purchased or otherwise acquired aaiPharma Publicly Traded

Securities between April 24, 2002 and June 15, 2004, inclusive. Excluded from the Class are the Settling

Defendants, members ofthe immediate families ofthe Defendants, the former and current directors, officers,

subsidiaries and affiliates of aaiPharma, as well as any person, firm, trust, corporation, officer, director or

other individual or entity in which any Defendant has a controlling interest and the legal representatives,

affiliates, heirs, successors-in-interest, or assigns of any such excluded party. Also excluded from the Class

are those Persons who timely and validly request exclusion from the Class pursuant to this Notice.

5. "Class Member" or "Class Members" mean any Person who falls within the definition ofthe

Class as set forth above.

6. "Defendants" means the Settling Defendants and the Non-Settling Defendant.

7. "Lead Plaintiff' means SEIU Pension Plans Master Trust.

8. "Person" means an individual, corporation, partnership, limited partnership, limited liability

company, association, joint stock company, estate, legal representative, trust, unincorporated association,

government or any political subdivision or agency thereof, and any business or legal entity and their spouses,

heirs, predecessors, successors, representatives, or assignees.

9. "Plaintiffs' Counsel" means any counsel who have appeared for any plaintiff in the

Litigation.

10. "Related Parties" means, with respect to each Settling Defendant, the immediate family

members, heirs, executors, administrators, successors , assigns, present and former employees , officers,

directors, attorneys, assigns, legal representatives, insurers , reinsurers, and agents of each of them, and any

-4-





insurers, reinsurers, and agents ofeach ofthem. Notwithstanding anything in this paragraph, Related Parties


11. "Released Claims" means all rights, demands, claims (including "Unknown Claims" as

defined below) and causes of action of every nature and description, in law or equity, accrued or unaccrued,

and whether known or unknown, and whether arising under federal, state, common or foreign law, that Lead

Plaintiff or any member of the Class asserted, or could have asserted, arising out of, or relating to, directly or

indirectly, the purchase or acquisition of aaiPharma Publicly Traded Securities during the Class Period, and

the facts, matters, allegations, transactions, events, disclosures, statements, acts or omissions which were

alleged or that could have been alleged in the Complaint.

12. "Released Persons" means each and all of the Settling Defendants and each and all of their

Related Parties.

13. "Settlement Fund" means the principal amount of Seven Million and Five Hundred Fifty

Thousand Dollars ($7,550,000.00) in cash, to be paid pursuant to ¶2.1 of the Stipulation, plus all interest

earned thereon.

14. "Settling Defendants" means Frederick D. Sancilio, William L. Ginna, Jr., Philip S. Tabbiner

and David M. Hurley.,

15. "Settling Parties" means, collectively, each ofthe Settling Defendants and the Lead Plaintiff

on behalf of itself and each of the Class Members.

16. "Unknown Claims" means all claims, demands, rights, liabilities, and causes of action of


his, her or its favor at the time of the release of the Released Persons which, if known by him, her or it, might



-5-





A general release does not extend to claims which the creditor does not know orsuspect to exist in his or her favor at the time of executing the release, which if knownby him or her must have materially affected his or her settlement with the debtor.




similar , comparable or equivalent to California Civil Code § 1542. The Lead Plaintiff and Class Members









discovery or existence, of such different or additional facts. The Lead Plaintiff acknowledges, and the Class



III. THE LITIGATION

On and after February 12, 2004, several securities class actions were filed in the United States District

Court for the Eastern District ofNorth Carolina, Southern Division on behalf of a class of purchasers of the

securities aaiPharma , Inc. On April 16, 2004, the Court entered an Order consolidating all of these cases

under the caption entitled In re aaiPharma Inc. Securities Litigation , Consolidated Civil Action No. 7:04-CV-

27-D (the "Litigation").

-6-


On October 14, 2004, the Court entered an Order appointing the SEIU Pension Plans Master Trust as

Lead Plaintiff pursuant to §21 D(a)(3)(B) of the Securities Exchange Act of 1934 (the "Exchange Act") and

approved their selection of Lerach Coughlin Stoia Geller Rudman & Robbins LLP as "Lead Counsel" and

McDaniel & Anderson , L.L.P. as Liaison Counsel , pursuant to §2 1 D(a)(3)(B)(v) of the Exchange Act.

The operative complaint in the Litigation is Plaintiffs' Consolidated Complaint filed February 11,

2005 (the "Complaint"). The Complaint alleges violations of § § 10(b) and 20(a) and Rule 1 Ob-5 promulgated

thereunder on behalf of a class of purchasers of all persons who purchased or otherwise acquired aaiPharma

securities during the period April 24, 2002 through June 15, 2004 ("Class Period") against Frederick D.

Sancilio, William L. Ginna, Jr., Philip S. Tabbiner and David M. Hurley (the "Settling Defendants") and Ernst

& Young LLP ("Non-Settling Defendant") who is not a party to this Stipulation. On or after December 9,

2005, all Defendants (other than aaiPharma) filed motions to dismiss the Complaint. The parties agreed to

stay briefing of the motions to dismiss to pursue mediation. On May 22, 2006, the parties participated in

mediation with the Honorable Howard B. Wiener (Ret.). Although no agreement was reached the parties

made progress towards a settlement. After approximately five months of additional settlement discussions

among the parties and Judge Wiener and an additional mediation on October 18, 2006, in November 2006, the

Lead Plaintiff and the Settling Defendants reached an agreement-in-principle to settle the action.

On May 10, 2005, aaiPharma filed for bankruptcy in the United States Bankruptcy Court for the

District ofDelaware ("Bankruptcy Court"), pursuant to Chapter 11 ofthe Bankruptcy Code. Lead Plaintiff's

and the Class' s claims against aaiPharma were extinguished in the Company's bankruptcy proceedings.

IV. CLAIMS OF THE LEAD PLAINTIFF AND BENEFITS OF SETTLEMENT

Lead Plaintiff believes that the claims asserted in the Litigation have merit and that the evidence

developed to date supports those claims. However, the Lead Plaintiff recognizes and acknowledges the

expense and length of continued proceedings necessary to prosecute the Litigation against the Settling

Defendants through trial and through appeals. The Lead Plaintiff also has taken into account the uncertain

outcome and the risk of any litigation, especially in complex actions such as this Litigation, as well as the

difficulties and delays,inherent in such litigation. Lead Plaintiff is also mindful ofthe inherent difficulties of

7-


proofunder and possible defenses to the securities law violations asserted in the Litigation. Finally, the Lead

Plaintiff has also weighed the benefits of a settlement in light ofthe bankruptcy discharge of aaiPharma, Inc.,

the disputed coverage under the various policies of directors and officers insurance and the limited resources

ofthose of Hurley, as well. The Lead Plaintiff believes that the settlement set forth in the Stipulation confers

substantial benefits upon the Class. Based on their evaluation, Lead Plaintiff and Lead Counsel have

determined that the settlement set forth in the Stipulation is in the best interests of Lead Plaintiff and the

Class.

V. THE D&O GROUP'S DENIALS OF WRONGDOING AND LIABILITY

The D&O Group expressly have denied and continue to deny all charges of wrongdoing or liability

against them arising out of any of the conduct, statements, acts or omissions alleged, or that could have been

alleged, in the Litigation; continue to believe the claims asserted against them in the Complaint are without

merit; and have agreed to enter into the settlement solely to avoid the expense, distraction, time, and

uncertainty associated with continuing the Litigation.

Nonetheless, the D&O Group and Hurley have concluded that further conduct ofthe Litigation would

be protracted and expensive and that it is desirable that the Litigation be fully and finally settled in the manner

and upon the terms and conditions set forth in the Stipulation. They also have taken into account the

uncertainty and risks inherent in any litigation, especially in complex cases like this Litigation and have,

therefore, determined that it is desirable and beneficial to them that the Litigation be settled in the manner and

upon the terms and conditions set forth in the Stipulation.

VI. TERMS OF THE PROPOSED SETTLEMENT

The amount of $7,550,000.00 has been transferred to an escrow account under the control of one or

more ofthe D&O insurance companies ofthe Settling Defendants. This principal amount of $7,550,000.00 in

cash, plus any accrued interest, shall constitute the Settlement Fund, and shall be transferred by the insurers of

the Settling Defendants to the Escrow Agent on or before five (5) business days after the Court preliminarily

approves the settlement. In addition, the D&O Group has agreed not to serve on the board of any public

company unless such company has adopted the corporate governance terms set forth in the Corporate

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Governance Term Sheet attached to the Stipulation. A portion of the settlement proceeds will be used for

certain administrative expenses, including costs of printing and mailing this Notice, the cost of publishing a

newspaper notice, payment of any taxes assessed against the Settlement Fund and costs associated with the

processing of claims submitted. In addition, as explained below, a portion of the Settlement Fund may be

awarded by the Court to Lead Counsel as attorneys' fees and for reimbursement of out-of-pocket expenses

and to Lead Plaintiff for reimbursement of its expenses. The balance of the Settlement Fund (the "Net

Settlement Fund") will be distributed according to the Plan ofAllocation described below to Class Members

who submit valid and timely Proof of Claim forms.

VII. PLAN OF ALLOCATION

The Net Settlement Fund will be distributed to Class Members who submit valid, timely Proof of

Claim forms ("Authorized Claimants") under the Plan ofAllocation described below. The Plan ofAllocation

provides that you will be eligible to participate in the distribution of the Net Settlement Fund only ifyou have

a net loss on all transactions in aaiPharma Publicly Traded Securities during the Class Period.

For purposes of determining the amount an Authorized Claimant may recover under the Plan of

Allocation, Lead Plaintiff's counsel have consulted with their damage consultants and the Plan ofAllocation

reflects an assessment of the damages that could have been recovered as well as Lead Plaintiffs counsel's

assessment of the likelihood of establishing liability for various periods of the Class.

To the extent there are sufficient funds in the Net Settlement Fund, each Authorized Claimant will

receive an amount equal to the Authorized Claimant's claim, as defined below. If, however, the amount in

the Net Settlement Fund is not sufficient to permit payment of the total claim of each Authorized Claimant,

then each Authorized Claimant shall be paid the percentage ofthe Net Settlement Fund that each Authorized

Claimant's claim bears to the total ofthe claims of all Authorized Claimants. Payment in this manner shall be

deemed conclusive against all Authorized Claimants.

The total of all profits shall be subtracted from the total of all losses from transactions during the

Class Period to determine if a Class Member has a claim. Only if a Class Member had a net loss, after all

-9-


profits from transactions in aaiPharma Publicly Traded Securities during the Class Period are subtracted from

all losses, will such Class Member be eligible to receive a distribution from the Net Settlement Fund.

A claim shall be calculated as follows.

1. For shares of aaiPharma common stock purchased or otherwise acquired from April 24, 2002 through

February 4, 2004, and

(a) sold prior to February 5, 2004, the claim per share is 25 percent of the difference

between the purchase price per share less the sales price per share.

(b) sold between February 5, 2004 through February 29, 2004, the claim per share is the

lesser of-

(i) the purchase price per share less the sales price per share, or

( ii) $6.36 per share (February 5, 2004 price decline).

(c) ' sold between March 1, 2004 through June 15, 2004 , the claim per share is the lesser

of-


(ii) $11.87 per share (February 5, 2004 and March 1, 2004 price declines).

(d) . retained at the end of June 15, 2004, the claim per share is the lesser of-

(i) the purchase price per share less $4.25 per share (June 16, 2004 closing

price), or

(ii) $12.42 per share (February 5, 2004 price decline, March 1, 2004 price

decline and 10% of price decline from March 1, 2004 through June 16, 2004).

2. For shares of aaiPharma common stock purchased or otherwise acquired from February 5, 2004

through February 29, 2004, and

(a) sold prior to March 1, 2004 the claim per share is 25 percent of the difference


(b) sold between March 1, 2004 through June 15, 2004, the claim per share is the lesser

of:

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(ii) $5.51 per share (March 1, 2004 price decline).

(c) retained at the end of June 15, 2004, the claim per share is the lesser of.

(i) the purchase price per share less $4.25 per share (June 16, 2004 closing

price), or

(ii) $6.06 per share (March 1, 2004 price decline and 10% of price decline from

March 1, 2004 through June 16, 2004).

3. For shares of aaiPharma common stock purchased or otherwise acquired between March 1, 2004

through June 15, 2004, and

(a) sold prior to June 16, 2004, the claim per share is 25 percent of the difference


(b) retained at the end of June 15, 2004, the claim per share is 10 percent of the

difference between the purchase price per share less $4.25 per share (June 16, 2004 closing price).

11 % Senior Subordinated Notes Due 2010 ("11% Notes")

For aaiPharma's 11 % Notes purchased or otherwise acquired between April 24, 2002 through June

15, 2004, and

(a) sold prior to June 16 , 2004, the claim per 11 % Note is the difference between the

purchase price per 11 % Note less the sales price per 11 % Note.

(b) retained at the end ofJune 15, 2004, the claim per 11% Note is the purchase price per

11% Note less $787.50 (June 16, 2004 closing price).

Call Options

1. For Call Options on aaiPharma common stock purchased between April 24, 2002 through

June 15, 2004, and

(a) owned at the end of one ofthe following dates: February 4, 2004, February 29, 2004,

or June 15, 2004 the claim per Call Option is the difference between the price paid for the Call Option less the

proceeds received upon the settlement of the Call Option contract.

-11-


(b) not owned at the end of one ofthe following dates: February 4, 2004, February 29,

2004, or June 15, 2004, the claim per Call Option is $0.

2. For Call Options on AaiPharma common stock written between April 24, 2002 through June

15, 2004, the claim per Call Option is $0.

Put Options

For Put Options on aaiPharma common stock written between April 24, 2002 through June

15, 2004, and

(a) owned at the end ofone ofthe following dates: February 4, 2004, February 29, 2004,

or June 15, 2004, the claim per Put Option is the difference between the amount paid upon settlement of the

Put Option contract less the initial proceeds received upon the sale of the Put Option contract.

(b) not owned at the end of one of the following dates: February 4, 2004, February 29,

2004 , or June 15, 2004, the claim per Put Option is $0.

For Put Options on aaiPharma common stock that were purchased between April 24, 2002

through June 15, 2004, the claim per Put option is $0.

Note: In the case the option was exercised for aaiPharma common stock, the amount paid, or

proceeds received, upon the settlement of the option contract equals the intrinsic value of the option using

aaiPharma common stock's closing price on the date the option was exercised.

Note: The combined recovery for the Call Options, Put Options and the 11 % Notes shall not exceed

3% of the Net Settlement Fund.

The date of purchase or sale is the "contract" or "trade" date as distinguished from the "settlement"

date. The determination of the price paid per share and the price received per security, shall be exclusive of

all commissions, taxes, fees and charges.

For Class Members who held securities at the beginning of the Class Period or made multiple

purchases or sales during the Class Period, the first-in, first-out ("FIFO") method will be applied to such

holdings, purchases and sales for purposes of calculating a claim. Under the FIFO method, sales of shares

during the Class Period will be matched, in chronological order, first against shares held at the beginning of

-12-


the Class Period. The remaining sales of shares during the Class Period will then be matched, in

chronological order, against shares purchased during the Class Period.

A Class Member will be eligible to receive a distribution from the Net Settlement Fund only if such

Class Member had a net loss, after all profits from transactions in aaiPharma Publicly Traded Securities

during the Class Period are subtracted from all losses. However, the proceeds from sales of shares which

have been matched against shares held at the beginning ofthe Class Period will not be used in the calculation

of such net loss.

The Court has reserved jurisdiction to allow, disallow or adjust the claim of any Class Member on

equitable grounds.

VIII. ORDER CERTIFYING A CLASS FOR PURPOSES OF SETTLEMENT

On , 2007, the Court certified a class. The Class is defined above.

IX. PARTICIPATION IN THE CLASS

Ifyou fall within the definition ofthe Class, you are a Class Member unless you elect to be excluded

from the Class pursuant to this Notice. Ifyou do not request to be excluded from the Class, you will be bound

by any judgment entered with respect to the settlement in the Litigation against the Settling Defendants

whether or not you file a Proof of Claim and Release form.

Ifyou are a Class Member, you need do nothing (other than timely file a Proof of Claim and

Releaseform ifyou wish to participate in the distribution ofthe Net Settlement Fund). Your interests will

be represented by Lead and Liaison Counsel. If you choose, you may enter an appearance individually or

through your own counsel at your own expense.

TO PARTICIPATE IN THE DISTRIBUTION OF THE NET SETTLEMENT FUND, YOU MUST

TIMELY COMPLETE AND RETURN THE PROOF OF CLAIM AND RELEASE FORM THAT

ACCOMPANIES THIS NOTICE. The Proof of Claim and Release must be postmarked on or before

2007, and delivered to the Claims Administrator at the address below. Unless the Court orders

otherwise, if you do not timely submit a valid Proof of Claim and Release form, you will be barred from

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receiving any payments from the Net Settlement Fund, but will in all other respects be bound by the

provisions of the Stipulation and the Judgment.

X. EXCLUSION FROM THE CLASS

You may request to be excluded from the Class. To do so, you must mail a written request stating

that you wish to be excluded from the Class to:

aaiPharma Securities LitigationClaims Administratorc/o Gilardi & Co. LLCP.O. Box 5100Larkspur, CA 94977-5100

The request for exclusion must state: (1) your name, address, and telephone number; and (2) all

purchases, acquisitions, and sales of aaiPharma Publicly Traded Securities made during the Class Period,

including the dates of each purchase, acquisition, or sale, and the number of shares, notes and/or options

purchased or sold. YOUR EXCLUSION REQUEST MUST BE POSTMARKED ON OR BEFORE

2007. If you submit a valid and timely request for exclusion, you shall have no rights

under the settlement, shall not share in the distribution ofthe Net Settlement Fund, and shall not be bound by

the Stipulation or the Judgment.

XI. DISMISSAL AND RELEASES

If the proposed settlement is approved, the Court will enter a Partial Final Judgment and Order of

Dismissal with Prejudice (the "Judgment"). The Judgment will dismiss the Released Claims with prejudice as

to all Settling Defendants. The litigation will continue against the Non-Settling Defendant. Any final verdict

orjudgment that may be obtained against the Non-Settling Defendant by or on behalf ofthe Lead Plaintiff or

Class Members may be reduced by a settlement credit consistent with applicable federal law.

The Judgment will provide that all Class Members who have not previously validly and timely

requested to be excluded from the Class shall be deemed to have released and forever discharged all Released

Claims (to the extent members of the Class have such claims) against all Released Persons.

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XII. APPLICATION FOR ATTORNEYS' FEES AND EXPENSES

At the Settlement Hearing, Lead Counsel will request the Court to award attorneys' fees of 30% of

the Settlement Fund, plus reimbursement ofthe expenses, not to exceed $325,000.00, which were advanced in

connection with the Litigation, plus interest thereon. The Lead Plaintiff may also seek reimbursement of its

expenses incurred in representing the Class in the Litigation. Class Members are not personally liable for any

such fees, expenses or compensation.

To date, Lead Counsel have not received any payment for their services in conducting this Litigation

on behalf ofthe Lead Plaintiff and the members ofthe Class, nor have counsel been reimbursed for their out-

of-pocket expenses. The fee requested by Lead Counsel would compensate counsel for their efforts in

achieving the Settlement Fund for the benefit ofthe Class, and for their risk in undertaking this representation

on a contingency basis. The fee requested is within the range of fees awarded to plaintiffs' counsel under

similar circumstances in litigation of this type.

XIII. CONDITIONS FOR SETTLEMENT

The settlement is conditioned upon the occurrence of certain events described in the Stipulation.

Those events include, among other things: (1) entry of the Judgment by the Court, as provided for in the

Stipulation; and (2) expiration of the time to appeal from or alter or amend the Judgment. If, for any reason,

any one of the conditions described in the Stipulation is not met, the Stipulation might be terminated and, if

terminated, will become null and void, and the parties to the Stipulation will be restored to their respective

positions as of November 6, 2006.

XIV. THE RIGHT TO BE HEARD AT THE HEARING

Any Class Member who has not validly and timely requested to be excluded from the Class, and who

objects to any aspect of the settlement, the Plan of Allocation, or the application for attorneys' fees and

expenses or reimbursement of the Lead Plaintiff's expenses, may appear and be heard at the Settlement

Hearing. Any such Person must submit and serve a written notice of objection, to be received on or before

, 2007, by each of the following:

-15-

Case 7:04-cv-00027-D Document 151-3 Filed 03/08/2007

CLERK OF THE COURTUNITED STATES DISTRICT COURTEASTERN DISTRICT OF NORTH CAROLINASOUTHERN DIVISIONAlton. Lennon Federal BuildingTwo Princess StreetWilmington , NC 28401

LERACH COUGHLIN STOIA GELLER RUDMAN& ROBBINS LLP

JEFFREY D. LIGHT655 West Broadway, Suite 1900San Diego , CA 92101


ALSTON & BIRD, LLPPETER BASSETTOne Atlantic Center1201 West Peachtree StreetAtlanta , GA, 30309-3424

Counsel for the D&O Group

Page 18 of 19

The notice of objection must demonstrate the objecting Person's membership in the Class, including the

number of shares of aaiPharma common stock purchased, acquired, and sold during the Class Period, and

contain a statement ofthe reasons for objection. Only Class Members who have submitted written notices of

objection in this manner will be entitled to be heard at the Settlement Hearing, unless the Court orders

otherwise.

XV. SPECIAL NOTICE TO NOMINEES

Ifyou hold or held any aaiPharma Publicly Traded Securities during the Class Period as nominee for

a beneficial owner, then, within ten (10) calendar days after you receive this Notice, you must either: (1) send

a copy ofthis Notice and the Proof of Claim by first class mail to all such Persons ; or (2) provide a list of the

names and addresses of such Persons to the Claims Administrator:


-16-


If you choose to mail the Notice and Proof of Claim yourself, you may obtain from the Claims

Administrator (without cost to you) as many additional copies of these documents as you will need to

complete the mailing.'

Regardless of whether you choose to complete the mailing yourself or elect to have the mailing

performed for you, you may obtain reimbursement for, or advancement of, reasonable administrative costs

actually incurred or expected to be incurred in connection with forwarding the Notice and ProofofClaim and

which would not have been incurred but for the obligation to forward the Notice and Proof of Claim, upon

submission of appropriate documentation to the Claims Administrator.

XVI. EXAMINATION OF PAPERS

This Notice is a summary and does not describe all of the details ofthe Stipulation. For full details of

the matters discussed in this Notice, you may review the Stipulation filed with the Court, which may be

inspected during business hours, at the office of the Clerk ofthe Court, United States District Court, Eastern

District of North Carolina, Southern Division, Alton Lennon Federal Building, Two Princess Street,

Wilmington, North Carolina 28401.

If you have any questions about the settlement of the Litigation, you may contact Lead Counsel:


RICK NELSON655 West Broadway, Suite 1900San Diego, CA 921011-800-449-4900

DO NOT TELEPHONE THE COURT REGARDING THIS NOTICE

DATED: , 2007 BY ORDER OF THE COURTUNITED STATES DISTRICT COURTEASTERN DISTRICT OF NORTH CAROLINASOUTHERN DIVISION

S:\Settlement\aaiPharma.set\A1-00036785.doc

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EXHIBIT A-2



SOUTHERN DIVISION




ALL ACTIONS.

CLASS ACTION

PROOF OF CLAIM AND RELEASE

EXHIBIT A-2


I. GENERAL INSTRUCTIONS

To recover as a member ofthe Class based on your claims in the consolidated action entitled

In re aaiPharma Inc. Securities Litigation, Consolidated Civil Action No. 7:04-CV-27-D (the "Litigation"),

you must complete and, on page _ hereof, sign this Proof of Claim and Release. If you fail to file a

properly addressed (as set forth in paragraph 3 below) Proof of Claim and Release, your claim may be

rejected and you may be precluded from any recovery from the Settlement Fund created in connection with

the proposed settlement of the Litigation.

2. Submission ofthis Proof ofClaim and Release, however, does not assure that you will share

in the proceeds of settlement in the Litigation.

3. YOU MUST MAIL YOUR COMPLETED AND SIGNED PROOF OF CLAIM AND

RELEASE POSTMARKED ON OR BEFORE , 2007, ADDRESSED AS FOLLOWS:


If you are NOT a member ofthe Class (as defined in the Notice ofPendency and Proposed Partial Settlement

of Class Action), DO NOT submit a Proof of Claim and Release form.

4. Ifyou are a member ofthe Class and you have not timely requested exclusion, you are bound

by the terms of anyjudgment entered in the Litigation, WHETHER OR NOT YOU SUBMIT A PROOF OF

CLAIM AND RELEASE FORM.

II. DEFINITIONS

1. "aaiPharma Publicly Traded Securities " means aaiPharma common stock, 11 % Senior

Subordinated Notes Due 2010 ("11% Notes") and Put and Call Options.

2. "Non- Settling Defendant" means Ernst & Young, LLP.

3. "Related Parties" means, with respect to each Settling Defendant, the immediate family

members, heirs, executors, administrators, successors, assigns, present and former employees, officers,

directors, attorneys, assigns, legal representatives , insurers , reinsurers, and agents of each of them, and any

-1-





insurers, reinsurers, and agents ofeach ofthem. Notwithstanding anything in this paragraph, Related Parties


4. "Released Persons" means each and all of the Settling Defendants and each and all of their

Related Parties.

5. "Settling Defendants" means Frederick D. Sancilio, William L. Ginna, Jr., Philip S. Tabbiner

and David M. Hurley.

III. CLAIMANT IDENTIFICATION

1. Ifyou purchased or acquired aaiPharma Publicly Traded Securities and held the certificate(s)

in your name, you are the beneficial purchaser as well as the record purchaser . If, however, you purchased or

acquired aaiPharma Publicly Traded Securities and the certificate (s) were registered in the name of a third

party, such as a nominee or brokerage firm , you are the beneficial purchaser or acquirer and the third party is

the record purchaser or acquirer.

2. Use Part I of this form entitled "Claimant Identification" to identify each purchaser or

acquirer of record ("nominee "), if different from the beneficial purchaser or acquirer of aaiPharma Publicly

Traded Securities which forms the basis of this claim . THIS CLAIM MUST BE FILED BY THE ACTUAL

BENEFICIAL PURCHASER OR ACQUIRER OR THE LEGAL REPRESENTATIVE OF SUCH

PURCHASER OR ACQUIRER OF THE AAIPHARMA PUBLICLY TRADED SECURITIES UPON

WHICH THIS CLAIM IS BASED.

3. All joint purchasers or acquirers must sign this claim. Executors, administrators , guardians,

conservators and trustees must complete and sign this claim on behalf of Persons represented by them and

their authority must accompany this claim and their titles or capacities must be stated . The Social Security (or

taxpayer identification) number and telephone number of the beneficial owner may be used in verifying the

-2-


claim. Failure to provide the foregoing information could delay verification of your claim or result in

rejection of the claim.

IV. CLAIM FORM

Use Part II of this form entitled "Schedule of Transactions in aaiPharma Publicly Traded

Securities" to supply all required details of your transaction(s) in aaiPharma Publicly Traded Securities. If

you need more space or additional schedules, attach separate sheets giving all of the required information in

substantially the same form. Sign and print or type your name on each additional sheet.

2. On the schedules, provide all of the requested information with respect to all of your

purchases or acquisitions and all ofyour sales of aaiPharma Publicly Traded Securities which took place at

any time between April 24, 2002 through June 15, 2004, inclusive (the "Class Period"), whether such

transactions resulted in a profit or a loss. Failure to report all such transactions may result in the rejection of

your claim.

3. List each transaction in the Class Period separately and in chronological order, by trade date,

beginning with the earliest. You must accurately provide the month, day and year ofeach transaction you list.

4. The date of covering a "short sale" is deemed to be the date of purchase of aaiPharma

common stock. The date of a "short sale" is deemed to be the date of sale of aaiPharma common stock.

5. Broker confirmations or other documentation of your transactions in aaiPharma Publicly

Traded Securities should be attached to your claim. Failure to provide this documentation could delay

verification of your claim or result in rejection of your claim.

-3-


UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF NORTH CAROLINA

SOUTHERN DIVISION

In re aaiPharma Inc. Securities Litigation,Consolidated Civil Action No. 7:04-CV-27-D

PROOF OF CLAIM

Must be Postmarked No Later Than:, 2007

Please Type or Print

PART I: CLAIMANT IDENTIFICATION

Beneficial Owner's Name (First, Middle, Last)

Street Address

City

Zip Code or Postal Code

State or Province

Country

Social Security Number orTaxpayer Identification Number

Individual

Corporation/Other

Area Code

Area Code

Telephone Number (work)

Telephone Number (home)

Record Owner's Name (if different from beneficial owner listed above)

-4-


PART II: SCHEDULE OF TRANSACTIONS IN AAIPHARMA PUBLICLY TRADEDSECURITIES

A. Number of shares of aaiPharma common stock held at the beginning oftrading on April 24,2002:

B. Number of 11% Senior Subordinated Notes Due 2010 held at the beginning of trading onApril 24, 2002:

C. Number of purchases or acquisitions (April 24, 2002 - June 15, 2004, inclusive) ofaaiPharma common stock or 11% Notes:

Trade DateMo. Day Year

Number of Shares and/or 11%Notes Purchased or Acquired

Total PurchasePrice

1. 1. 1.

2. 2. 2.

3. 3. 3.

IMPORTANT: Identify by number listed above all purchases in which you covered a "short sale":

D. Sales (April 24, 2002 - June 15, 2004, inclusive) of aaiPharma common stock and 11%Notes:

Trade DateMo. Day Year

Number of Shares and11 % Notes Sold

Total SalesPrice

1. 1. 1.

2. 2. 2.

3. 3. 3.

E. Number of shares of aaiPharma common stock held at close of trading on June 15, 2004:

F. Number of shares of aaiPharma 11 % Notes held at close of trading on June 15, 2004:

G. For 11% Note purchasers, please list the following information for each note purchasedduring the Class Period that was later redeemed at any time:

Note Date of Redemption

-5-


OPTION TRANSACTIONS IN AAIPHARMA

G. Number of AaiPharma options held at beginning of trading on April 24, 2002:

H. Options: Purchases and/or sales during the period April 24, 2002 through June 15, 2004:

Type Number of[C]all [B]uy Trade Date Option ContractsfPlut [S]ell Mth/Day/Year Purchased/Sold Total Price Price Received

1.

2.

3.

4.

1. Number of AaiPharma options held at close of trading on June 15, 2004:

Ifyou require additional space, attach extra schedules in the same format as above. Sign and print your nameon each additional page.

YOU MUST READ THE RELEASE AND YOUR SIGNATURE ON PAGE WILL CONSTITUTE

YOUR ACKNOWLEDGMENT OF THE RELEASE.

-6-


V. SUBMISSION TO JURISDICTION OF COURT AND ACKNOWLEDGMENTS

I (We) submit this ProofofClaim and Release under the terms ofthe Stipulation ofPartial Settlement

described in the Notice. I (We) also submit to the jurisdiction of the United States District Court for the

Eastern District ofNorth Carolina, Southern Division, with respect to my (our) claim as a Class Member and

for purposes of enforcing the release set forth herein. I (We) further acknowledge that I am (we are) bound by

and subject to the terms of any judgment that may be entered in the Litigation. I (We) agree to furnish

additional information to the Claims Administrator or Lead Counsel to support this claim if required to do so.

I (We) have not submitted any other claim covering the same purchases or sales ofaaiPharma Publicly Traded

Securities (other than a claim in aaiPharma's bankruptcy proceedings or a claim in the ERISA Litigation)

during the Class Period and know of no other Person having done so on my (our) behalf.

VI. RELEASE

1. I (We) hereby acknowledge full and complete satisfaction of, and do hereby fully, finally and

forever settle, release and discharge from the Released Claims, each and all of the "Released Persons,"

including each and all of the Settling Defendants and each and all of their Related Parties.

2. "Released Claims" shall collectively mean all rights, demands, claims (including "Unknown

Claims" as defined below) and causes of action of every nature and description, in law or equity, accrued or

unaccrued, whether known or unknown, and whether arising under federal, state, common or foreign law, that

Lead Plaintiff or any member of the Class asserted, or could have asserted, arising out of, or relating to,

directly or indirectly, the purchase or acquisition of aaiPharma Publicly Traded Securities during the Class

Period, and the facts, matters, allegations, transactions, events, disclosures, statements, acts or omissions

which were alleged or that could have been alleged in the Complaint.

"Unknown Claims" means all claims, demands, rights, liabilities , and causes of action of


his, her or its favor at the time of the release ofthe Released Persons which, if known by him, her or it, might



-7-





A general release does not extend to claims which the creditor does not know orsuspect to exist in his or her favor at the time of executing the release, which if knownby him or her must have materially affected his or her settlement with the debtor.




similar, comparable or equivalent to California Civil Code § 1542. The Lead Plaintiff and Class Members









discovery or existence of such different or additional facts. The Lead Plaintiff acknowledges, and the Class



4. This release shall be of no force or effect unless and until the Court approves the Stipulation

of Partial Settlement' and the Stipulation becomes effective on the Effective Date (as defined in the

Stipulation).

5. I (We) hereby warrant and represent that I (we) have not assigned or transferred or purported

to assign or transfer, voluntarily or involuntarily, any matter released pursuant to this release or any other part

or portion thereof.

-8-


6. I (We) hereby warrant and represent that I (we) have included information about all of my

(our) transactions in aaiPharma Publicly Traded Securities which occurred during the Class Period as well as

the number of shares of aaiPharma Publicly Traded Securities held by me (us) at the close of trading on June

15, 2004.

-9-

Case 7 : 04-cv-00027-D Document 151-4 Filed 03/08/2007 Page 12 of 13

SUBSTITUTE FORM W-9

Request for Taxpayer Identification Number ("TIN") and Certification

PART I

NAME:

Check appropriate box:

q Individual/Sole Proprietor q Pension Planq Corporation q Partnership q Trustq IRA q Other

Enter TIN on appropriate line.

For individuals, this is your social security number ("SSN")

For sole proprietors, you must show your individual name, but you may also enter your business or"doing business as" name. You may enter either your SSN or your Employer Identification Number("EIN").

For other entities , it is your EIN.

- - or ---- -- ---- -- -------Social Security Number Employer Identification Number

PART II

For Payees Exempt from Backup Withholding

If you are exempt from backup withholding, enter your correct TIN in Part I and write "exempt" on thefollowing line:

PART III

Certification

UNDER THE PENALTY OF PERJURY, I (WE) CERTIFY THAT:

The number shown on this form is my correct TIN; and

2. I (We) certify that I am (we are) NOT subject to backup withholding under the provisions ofSection 3406 (a)(1)(C) ofthe Internal Revenue Code because: (a) I am (we are) exempt from backupwithholding; or (b) I (we) have not been notified by the Internal Revenue Service that I am (we are)subject to backup withholding as a result of a failure to report all interest or dividends; or (c) theInternal Revenue Service has notified me (us) that I am (we are) no longer subject to backupwithholding.

-10-


NOTE: If you have been notified by the Internal Revenue Service that you are subject to backupwithholding, you must cross out Item 2 above.

SEE ENCLOSED FORM W-9 INSTRUCTIONS

The Internal Revenue Service does not require your consent to any provision ofthis document other than the

certification required to avoid backup withholding.

I declare under penalty of perjury under the laws of the United States ofAmerica that the foregoing

information supplied by the undersigned is true and correct.

Executed this day of(Month/Year)

in _(City) ( State/Country)

(Sign your name here)

(Type or print your name here)

(Capacity of person(s) signing,e.g., Beneficial Purchaser, Acquirer,Executor or Administrator)

ACCURATE CLAIMS PROCESSING TAKES ASIGNIFICANT AMOUNT OF TIME.THANK YOU FOR YOUR PATIENCE.

Reminder Checklist:

1. Please sign the above release and declaration.

2. Remember to attach supporting documentation, if available.

3. Do not send original stock certificates.

4. Keep a copy of your claim form for your records.

5. If you desire an acknowledgment of receipt ofyour claim form, please send it Certified Mail,Return Receipt Requested.

6. If you move, please send us your new address.

S:\Settlement\aaiPharma . set\A2-00036786. doc

-11-


EXHIBIT A-3



SOUTHERN DIVISION




ALL ACTIONS.

CLASS ACTION

SUMMARY NOTICE

EXHIBIT A-3


TO: ALL PERSONS WHO PURCHASED OR OTHERWISE ACQUIRED AAIPHARMA, INC.'S("AAIPHARMA") COMMON STOCK, 11% SENIOR SUBORDINATED NOTES DUE 2010("11% NOTES") AND/OR AAIPHARMA PUT OR CALL OPTIONS DURING THE PERIODBETWEEN APRIL 24, 2002 THROUGH AND INCLUDING JUNE 15, 2004, INCLUSIVE("CLASS PERIOD")

YOU ARE HEREBY NOTIFIED, pursuant to an Order of the United States District Court for the

Eastern District of North Carolina, Southern Division, that a hearing will be held on , 2007, at

_ _.m., before the Honorable James C. Dever III, United States District Judge, at the Alton Lennon

Federal Building, Two Princess Street, Wilmington, North Carolina, for the purpose of determining: (1)

whether the proposed partial settlement ofthe claims in the Litigation against the Settling Defendants for the

sum of $7,550,000 in cash, plus accrued interest, should be approved by the Court as fair, just, reasonable,

and adequate; (2) whether, thereafter, this Litigation should be dismissed with prejudice as set forth in the

Stipulation of Partial Settlement dated as of February 23, 2007 (the "Stipulation"); (3) whether the Plan of

Allocation is fair, just, reasonable, and adequate and therefore should be approved; and (4) whether the

application of Lead Counsel for the payment of attorneys' fees and reimbursement of costs and expenses and

the reimbursement of the Lead Plaintiffs expenses incurred in connection with this Litigation should be

approved.

Ifyou purchased or acquired aaiPharma common stock, l l % Notes and/or put and call options during

the period beginning April 24, 2002 through and including June 15, 2004 , your rights may be affected by the

partial settlement of this Litigation . If you have not received a detailed Notice of Pendency and Proposed

Partial Settlement of Class Action and a copy of the Proof of Claim and Release form , you may obtain copies

by writing to aaiPharma Securities Litigation, c/o Gilardi & Co. LLC, P.O. Box 5100 , Larkspur , CA 94977-

5 100. If you are a Class Member, in order to share in the distribution of the Net Settlement Fund, you must

submit a Proofof Claim and Release postmarked no later than , 2007, establishing that you are

entitled to recovery. You will be bound by anyjudgment rendered in the Litigation whether or not you make

a claim.

If you desire to be excluded from the Class , you must submit a Request for Exclusion postmarked by

, 2007, in the manner and form explained in the detailed Notice referred to above. All

-1-


members of the Class who have not requested exclusion from the Class will be bound by any judgment

entered in the Litigation pursuant to the Stipulation.

Any objection to the settlement must be mailed or delivered such that it is received by each of the

following no later than , 2007:

CLERK OF THE COURTUNITED STATES DISTRICT COURTEASTERN DISTRICT OF NORTH CAROLINASOUTHERN DIVISIONAlton Lennon Federal BuildingTwo Princess StreetWilmington , NC 28401

LERACH COUGHLIN STOIA GELLER RUDMAN& ROBBINS LLP

JEFFREY D. LIGHT655 West Broadway, Suite 1900San Diego , CA 92101


ALSTON & BIRD, LLPPETER BASSETTOne Atlantic Center1201 West Peachtree StreetAtlanta, GA, 30309-3424

Counsel for the D&O Group

PLEASE DO NOT CONTACT THE COURT OR THE CLERK' S OFFICE REGARDING

THIS NOTICE.

DATED: , 2007 BY ORDER OF THE COURTUNITED STATES DISTRICT COURTEASTERN DISTRICT OF NORTH CAROLINASOUTHERN DIVISION

S:\Settlement\aaiPharma.set\A3-00036823.doc

-2-


EXHIBIT B



SOUTHERN DIVISION




ALL ACTIONS.

CLASS ACTION

[PROPOSED] PARTIAL FINAL JUDGMENT AND ORDER OF DISMISSAL WITH PREJUDICE

EXHIBIT B


This matter came before the Court for hearing pursuant to the Order Preliminarily Approving Partial

Settlement and Providing for Notice ("Order") dated February , 2007, on the application of the parties

for approval of the settlement set forth in the Stipulation of Partial Settlement dated as of February 23, 2007

(the "Stipulation"). Due and adequate notice having been given to the Class as required in said Order, and the

Court having considered all papers filed and proceedings had herein and otherwise being fully informed in the

premises and good cause appearing therefore, IT IS HEREBY ORDERED, ADJUDGED AND DECREED

that:

This Judgment incorporates by reference the definitions in the Stipulation, and all terms used

herein shall have the same meanings as set forth in the Stipulation, unless otherwise set forth herein.

2. This Court has jurisdiction over the subject matter ofthe Litigation and over all parties to the

Litigation, including all members of the Class.

The Court hereby certifies the following class for settlement purposes only:

All Persons who purchased or otherwise acquired aaiPharma Publicly Traded

Securities between April 24, 2002 and June 15, 2004, inclusive. Excluded from the Class are

the Settling Defendants, members of the immediate families of the Defendants, the former

and current directors, officers, subsidiaries and affiliates of aaiPharma, as well as any person,firm, trust, corporation, officer, director or other individual or entity in which any Defendant

has a controlling interest and the legal representatives, affiliates, heirs, successors-in-interest,or assigns ofany such excluded party. Also excluded from the Class are those Persons who

timely and validly requested exclusion from the Class pursuant to the Notice of Pendency

and Proposed Partial Settlement of Class Action. (Identified on Exhibit A attached hereto.)

4. Pursuant to Federal Rule of Civil Procedure 23, this Court hereby approves the settlement set

forth in the Stipulation and finds that said settlement is, in all respects, fair, reasonable, and adequate to the

Class.

Pursuant to Rule 23 of the Federal Rules of Civil Procedure, the Court finds that the

Stipulation and settlement are fair , reasonable , and adequate as to each of the Settling Parties, and that the

Stipulation and settlement are hereby finally approved in all respects, and the Settling Parties are hereby

directed to perform its terms.

6. Accordingly, the Court authorizes and directs implementation ofall the terms and provisions

of the Stipulation , as well as the terms and provisions hereof. The Court hereby dismisses , as to the Settling

-1-


Defendants only, the Litigation and all Released Claims of the Class with prejudice, without costs as to any

Settling Party, except as and to the extent provided in the Stipulation and herein.

7. Upon,the Effective Date hereof, the Lead Plaintiff shall, and each ofthe Class Members shall

be deemed to have, and by operation of this Judgment shall have, fully, finally, and forever released,

relinquished and discharged all Released Claims against the Released Persons, whether or not such Class

Member executes and delivers the Proof of Claim and Release.

8. Upon the Effective Date hereto, each ofthe Settling Defendants shall be deemed to have, and

by operation ofthis Judgment shall have, fully, finally, and forever released, relinquished and discharged the

Lead Plaintiff, each and all ofthe Class Members and Plaintiffs' Counsel from all claims (including Unknown

Claims) arising out of, relating to, or in connection with the institution, prosecution, assertion, settlement or

resolution of the Litigation or the Released Claims.

9. Lead Plaintiff, all members of the Class, the successors and assigns of any of them and

anyone claiming through or on behalf of any of them, are hereby permanently BARRED, ENJOINED and

RESTRAINED from instituting, commencing or prosecuting, either directly or in any other capacity, in the

Litigation or any other action or proceeding any Released Claims against any of the Released Persons. The

Released Claims against each and all ofthe Released Persons shall be released and dismissed with prejudice

and on the merits. Nothing in this paragraph shall release the Released Claims against the Released Persons

of any Person who submitted a timely, signed request for exclusion from the Class and who did not submit a

timely, signed request to revoke the prior request for exclusion ("Opt-Out Plaintiffs").

10. The Non-Settling Defendant, any other defendant or third party defendant in the Litigation,

whether named in the Complaint or hereafter named as a defendant or third party defendant, and all other

Persons and entities, are hereby permanently BARRED, ENJOINED and RESTRAINED from commencing,

prosecuting, or asserting any claim for contribution against the Released Persons or any other claim against

the Released Persons where the injury to such entity/individual is the entity's/individual's actual or threatened

liability to the Lead Plaintiff, named plaintiffs and other Class Members (whether contractual or otherwise

and whether characterized as contribution, indemnity or otherwise) including any amounts paid in settlement

-2-


of such actual or threatened liability, or any other costs or expenses (including attorneys' fees) incurred in

connection with the Litigation; provided, however, that the Bar Order stated in this paragraph shall not apply

to claims that may be asserted by any Opt-Out Plaintiff, or between and/or among any defendants in cases

brought by Opt-Out Plaintiffs (but only to the extent such a claim between and/or among defendants is based

upon the defendant's actual or threatened liability solely to the Opt-Out Plaintiffs or the costs and expenses

incurred solely in connection with a claim asserted by an Opt-Out Plaintiff). For purposes of this Bar Order,

Barred Persons shall be defined as any Person who is barred and/or enjoined by this ¶10.

11. Barred Persons shall be entitled to a judgment credit (i.e., a reduction to the total amount of

the judgment for each claim entered in the action) in an amount that is the greater of. (i) the total Settlement

Amount paid by or on behalf ofthe Settling Defendants, as allocated to claims for which contribution would

be sought; or (ii) the amount that corresponds to the percentage of responsibility ofthe Settling Defendants as

determined at trial.

12. The Released Persons are hereby permanently BARRED, ENJOINED and RESTRAINED

from commencing, prosecuting, or asserting any claim for contribution against the Barred Persons or any

other claim against the Barred Persons where the injury to the Released Person is the Released Person's actual

or threatened liability to the Lead Plaintiff, named plaintiffs and other Class Members (whether contractual or

otherwise and whether characterized as contribution, indemnity or otherwise) including any amounts paid in

settlement of such actual or threatened liability, or any other costs or expenses (including attorneys' fees)

incurred in connection with the Litigation, provided, however, that the Bar Order stated in this paragraph shall

not apply to claims that may be asserted by the Released Persons in any case brought by an Opt-Out Plaintiff

or between and/or among any defendants in cases brought by Opt-Out Plaintiffs (but only to the extent such a

claim by a Released Person is based upon such Released Person's actual or threatened liability solely to the

Opt-Out Plaintiffs or the costs and expenses incurred solely in connection with a claim asserted by an Opt-Out

Plaintiff).

13. The provisions in this Bar Order are reciprocal and in the event that any Person or entity

asserts and is legally not barred by the Bar Order from bringing any claim, action or actions, cause or causes

-3-


of action, suits, debts, liens, contracts, agreements, promises, liabilities, claims, rights, demands, damages,

losses, costs, charges or expenses falling within the scope of this Bar Order (the "First Person") against any

other person (the "Second Person"), this Bar Order shall not bar, enjoin or restrain the Second Person from

asserting or bringing any claim, action or actions, cause or causes of action, suits, debts, liens, contracts,

agreements, promises, liabilities, claims, rights, demands, damages, losses, costs, charges or expenses falling

within the scope of this Bar Order against the First Person.

14. The Notice of Pendency and Proposed Partial Settlement of Class Action given to the Class

was the best notice practicable under the circumstances, including the individual notice to all members ofthe

Class who could be identified through reasonable effort. Said notice provided the best notice practicable

under the circumstances of those proceedings and of the matters set forth therein, including the proposed

settlement set forth in the Stipulation, to all Persons entitled to such notice, and said notice fully satisfied the

requirements of Federal Rule of Civil Procedure 23, §21 D(a)(7) of the Securities Exchange Act of 1934, 15

U.S.C. §78u-4(a)(7), as amended including by the Private Securities Litigation Reform Act of 1995 and the

requirements of due process.

15. Any plan of allocation submitted by Lead Counsel or any order entered regarding any

attorneys' fee and expense application shall in no way disturb or affect this Judgment and shall be considered

separate from this Judgment.

16. Neither the Stipulation nor the settlement contained therein, nor any act performed or

document executed pursuant to or in furtherance ofthe Stipulation or the settlement: (a) is or may be deemed

to be or may be used as an admission of, or evidence of, the validity of any Released Claim, or of any

wrongdoing or liability of the Settling Defendants or their respective Related Parties, or (b) is or may be

deemed to be or may be used as an admission of, or evidence of, any fault or omission of any of the Settling

Defendants or their respective Related Parties in any civil, criminal or administrative proceeding in any court,

administrative agency or other tribunal. Settling Defendants and/or their respective Related Parties may file

the Stipulation and/or the Judgment from this action in any other action in which they are parties or that may

be brought against them in order to support a defense, claim or counterclaim based on principles of res

-4-


judicata, collateral estoppel, release, good faith settlement, judgment bar or reduction, or any theory ofclaim

preclusion or issue preclusion or similar defense or counterclaim.

17. Without affecting the finality of this Judgment in any way, this Court hereby retains

continuing exclusive jurisdiction over: (a) implementation ofthis settlement and any award or distribution of

the Settlement Fund, including interest earned thereon; (b) disposition ofthe Settlement Fund; (c) hearing and

determining applications for attorneys' fees, interest and expenses in the Litigation; (d) all parties hereto for

the purpose of construing, enforcing and administering the Stipulation; and (e) exclusive jurisdiction to

enforce the provisions of the Bar Orders in this Judgment.

18. The Court finds that during the course of the Litigation, the Settling Parties and their

respective counsel at all times complied with the requirements of Federal Rule of Civil Procedure 11.

19. In the event that the settlement does not become effective in accordance with the terms ofthe

Stipulation, or the Effective Date does not occur, or in the event that the Settlement Fund, or any portion

thereof, is returned to the Settling Defendants, then this Judgment shall be rendered null and void to the extent

provided by and in accordance with the Stipulation and shall be vacated and, in such event, all orders entered

and releases delivered in connection herewith shall be null and void to the extent provided by and in

accordance with the Stipulation.

20. Without further order ofthe Court, the Settling Parties may agree to reasonable extensions of

time to carry out any of the provisions of the Stipulation.

21. There is no reason for delay in the entry ofthis Partial Final Judgment and Order ofDismissal

with Prejudice and immediate entry by the Clerk of the Court is expressly directed pursuant to Rule 54(b) of

the Federal Rules of Civil Procedure.

IT IS SO ORDERED.

DATED:THE HONORABLE JAMES C. DEVER IIIUNITED STATES DISTRICT JUDGE

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Submitted by,

McDANIEL & ANDERSON, L.L.P.L. BRUCE McDANIEL (N.C. State Bar #5025)WILLIAM E. ANDERSON (N.C. State Bar#098)

L. BRUCE McDANIEL

Lafayette Square4942 Windy Hill DriveRaleigh, NC 27609Telephone: 919/872-3000919/790-9273 (fax)

Liaison Counsel


WILLIAM S. LERACHDARREN J. ROBBINSJEFFREY D. LIGHTKATHLEEN A. HERKENHOFFAMBER L. ECKRYAN A. LLORENS655 West Broadway, Suite 1900San Diego, CA 92101Telephone : 619/231-1058619/231-7423 (fax)


PAUL J. GELLERJACK REISE120 East Palmetto Park Road , Suite 500Boca Raton , FL 33432Telephone : 561/750-3000561/750-3364 (fax)


S:\Settlement\aaiPharma. set\EB-00036787. doc

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EXHIBIT C


aaiPharma Inc.(Civ. No. 7:04-CV-27-D)

CORPORATE GOVERNANCE TERM SHEET (9/1/06)

Settling Defendants agree that they shall not serve on the board of any public company for aperiod of five years from January 1, 2005 (or until January 1, 2010), unless such company has, priorto the appointment of said Settling Defendant as a board member, adopted the corporate governanceterms as set forth below:

A. The Board

With respect to the Board, to be deemed "independent" in any calendar year, a director mustsatisfy the following:

I . Has not been employed by the Company or its subsidiaries or affiliates within the lasteight calendar years;

2. Has not received, during the current calendar year or any of the five immediatelypreceding calendar years, remuneration, directly or indirectly, other than de minimis remuneration,as a result of service as, or being affiliated with an entity that serves as, (i) an advisor, consultant, orlegal counsel to the Company or to a member of the Company's senior management; or (ii) asignificant customer or supplier of the Company;

3. Has no personal services contract(s) with the Company, or any member of theCompany's senior management;

4. Is not affiliated with a not-for-profit entity that has received contributions from theCompany or from its executive officers in the past five years;

5. During the current calendar year or any of the five immediately preceding calendaryears, has not had any business relationship with the Company for which the Company has beenrequired to make disclosure under Regulation S-K of the SEC, other than for service as a director orfor which relationship no more than de minimis remuneration was received in any year;

6. Is not employed by a public company at which an executive officer of the Companyalso serves as a director;

7. Has not had any of the relationships described in subsections 1-6 above, with anyaffiliate of the Company;

8. Is not a member of the immediate family of any person described in subsections 1-7above; and

9. A director is deemed to have received remuneration, directly or indirectly, ifremuneration, other than de minimis remuneration, was paid by the Company, its subsidiaries, oraffiliates, to any entity in which the director has a beneficial ownership interest of five percent or


more, or to an entity by which the director is employed or self-employed other than as a director.Remuneration is deemed de minimis remuneration if such remuneration is $30,000 or less in anycalendar year.

B. Compensation of Officers and Directors

The Board shall adopt a resolution setting forth the following compensation principles:

1. Compensation arrangements shall emphasize pay for performance and encourageretention of those employees who enhance the Company's performance;

2. Compensation arrangements shall promote long-term ownership of the Company's

stock to align the interests of management and stockholders;

3. Compensation arrangements shall maintain a balance between base salary and long-term and annual incentive compensation designed to encourage and award consistent long-term

growth by the Company;

4. In approving compensation, the recent compensation history of the executive,

including special or unusual compensation payments, shall be taken into consideration;

5. Cash incentive compensation plans for senior executives shall link pay toachievement of financial goals set in advance by the Compensation Committee;

6. The Compensation Committee shall separately retain independent experts to advise it

as to executive compensation which shall provide separate, independent, comparative executive

compensation data;

7. Neither executives nor the Board shall approve accelerated vesting provisions, re-

pricing of stock options, or cashless exercise of options, and the Board shall not approve the issuing

of options that are not indexed to the stock performance of the market or to the stock performance of

the Company's specific industry grouping;

8. Compensation for directors shall promote long-term ownership of the Company stock

to align the interests of directors and stockholders;

9. Independent Directors will have no participation in any equity-based compensation

program of the Company. Compensation shall be exclusively cash; and

10. The Compensation Committee shall review annually the compensation of directors.

Directors shall be prohibited from participating in any equity-based compensation program of the

Company. Director compensation shall be exclusively paid in cash. The Committee shall have the

authority and resources to hire such consultants and experts as it deems appropriate and for whatever

period it deems appropriate.

• The Company will modify its annual proxy disclosures to show a total pay figure for

each of the six highest-paid executives. That total pay figure shall include, but not be

limited to, base salary; annual bonus; the estimated present value of stock option

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grants made during the year measured at the grant date; the value of free sharesgranted during the year, again measured at the grant date; payouts under other formsof long-term incentive compensation and miscellaneous compensation that constitutepresent or future liabilities of the Company. This total pay figure will be presented ina prominent location in the proxy statement.

Current proxy disclosure rules require that the Company include in its proxystatement a graph showing three lines over the past five years: (i) the Company'stotal return to investors; (ii) the total return from a broad-based index, such asStandard & Poor's 500 Index; and (iii) the total return from an index of theCompany's major competitors. The Company will add a fourth line to that graph,showing, over five years, the CEO's total pay.

• The Company will show graphically in its annual proxy the ratio of the CEO's totalpay to that of an average entry-level worker in the Company over the five mostrecent years.

• The Company will include in its annual proxy a table showing how much the CEOand the Company's next top five executives stand to receive upon termination fordeath, disability, normal retirement, discharge for cause, discharge for other thancause and voluntary resignation.

• The Company shall comply with all proxy rules under the U.S. securities laws whichrequire the disclosure of all related party transactions.

• The compensation packages of the three principal officers of the Company shall be

subject to specific shareholder approval. The Company shall make no payments,

including reimbursements, to such executives except to the extent such are disclosedwith particularity to and approved by the shareholders.

• No severance or termination payment equal to or in excess of $1 million may bemade without majority shareholder approval, excluding the votes of officers,

directors or their controlled persons or affiliates.

• The Company shall list in its annual proxy the names of the pay consultant(s) for the

Board Compensation Committee and the pay consultant(s) for management, if any,and how much they were paid in each of the past three years.

• The CEO and the next five top-ranking executives of the Company shall notparticipate in more than a single long-term incentive plan.

• A single stock option plan shall be instituted to replace all existing stock option

plans. The Company's stock option plan must provide for delayed vesting for a

period of at least two years. Once established, a stock option plan may not be

modified via reload, re-priced or replacement options to reduce option exercise prices

or increase the number of shares granted without a majority shareholder vote,

excluding the votes of officers, directors and their controlled persons or affiliates.

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Case 7 : 04-cv-00027-D Document 151-7 Filed 03/08/2007 Page 5 of 6

All option exercise prices must be "indexed" to performance of an appropriate stockindex.

• No option shall be exercisable for at least two years from its grant date.

• 50% of any shares acquired via option exercise must be retained for at least 18

months.

• The Company will fully expense all stock options and disclose the earnings per share

impact of expensing them.

• No Company compensation or stock option plan may include any "change-in-

control" definition that does not require the actual sale or merger of the Company to

trigger a "change-in-control." A vote in favor of a merger or sale of the Company

shall not constitute a "change-in-control." Acceleration or vesting of benefits upon a

"change-in-control" shall only take place where an executive is terminated without

cause after a "change-in-control" takes place.

C. Financial Integrity, Reporting and Controls

1. At each regularly scheduled Board meeting following quarter end, the Company's

CFO shal I provide a report as to the Company's financial condition and prospects, including, but not

limited to, a discussion of whether the Company can or will reach existing internally and externally

circulating financial forecasts, all reasons for any material increases in expenses and liabilities and

material decreases in revenues and earnings including any modification or adjustment of reserve

accounts or contingencies and management plans for ameliorating or reversing any negative trends

and the success or failure of any such plans presented in the past. This presentation will be detailed

in the Board minutes and preserved.

2. The CEO and CFO shall be responsible for ensuring that the Company's accounting

practices strictly conform to the requirements of GAAP as currently in effect or as amended, is

implemented and utilized throughout the Company. The policy shall be reviewed, discussed and

approved by the Board. The CEO and CFO shall report to the Board on a semi-annual basis

regarding the implementation and operation of this policy.

3. The CEO and CFO shall be responsible for ensuring that the Company's periodic

financial reporting practices, including interim and annual financial reporting practices, strictly

conform to reporting requirements

D. Insider Trading Disclosure and Controls

1. The Company shall cause its officers and directors to comply with all stock

transaction disclosure and reporting requirements as established for public companies.

2. The Board will appoint a senior officer of the Company who will be responsible for

effecting compliance with the Company's stock trading and market communications policy. That

individual will be designated the "Trading Compliance Officer," and will be responsible for

developing (with Board involvement), presenting to the Board for approval, and implementing,

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monitoring and updating (with Board involvement and approval) a comprehensive program (the"Trading Compliance Program") designed to ensure compliance with the Company's tradingpolicies, including the policies and provisions of the settlement. The Board will be responsible foroversight of the Trading Compliance Program and the Trading Compliance Officer, and theindependent directors will have direct access to the Trading Compliance Officer, including theopportunity to meet with the Trading Compliance Officer outside the presence ofany other memberof management. At least twice yearly, the independent directors will receive a report from theTrading Compliance Officer outside the presence of any other members of management, whichreport shall be detailed in the Board minutes.

3. Any director or officer of the Company who possesses material inside information, asdefined by applicable SEC regulations and U.S. court decisions, concerning the Company's financialresults shall be prohibited from trading in the Company's securities. No director or officer of theCompany shall make any transaction in Company stock from the fifteenth day of the last month ofeach quarter through the close of trading on the fifth day after the Company's public disclosure of itsfinancial results for that quarter.

4. The Company shall require the immediate public disclosure of all sales or purchasesof the Company's stock by any corporate officer or director on the Company's web site, by pressrelease or otherwise. Using Company stock or options to secure any loan to a corporate officer ordirector shall be considered a "sale" and so disclosed. Any transaction relating to the Company'sstock by any officer or director of the Company, including any derivative basket or similartransaction shall be fully, accurately and immediately disclosed by the Company. The TradingCompliance Officer will ensure that all directors and officers file all trading forms required by themas per this settlement.

5. In the Company's Quarterly Report or financial release, the Company shall report allstock transactions covered by the Trading Compliance Program engaged in by Company officers ordirectors in the prior quarter, including all transactions, prices and profits/losses.

6. During the pendency of any Company-funded open market stock buy-back program,no officer or director shall be permitted to sell Company stock.

7. Failure to comply with the Company's Trading Compliance Program will result insanctions, including disgorgement by the individual to the Company of all profits from thetransaction, termination, or other appropriate disciplinary action.

Notwithstanding paragraphs (A)(1)-(9), (B)(1)-(10), C(1)-(3) and D(1)-(7) above, the SettlingDefendants shall not be precluded from serving on the board of a company that does not adopt(A)(1)-(9), (B)(1)-(10), C(l)-(3) and D(l)-(7), if such company has a market capitalization of lessthan $500 million as of the date of appointment or election to the board.

C:Documents and Settings\bartg\Local Settings\Temporary Internet Files\0LK92\Term Sheet (2).doc

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EXHIBIT .D


LLP

[email protected]

January 16, 2007

Peter Bassett, Esq.ALSTON & BIRD, LLPOne Atlantic Center1201 West Peachtree StreetAtlanta, GA 30309-3424

Re: In re aaiPharma Inc. Sec. Litig.Consolidated Civil Action No. 7:04-CV-27-D

Dear Peter:

SAN DIEGO • SAN FRANCISCO

LOS ANGELES • NEW YORK • BOCA RATON

WASHINGTON,DC -HOUSTON

PHILADELPHIA • SEATTLE

VIA FACSIMILE & U.S. MAIL404/881-7777

As we have discussed, in connection with the settlement of the referenced action as to',your-clients, Frederick D. Sancilio, William L. Ginna, Jr., and Phillip S. Tabbiner, your clients(referred to herein as the ."Individual.. Defendants") agree to cooperate with the courtappointed Lead Plaintiff with respect to any claims that Lead Plaintiff may have against Ernst& Young, LLP by making themselves available for informal interviews, as well as appearing ata deposition and at trial, without the necessity of a subpoena. The Individual Defendants alsoagree to respond to document requests as if they were still parties to this Litigation.

Lead Plaintiffs will reimburse the Individual Defendants at the requested per diem rateof $750, plus reasonable out-of-pocket expenses incurred in connection with suchappearances. Out-of-pocket expense reimbursement will require submission of an invoicewith receipts.

Very truly yours,

ARREN J. ROBBINS

DJR:pI

Agr d a pted as of January :2007..,

Peter' Bassett, Esq.ALSTON & BIRD, LLP

On Behalf of Defendants Saricilio, Ginna & TabbinerS:\CasesSD\aa!Pharma\Corres\Ltr Bassett04_DJR.doc

655 West Broadway, Suite 1900 • San Diego, California 92101-3301 • 619.231.1058 • Fax 619.231.7423 • www.lerachlaw.com

® 345 ®61-M

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