<PAGE>

                                 EXHIBIT 10.12
<PAGE>

                         Integrated Orthopaedics, Inc.
                           5858 Westheimer, Suite 500
                             Houston, Texas  77057


                               December 12, 1997


Mr. Jose E. Kauachi
4840 Post Oak Timber
Houston, Texas  77056

     Re:  Termination of Employment Agreement

Dear Mr. Kauachi:

     The purpose of this letter agreement is to set forth our agreement as to
certain matters pertaining to your relationship with Integrated Orthopaedics,
Inc., a Texas corporation (the "Company").  Reference is made to (i) that
certain Securities Purchase Agreement, dated as of December 12, 1997 (the
"Purchase Agreement"), by and among FW Integrated Orthopaedics Investors, L.P.,
a Texas limited partnership ("FW IOI"), FW Integrated Orthopaedics Investors II,
L.P., a Texas limited partnership (together with FW IOI, the "Purchasers"), the
Company, and, for certain limited purposes, certain other parties thereto, which
provides for the purchase by Purchasers of certain securities of the Company;
and (ii) that certain Executive Employment Agreement, dated as of November 14,
1997 (the "November 1997 Employment Agreement"), by and between you and the
Company.

     In connection with the consummation of the transactions evidenced by the
Purchase Agreement and in consideration thereof, and for other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged, you and
the Company hereby (i) terminate the November 1997 Employment Agreement and you
hereby (without the necessity of any other documentation) forever discharge and
release the Company in all respects from any and all obligations of the Company
to you under the November 1997 Employment Agreement, including, but not limited
to, any obligation of the Company to pay money and/or provide other benefits to
you that might otherwise be required if your employment with the Company
terminated; and (ii) agree to enter into a Consulting Agreement in substantially
the form attached hereto, which Consulting Agreement shall control your
relationship with the Company following the date hereof.
<PAGE>

Mr. Jose E. Kauachi
December 12, 1997
Page 2


     Attached hereto is a list of all options and warrants for common stock of
the Company granted to you as an employee of the Company under any previous
option, warrant or compensation plans of the Company (collectively, "Options"),
indicating the grant date, exercise price, number of shares, and vesting
schedule for each Option.  Notwithstanding the termination of the November 1997
Employment Agreement and notwithstanding any provisions to the contrary
contained in the Options, related agreements, or the Consulting Agreement, the
parties hereto acknowledge and agree that you will retain all rights under the
Options.

     You hereby acknowledge and agree that you, in your capacity as a
shareholder of the Company, have received, or will receive, as valuable and
independent consideration for the termination of the November 1997 Employment
Agreement and the waiver and release set forth in this letter agreement,
monetary benefits derived from the consummation of the transactions contemplated
by the Purchase Agreement.

     The validity, interpretation, construction and performance of this letter
agreement shall be governed by the substantive laws of the State of Texas,
without giving effect to the principles of conflict of laws of such State.

     If the foregoing sets forth the agreement of you and the Company with
regard to the matters addressed herein, please so evidence by signing the
attached duplicate original of this letter in the space provided for your
signature and returning it to the undersigned, whereupon the provisions hereof
will constitute a binding agreement.

                              Sincerely,

                              INTEGRATED ORTHOPAEDICS, INC.

                                    By:________________________________

                                    Title:_____________________________


AGREED TO AND ACCEPTED:



______________________________
JOSE E. KAUACHI
<PAGE>

Mr. Jose E. Kauachi
December 12, 1997
Page 3




JOSE E. KAUACHI


<TABLE>
<CAPTION>
                                                          Number of         Date        Expiration        Strike
Type of Security                                        Shares Granted     Granted         Date           Price
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>             <C>            <C>           <C>
Warrant                                                   100,000         02/23/89       02/22/1999       $2.125

Employee Stock Option (1988 Plan)                          50,000         02/02/95       02/01/2005       $2.500

Employee Stock Option (1997 Plan)                          50,000         06/30/97       06/29/2007       $5.125
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>