EXECUTIVE VERSION

CONFIDENTIAL TREATMENT REQUESTED.  CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVEBEEN SEPERATELY FILED WITH THE COMMISSION.

 

 

**AGREEMENT AND PLAN OF MERGERAND REORGANIZATION**

datedas of July 24, 2001

among

**DELTAGEN, INC.,**

**WINTER GAMES ACQUISITIONCORPORATION**

and

**ARCARIS, INC.TABLE OF CONTENTSARTICLE  ITHE  MERGER   Section  1.1Effective  Time of the Merger    Section  1.2Closing    Section  1.3Effects  of the Merger    Section  1.4Directors  and Officers   ARTICLE  IICONVERSION  OF SECURITIES   Section  2.1Conversion  of Capital Stock    Section  2.2Escrow  Agreement    Section  2.3Dissenting  Shares    Section  2.4Exchange  of Certificates    Section  2.5Distributions  with Respect to Unexchanged Shares    Section  2.6No  Fractional Shares    Section  2.7Tax  and Accounting Consequences    Section 2.8No Further Ownership  Rights in Target Capital Stock    Section  2.9Taking  of Necessary Action; Further Action   ARTICLE IIIREPRESENTATIONS AND  WARRANTIES OF TARGET   Section 3.1Organization of Target    Section 3.2Target Capital  Structure    Section  3.3Authority;  No Conflict; Required Filings and Consents    Section  3.4Financial  Statements; Absence of Undisclosed Liabilities    Section  3.5Tax  Matters    Section  3.6Absence  of Certain Changes or Events    Section  3.7Title  and Related Matters    Section  3.8Proprietary  Rights    Section  3.9Employee  Benefit Plans    Section  3.10Bank  Accounts    Section  3.11Contracts    Section  3.12[Reserved]    Section  3.13Compliance  With Law    Section  3.14Labor  Difficulties; No Discrimination    Section  3.15[Reserved]    Section  3.16Insider  Transactions    Section  3.17Employees,  Independent Contractors and Consultants   
 
 Section  3.18Insurance    Section  3.19Litigation    Section  3.20Governmental  Authorizations and Regulations    Section 3.21Subsidiaries    Section  3.22Compliance  with Environmental Requirements    Section 3.23Corporate Documents    Section  3.24No  Brokers    Section  3.25[Reserved]    Section 3.26Target Action    Section  3.27Offers    Section 3.28Information  Statement    Section  3.29[Reserved]    Section  3.30Complete  Copies of Materials    Section 3.31Export Control  Laws.    Section  3.32[Reserved]    Section  3.33Disclosure   ARTICLE  IVREPRESENTATIONS  AND WARRANTIES OF ACQUIROR AND SUB   Section  4.1Organization  of Acquiror and Sub    Section  4.2Acquiror  and Merger Sub Capital Structure    Section  4.3Authority;  No Conflict; Required Filings and Consents    Section  4.4Commission  Filings; Financial Statements    Section  4.5Absence  of Certain Changes or Events    Section 4.6Compliance with  Laws    Section 4.7Interim  Operations of Sub    Section  4.8Disclosure    Section 4.9Stockholders  Consent    Section  4.10Litigation   ARTICLE VPRECLOSING COVENANTS OF  TARGET   Section 5.1Notice to Target  Stockholders    Section 5.2Advice of Changes    Section 5.3Operation of  Business    Section 5.4Access to  Information    Section  5.5Satisfaction  of Conditions Precedent    Section 5.6Other Negotiations
 
   ARTICLE  VIPRECLOSING  AND OTHER COVENANTS OF ACQUIROR AND SUB   Section 6.1Advice of Changes    Section  6.2Reservation  of Acquiror Common Stock    Section  6.3Satisfaction  of Conditions Precedent    Section  6.4Nasdaq  National Market Listing    Section  6.5Stock  Options    Section  6.6Registration  of Shares Issued in the Merger    Section  6.7Procedures  for Sale of Shares Under Registration Statement    Section  6.8Certain  Employee Benefit Matters    Section 6.9Indemnity of Target  Affiliates   ARTICLE VIIOTHER AGREEMENTS   Section 7.1Confidentiality    Section 7.2No Public  Announcement    Section  7.3Regulatory  Filings; Consents; Reasonable Efforts    Section 7.4Further Assurances    Section 7.5Escrow Agreement    Section  7.6FIRPTA    Section  7.7Blue  Sky Laws    Section  7.8Other  Filings   ARTICLE VIIICONDITIONS  TO MERGER   Section  8.1Conditions  to Each Party’s Obligation to Effect the Merger    Section  8.2Additional  Conditions to Obligations of Acquiror and Sub    Section 8.3Additional Conditions to  Obligations of Target   ARTICLE  IXTERMINATION  AND AMENDMENT   Section  9.1Termination    Section 9.2Effect of  Termination    Section 9.3Fees and Expenses   ARTICLE XESCROW  AND INDEMNIFICATION   Section 10.1Indemnification    Section  10.2Escrow  Fund    Section 10.3Damage Threshold    Section 10.4Escrow Periods    Section 10.5Claims Upon  Escrow Fund    Section  10.6Valuation    Section 10.7Objections to  Claims    Section 10.8Resolution of  Conflicts    Section 10.9Stockholders’ Agent    Section  10.10Actions  of the Stockholders’ Agent    Section 10.11Third-Party Claims   ARTICLE  XIMISCELLANEOUS   Section  11.1Survival  of Representations and Covenants    Section  11.2Notices    Section 11.3Interpretation    Section 11.4Counterparts    Section  11.5Entire  Agreement; No Third Party Beneficiaries    Section 11.6Governing Law    Section  11.7Assignment    Section  11.8Amendment    Section 11.9Extension; Waiver    Section 11.10Specific  Performance
 

EXHIBITS

EXHIBIT A - EMPLOYMENT AGREEMENTEXHIBIT B - NONCOMPETITION AGREEMENTEXHIBIT C - ESCROW AGREEMENTEXHIBIT D - SUBJECT MATTER OF OPINION OF COUNSEL TO TARGETEXHIBIT E - SUBJECT MATTER OF OPINION OF COUNSEL TO ACQUIROREXHIBIT F - RESTRICTED STOCK AGREEMENT
**AGREEMENTAND PLAN OF MERGER AND REORGANIZATION**

             THISAGREEMENT AND PLAN OF MERGER AND REORGANIZATION dated as of July 24, 2001 (this“Agreement”), is entered into by and among Deltagen, Inc., a Delaware corporation(“Acquiror”), Winter Games Acquisition Corporation, a Delaware corporation anda wholly-owned subsidiary of Acquiror (“Sub”), and Arcaris, Inc., a Delawarecorporation (“Target”).

RECITALS:

             A.         The Boards of Directors of Acquiror,Sub and Target deem it advisable and in the best interests of each corporationand the respective stockholders that Acquiror and Target combine in order toadvance the long-term business interests of Acquiror and Target;

             B.          The combination of Acquiror and Targetshall be effected by the terms of this Agreement through a transaction in whichSub will merge with and into Target, Target will become a wholly-ownedsubsidiary of Acquiror and the stockholders of Target will become stockholdersof Acquiror (the “Merger”);

             C.          For Federal income tax purposes, it isintended that the Merger shall qualify as a reorganization within the meaningof Section 368(a) of the Internal Revenue Code of 1986, as amended (the“Code”);

             D.         For accounting purposes, it is intendedthat the Merger shall be accounted for as a purchase;

             E.          As a further condition and inducementto Acquiror’s willingness to enter into this Agreement, certain employees ofTarget who are also stockholders of Target, including Alexander Kamb, LauraHandley, and Mark Stump have, concurrently with the execution of this Agreementexecuted and delivered Employment Agreements in the form attached hereto as ExhibitA which agreements shall only become effective at the Effective Time (asdefined in Section 1.1 below), and Alexander Kamb has agreed to execute,simultaneously at the Closing (as defined herein) and deliver to Acquiror aNoncompetition Agreement in the form attached hereto as Exhibit B (the“Noncompetition Agreement”), which agreement shall only become effective at theEffective Time.

             F.          As a further condition and inducementto Acquiror’s willingness to enter into this Agreement, Alexander Kamb hasagreed to execute, simultaneously at the Closing and deliver to Acquiror arestricted stock agreement in the form attached hereto as Exhibit F (the“Restricted Stock Agreement”).

             G.          As a further condition and inducementto Acquiror’s willingness to enter into this Agreement, Target’s majorityshareholder Warburg Pincus Ventures, L.P. (“Warburg”) has concurrently with theexecution of this Agreement executed and delivered to Acquiror a salerestriction Agreement (the “Sale Restriction Agreement”).

             H.         As a further condition and inducementto Acquiror’s willingness to enter into this Agreement Warburg and any of itsAffiliates that are holders of Target Common Stock or Target Preferred Stock,and Alexander Kamb have has concurrently with the execution of this Agreementexecuted and delivered to Acquiror support agreements (the “SupportAgreements”).

             NOW,THEREFORE, in consideration of the foregoing and the respectiverepresentations, warranties, covenants and agreements set forth below, theparties agree as follows:

 

ARTICLE ITHE MERGER

             Section 1.1       Effective Time of the Merger.  Subject to the provisions of this Agreement,a certificate of merger (the “Certificate of Merger”) in such mutuallyacceptable form as is required by the relevant provisions of the DelawareCorporations Code (“Delaware Law”) shall be duly executed by the SurvivingCorporation (as defined in Section 1.3) and thereafter delivered to theSecretary of State of the State of Delaware for filing on the Closing Date (asdefined in Section 1.2). The Merger shall become effective upon the filing ofthe Certificate of Merger with the Secretary of State of the State of Delaware(the “Effective Time”).

             Section1.2       Closing.  The closing of the Merger (the “Closing”)will take place at 10:00 a.m., California time, on such date as is agreed byAcquiror and Target, which shall be no later than the second business day aftersatisfaction or waiver of the latest to occur of the conditions set forth inArticle VIII (the “Closing Date”), at the offices of Orrick, Herrington &Sutcliffe LLP, 400 Sansome Street, San Francisco, California unless anotherdate, time or place is agreed to in writing by Acquiror and Target.

             Section 1.3       Effectsof the Merger.

             (a)         At the Effective Time (i) the separateexistence of Sub shall cease and Sub shall be merged with and into Target (Suband Target are sometimes referred to herein as the “Constituent Corporations”and Target following consummation of the Merger is sometimes referred to hereinas the “Surviving Corporation”), (ii) subject to Section 6.9 of this Agreement,the Certificate of Merger shall provide that the Restated Certificate of Incorporationof the Target as amended and restated as set forth in such Certificate ofMerger shall become  the Certificate ofIncorporation of the Surviving Corporation, until the same shall thereafter bealtered, amended or repealed in accordance with applicable law or suchCertificate of Incorporation and (iii) subject to Section 6.9 of thisAgreement, the Bylaws of Sub as in effect immediately prior to the EffectiveTime shall be the Bylaws of the Surviving Corporation.

             (b)        At the Effective Time, the effect of theMerger shall be as provided this Agreement and in the applicable provisions ofDelaware Law.  Without limiting thegenerality of the foregoing, at and after the Effective Time, the SurvivingCorporation shall possess all the rights, privileges, powers and franchises ofa public as well as of a private nature, and be subject to all therestrictions, disabilities and duties of each of the Constituent Corporations.

             Section 1.4       Directors and Officers.  The directors of Sub immediately prior to the Effective Timeshall be the initial directors of the Surviving Corporation, each to holdoffice in accordance with the Certificate of Incorporation and Bylaws of theSurviving Corporation, and the officers of Sub immediately prior to theEffective Time shall be the initial officers of the Surviving Corporation, ineach case until their respective successors are duly elected or appointed.

ARTICLE IICONVERSION OF SECURITIES

             Section 2.1       Conversion of Capital Stock.  At the Effective Time, by virtue of the Mergerand without any action on the part of the holder of any shares of Common Stock,$0.001 par value of Target (“Target Common Stock”), or, Series A PreferredStock, $0.001 par value (the “Target Series A Stock”), Series B PreferredStock, $0.001 par value (the “Target Series B Stock”), Series C PreferredStock, $0.001 par value (the “Target Series C Stock”), Series D PreferredStock, $0.001 par value (the “Target Series D Stock”), Series E PreferredStock, $0.001 par value (the “Target Series E Stock”), or Series F PreferredStock, $0.001 par value (the “Target Series F Stock”), of Target (collectively,the “Target Preferred Stock”) or capital stock of Sub:

             (a)         Capital Stock of Sub.  Each issued and outstanding share of thecapital stock of Sub shall be converted into and become one fully paid andnonassessable share of Common Stock, $0.001 par value, of the SurvivingCorporation.

             (b)        Cancellation of Acquiror-Owned andTarget-Owned Stock.  Any shares ofTarget Common Stock or Target Preferred Stock that are owned by Acquiror, Sub,Target or any other direct or indirect wholly-owned Subsidiary (as definedbelow) of Acquiror or Target shall be canceled and retired and shall cease toexist and no stock of Acquiror or other consideration shall be delivered in exchange.  As used in this Agreement, the word“Subsidiary” means, with respect to any other party, any corporation or otherorganization, whether incorporated or unincorporated, of which (i) such partyor any other Subsidiary of such party is a general partner (excludingpartnerships, the general partnership interests of which held by such party orany Subsidiary of such party do not have a majority of the voting interest insuch partnership) or (ii) at least a majority of the securities or otherinterests having by their terms ordinary voting power to elect a majority ofthe Board of Directors or others performing similar functions with respect tosuch corporation or other organization or a majority of the profit interests insuch other organization is directly or indirectly owned or controlled by suchparty or by any one or more of its subsidiaries, or by such party and one ormore of its subsidiaries.
             (c)         Conversion of Outstanding TargetCapital Stock

Sharesissued at Closing:
 (i)             Subject to Sections 2.1(b), 2.2,  2.3 and 2.4, and in addition to any shares of Acquiror Common Stock to be  received pursuant to Section 2.1(e), at the Effective Time:    (1)each  issued and outstanding share of Target Series F Stock shall be converted into  the right to receive a fraction of a fully paid and nonassessable share of  Acquiror Common Stock (as defined in Section 4.2) equal to (A) $6.20, divided  by (B) the Average Acquiror Closing Price (as defined in subsection (ii)  below) (the total number of shares of Acquiror Common Stock to be issued  pursuant to this Section 2.1(c)(i)(1) shall be referred to herein as the  “Series F Liquidation Preference Shares”); it being understood that 10% of  the Series F Liquidation Preference Shares to be issued hereunder shall be  placed in escrow in accordance with Section 2.2(a);    (2)each  issued and outstanding share of Target Series A Stock, Target Series B Stock,  Target Series C Stock, Target Series D Stock and Target Series E Stock, shall  be converted into the right to receive that number of shares of Acquiror  Common Stock equal to (A) the Exchange Ratio, multiplied by (B) that number  of shares of Target Common Stock into which such share of Target Series A  Stock, Target Series B Stock, Target Series C Stock, Target Series D Stock or  Target Series E Stock, as the case may be, is then convertible; it being  understood that 10% of the shares of Acquiror Common Stock to be issued  hereunder shall be placed in escrow in accordance with Section 2.2(a); and    (3)each  issued and outstanding share of Target Common Stock, shall be converted into  the right to receive that number of shares of Acquiror Common Stock equal to  the Exchange Ratio (as defined in Section 2.1(c)(ii)), it being understood  that 10% of the shares of Acquiror Common Stock to be issued hereunder shall  be placed in escrow in accordance with Section 2.2(a).    (ii)             The “Exchange Ratio” shall be  equal to that fraction of a share of Acquiror Common Stock calculated by  dividing (1) the Total Merger Shares, less the aggregate number of Series F  Liquidation Preference Shares, by (2) the Adjusted Diluted Target  Capitalization.  The “Total Merger  Shares” shall be equal to the quotient obtained by dividing (1) the Adjusted  Merger Consideration, by (2) the Average Acquiror Closing Price.  The “Adjusted Merger Consideration” shall  be equal to (1) $8,200,000, plus (2) the aggregate amount of cash and cash  equivalents held by Target as of the Effective Time minus (3) the sum of (A)  the aggregate exercise price received by Target as the result of the exercise  of Target Options and Target Warrants between May 31, 2001 and the Closing  Date, plus (B) except as such are specifically set forth on Schedule 2.1(c),  the total amount of all fees, costs and expenses incurred by Target in connection  with the Merger, including, without limitation all fees, costs and expenses  of services provided to Target plus (C) the principal amount of that certain  secured loan made by Acquiror to Target on May 31, 2001, plus any accrued  interest thereon, plus (D) the total amount of the items listed on Schedule  2.1(c).  The “Average Acquiror Closing  Price” shall be equal to $8.585.  The  “Adjusted Diluted Target Capitalization” shall be equal to the (1) aggregate  number of shares of Target Common Stock outstanding as of immediately prior  to the Effective Time (assuming for such calculation the conversion of all  shares of Target Preferred Stock and the exercise of all outstanding Target  Options and Target Warrants), less (2) the total number of shares of Target Series  F Stock outstanding as of immediately prior to the Effective Time.
 
 (iii)             All shares of Target Common Stock  and Target Preferred Stock converted pursuant to this Section 2.1(c) into the  right to receive Acquiror Common Stock shall, when so converted, no longer be  outstanding and shall automatically be canceled and retired and shall cease  to exist, and each holder of a certificate representing any such shares shall  cease to have any rights with respect thereto, except the right to receive  the shares of Acquiror Common Stock and any cash in lieu of fractional shares  of Acquiror Common Stock to be issued or paid in consideration therefor upon  the surrender of such certificate in accordance with Section 2.4, without  interest.
             (d)        In addition to any Merger Shares to bereceived by the stockholders of the Company pursuant to Section 2.1(c), if anyEarn-Out Shares are required to be paid by the Acquiror pursuant to Section2.1(e), then
 (i)             each former holder of Target  Series A Stock, Target Series B Stock, Target Series C Stock, Target Series D  Stock and Target Series E Stock, shall be entitled to receive for each share  of any such series held by such holder as of immediately prior to the  Effective Time that fraction of an Earn Out Share equal to (A) the Earn Out  Exchange Ratio applicable to the Earn Out Shares then being paid, as  calculated pursuant to Section 2.1(d)(iii), multiplied by (B) that number of  shares of Target Common Stock into which such share of Target Series A Stock,  Target Series B Stock, Target Series C Stock, Target Series D Stock or Target  Series E Stock, as the case may be, was convertible as of the Effective Time;  it being understood that 10% of any Earn Out Shares to be issued hereunder  shall be placed in escrow in accordance with Section 2.2(a); and    (ii)             each former holder of Target  Common Stock, shall be entitled to receive for each share of Target Common  Stock held by such holder as of immediately prior to the Effective Time that  fraction of an Earn Out Share equal to the Earn Out Exchange Ratio applicable  to the Earn Out Shares then being paid, as calculated pursuant to Section  2.1(d)(iii); it being understood that 10% of any Earn Out Shares to be issued  hereunder shall be placed in escrow in accordance with Section 2.2(a).    (iii)             The “Earn Out Exchange Ratio”  shall, from time to time, be equal to that fraction of a share of Acquiror  Common Stock calculated by dividing (1) the total amount of any Earn Out  Shares then required to be paid, divided by (2) the Adjusted Diluted Target  Capitalization.
             (e)         Earn Out Shares.  Subject to Section 2.2, upon satisfaction ofone or more of the conditions set forth in clauses (i) through (v) of thisSection 2.1(e), Acquiror shall be required to issue to the former securityholders of Target up to an aggregate of 547,467 shares of Acquiror Common Stock(such aggregate number of shares being referred to herein as the “Earn OutShares”).

Upon* by the Surviving Corporation and certain*  (each a *) of each *to the* set forth in clauses (i) through (v)below to *derived from the Surviving Corporation’s (or its affiliates) research(i.e., a **the Surviving Corporation and its affiliates the *) (each a *) setforth below, that number of Earn Out Shares relating to such *shall be distributed to the former holders of Targetsecurities in accordance with Section 2.1(d); provided, however, that thenumber of Earn Out Shares payable under any specific* described in clauses (i)through (v) below shall be reduced by the number of shares of Acquiror CommonStock equal to (W) the net present value (employing an annual discount rate of8%) of any *(other than the first *of any annual* assessed for periodsbeginning at least one year after the* of such *) required under such *, divided by the Average AcquirorClosing Price, (X) the fair market value of any intellectual property of aparty other than Target that is *to the* in exchange for such *divided by theAverage Acquiror Closing Price, (Y) other than with respect to the *to* of* ofTarget’s *) the fair market value of any *that is *to the *in exchange forsuch* divided by the Average Acquiror Closing Price and (Z) to the extentany *is not free of *and *on *to *, the amount determined by Acquiror in itssole and absolute discretion in good faith (after consultation with *) equal to(A) the cost of such *on a *and* basis less (B) the cost of such *,divided by the Average Acquiror Closing Price. Acquiror and Surviving Corporation shall not engage in bad faith duringthe *and shall not in bad faith delay the* of any* solely in order to cause the reduction or elimination of anyamounts to be paid under this Section 2.1(e).

*Confidential portions of this documenthave been redacted and have been filed separately with the Commission.

 

Subject to the provisions set forthabove, with respect to all *, the scope, terms and conditions of such *shall beacceptable to Acquiror in its sole and absolute discretion.
 (i)             Subject to the reductions set  forth above and herein, upon*  of a *,  and/or purchase of a product that * a *, such *or product relating to a *with  *(the *) prior to or on the date that is *months after the Effective  Time,*  Earn Out Shares will be paid  out in accordance with Section 2.1(d) and Section 6.5.  If the *is executed after the date that  is* months after the Effective Time but prior to or on the date that is  *months after the Effective Time, then *Earn Out Shares will be paid out in  accordance with Section 2.1(d) and Section 6.5.  If the* is not executed prior to or on the date that is *months  after the Effective Time, no Earn Out Shares will be required to be paid  under this clause (i).   Notwithstanding the foregoing, if the* set forth in (ii) below is  obtained prior to the *, no Earn Out Shares will be required to be paid under  this clause (i).    (ii)             Subject to the reductions set  forth above and herein, upon* (the *) prior to or on the date that is *months  after the Effective Time, *Earn Out Shares will be paid out in accordance  with Section 2.1(d) and Section 6.5.   If the *is executed after the date that is* months after the Effective  Time but prior or on to the date that is *months after the Effective Time,  then *Earn Out Shares will be paid out in accordance with Section 2.1(d) and  Section 6.5.  If the* is not executed  prior to or on the date that is* months after the Effective Time, then no  Earn Out Shares will be required to be paid under this clause (ii).  Notwithstanding the foregoing (X) if  the*  is obtained before the*  set forth in (i) above, then all  references to *Earn Out Shares in this subsection (ii) shall be increased to*  Earn Out Shares and all references to *Earn Out Shares in this subsection  (ii) shall be increased to* Earn Out Shares, (Y) if the*  is obtained after the*  set forth in (iv) below and after  the*  set forth in (i) above, then,  then all amounts referred to in this subsection shall be further reduced by  *Earn Out Shares during the period prior to the date that is *months after  the Effective Time and* Earn Out Shares thereafter and (Z) if the*  is obtained after the*  set forth in (v) below and after the*  set forth in (i) above, then all amounts  referred to in this subsection shall be further reduced by *Earn Out Shares  during the period prior to the date that is *months after the Effective Time  and *Earn Out Shares thereafter.
For clarification, the total number ofEarn Out Shares to be paid by the Acquiror under this Section 2.1(d) forobtaining *of the*  and the*  under (i) and (ii) above will in no eventexceed *Earn Out Shares, and 10% of any amounts to be paid to former Targetstockholders hereunder shall be deposited into the Escrow Fund as EscrowShares.
 (iii)             Subject to the reductions set  forth above and herein, upon*  of  a*  relating to *with*  or its * or *  (the *) or relating to *with *or its authorized assignee  or*  (the *) prior to or on the date  that is* months after the Effective Time, then (A) *Earn Out Shares will be  paid out in accordance with Section 2.1(d) and Section 6.5 if*  the*   or the*  has been executed  prior to the date that is *months after the Effective Time or (B) *Earn Out  Shares of the Earn-Out will be paid out in accordance with Section 2.1(d) and  Section 6.5 if*  the*  or the*   is executed during the period that begins on the date that is *months  after the Effective Time and ends on the date that is *months after the  Effective Time.  If*  the*   or the*  is executed after the  date that is* months after the Effective Time but prior to or on the date  that is *months after the Effective Time, then* Earn Out Shares will be paid  out in accordance with Section 2.1(d) and Section 6.5.  If *the*   the*  is executed prior to or  on the date that is* months after the Effective Time, then no Earn Out Shares  will be required to be paid under this clause (iii).  Notwithstanding the foregoing (X) no  portion of the Earn-Out Shares will be required to be paid under this clause  (iii) until such time as *the*  or  the*  has been executed.
 

*Confidential portions of this documenthave been redacted and have been filed separately with the Commission.

 

 
 (iv)             Subject to the reductions set  forth above and herein, upon*  of  a*  with *(the *) prior to or on the  date that is* months after the Effective Time, then (A) *Earn Out Shares will  be paid out in accordance with Section 2.1(d) and Section 6.5 if*  the*   or the*  has been executed  prior to the date that is *months after the Effective Time or (B) *Earn Out  Shares of the Earn-Out will be paid out in accordance with Section 2.1(d) and  Section 6.5 if*  the*  or the*   is executed  during the period  that begins on the date that is *months after the Effective Time and ends on  the date that is *months after the Effective Time.  If the*  is executed  after the date that is* months after the Effective Time but prior to or on  the date that is *months after the Effective Time, then* Earn Out Shares will  be paid out in accordance with Section 2.1(d) and Section 6.5.  Notwithstanding the foregoing, if  the*  and the*  are obtained prior to the *, then all  references to *Earn Out Shares in this subsection (iv) shall be increased to*  Earn Out Shares and all references to *Earn Out Shares in this subsection  (iv) shall be increased to* Earn Out Shares; and further notwithstanding the  foregoing (X) no portion of the Earn-Out Shares required to be paid under  this clause (iv) shall be paid until such time as *the*  or the*   has been executed.    (v)             Subject to the reductions set  forth above and herein, upon*  of  a*  relating to the *with *(the *)  prior to or on the date that is* months after the Effective Time, then (A)  *Earn Out Shares will be paid out in accordance with Section 2.1(d) and  Section 6.5 if*  the*  or the*   has been executed prior to the date that is* months after the  Effective Time or (B) *Earn Out Shares of the Earn-Out will be paid out in  accordance with Section 2.1(d) and Section 6.5 if*  the*  or the*  is executed  during the period that begins on the date that is *months after  the Effective Time and ends on the date that is *months after the Effective  Time.  If such*  is executed after the date that is* months  after the Effective Time but prior to the date that is *months after the  Effective Time, then* Earn Out Shares will be paid out in accordance with  Section 2.1(d) and Section 6.5.    Notwithstanding the foregoing, if the*  and the*  are obtained  prior to the *, then all references to *Earn Out Shares in this subsection  (v) shall be increased to* Earn Out Shares and all references to *Earn Out  Shares in this subsection (v) shall be increased to* Earn Out Shares; and  further notwithstanding the foregoing (X) no portion of the Earn-Out Shares  to be paid under this subsection (v) shall be paid until such time as  *the*  or the*  has been executed.
For clarification, the total number ofEarn Out Shares to be paid under clauses (i) through (v) above shall for * allof the*  under clauses (i) through (v)above will in no event exceed 547,467 Earn Out Shares, and 10% of any the totalnumber of Earn Out Shares actually paid under clauses (i) through (v) aboveshall be deposited into the Escrow Fund as Escrow Shares.

             (f)         Target Stock Options.  At the Effective Time, all then outstandingoptions, whether vested or unvested to purchase Target Common Stock underTarget’s 1997 Equity Incentive Plan (the “Target Stock Plan”) or otherwiseissued prior to adoption of the Target Stock Plan (the “Target Options”) thatby their terms survive the Closing will be assumed by Acquiror in accordancewith Section 6.5.

             (g)        Restricted Shares.  Shares of Target Common Stock or TargetPreferred Stock which are subject to repurchase by Target in the event theholder thereof ceases to be employed by Target (“Target Restricted Shares”)shall be converted into Acquiror Common Stock on the same basis as provided inSection 2.1(c) above and shall be registered in such holder’s name, but shallbe held by Target or Acquiror pursuant to the existing agreements in effect onthe date of this Agreement.  Holders ofthe Target Restricted Shares are identified on Schedule 2.1(g) together withthe vesting schedules associated with such shares.

*Confidential portions of this documenthave been redacted and have been filed separately with the Commission.

 

 

             Section2.2       Escrow Agreement.  At the Effective Time, or such later time asis determined in accordance with Section 2.3(b), Acquiror shall (i) deliver toeach holder of capital stock of Target a certificate representing that numberof Merger Shares equal to 90% of the total number of Merger Shares to whichsuch holder is entitled to receive pursuant to Section 2.1(c), and (ii) deliverto the Escrow Agent, to be held in escrow, a certificate representing thatnumber of Merger Shares equal to 10% of the total number of Merger Shares towhich such holder is entitled to receive pursuant to Section 2.1(c).  In addition, at any time that Acquiror isrequired to pay to the former holders of Target capital stock any Earn OutShares pursuant to Section 2.1(d), upon such date of payment, Acquiror shall(i) deliver to each such stockholder a certificate representing that number ofEarn Out Shares to be paid at such time equal to 90% of the total number ofEarn Out Shares then required to be paid, and (ii) deliver to the Escrow Agent,to be held in escrow, that number of Earn Out Shares to be paid at such timeequal to 10% of the total number of Earn Out Shares then required to bepaid.  The aggregate number of MergerShares to be placed in escrow and any Earn Out Shares placed in escrow fromtime to time pursuant to this Section 2.2 shall be collectively referred toherein as the “Escrow Shares”.   TheEscrow Shares shall be held as security for the indemnification rights ofAcquiror under Article X and pursuant to the provisions of an escrow agreement(the “Escrow Agreement”) executed pursuant to Section 7.6.

             Section2.3       Dissenting Shares.

             (a)         Notwithstanding any provision of thisAgreement to the contrary, any shares of Target Common Stock or TargetPreferred Stock held by a holder who has exercised, or who still has the rightto exercise, such holder’s dissenter’s rights in accordance with Section 262 ofDelaware Law (“Dissenting Shares”), shall not be converted into or represent aright to receive Acquiror Common Stock pursuant to Section 2.1, but the holderof the Dissenting Shares shall only be entitled to such rights as are grantedby Section 262 of Delaware Law.

             (b)        Notwithstanding the provisions ofSection 2.3(a), if any holder of shares of Target Common Stock or TargetPreferred Stock who does not vote in favor of the Merger Agreement or whodemands his dissenter’s rights with respect to such shares under Section 2.1shall effectively withdraw or lose (through failure to perfect or otherwise)his rights to receive payment for the fair market value of such shares underDelaware Law, then, as of the later of the Effective Time or the occurrence ofsuch event, such holder’s shares shall automatically be converted into andrepresent only the right to receive Acquiror Common Stock and payment forfractional shares as provided in Section 2.1(c) and 2.6, without interest, uponsurrender of the certificate or certificates representing such shares; *provided* that if such holder effectivelywithdraws or loses his right to receive payment for the fair market value ofsuch shares after the Effective Time, then, at such time Acquiror will depositin escrow certificates representing 10% of the shares of Acquiror Common Stockwhich such holder would otherwise be entitled to receive.

             (c)         Target shall give Acquiror (i) promptnotice of any written demands for payment with respect to any shares of capitalstock of Target pursuant to Section 262 of Delaware Law, withdrawals of suchdemands, and any other instruments served pursuant to Delaware Law and receivedby the Target and (ii) the opportunity to participate in all negotiations andproceedings with respect to demands for dissenter’s rights under DelawareLaw.  Target shall not, except with theprior written consent of Acquiror, voluntarily make any payment with respect toany demands for dissenter’s rights with respect to Target Common Stock orTarget Preferred Stock or offer to settle or settle any such demands.

             Section 2.4       Exchange of Certificates.

             (a)         From and after the Effective Time, eachholder of an outstanding certificate or certificates (“Certificates”) whichrepresented shares of Target Common Stock or Target Preferred Stock immediatelyprior to the Effective Time shall have the right to surrender each Certificateto Acquiror (or at Acquiror’s option, an exchange agent to be appointed byAcquiror), and receive in exchange for all Certificates held by such holder acertificate representing the number of whole shares of Acquiror Common Stock(other than the Escrow Shares attributable to such holder) into which theTarget Common Stock or Target Preferred Stock evidenced by the Certificates sosurrendered shall have been converted pursuant to the provisions of Article IIof this Agreement.  The surrender ofCertificates shall be accompanied by duly completed and executed Letters ofTransmittal, which (along with appropriate instructions) shall be sent by Acquiror’sTransfer Agent to the former Target stockholders promptly but in any event withfive business days thereafter following the Closing Date. Until surrendered,each outstanding Certificate which prior to the Effective Time representedshares of Target Common Stock or Target Preferred Stock shall be deemed for allcorporate purposes to evidence ownership of the number of whole shares ofAcquiror Common Stock into which the shares of Target Common Stock or TargetPreferred Stock have been converted but shall, subject to applicabledissenter’s rights under applicable law and Section 2.3, have no other rights.Subject to dissenter’s rights under applicable law and Section 2.3, from andafter the Effective Time, the holders of shares of Target Common Stock orTarget Preferred Stock shall cease to have any rights in respect of such sharesand their rights shall be solely in respect of the Acquiror Common Stock intowhich such shares of Target Common Stock or Target Preferred Stock have beenconverted. From and after the Effective Time, there shall be no furtherregistration of transfers on the records of Target of shares of Target CommonStock or Target Preferred Stock outstanding immediately prior to the EffectiveTime.
             (b)        If any shares of Acquiror Common Stockare to be issued in the name of a person other than the person in whose namethe Certificate(s) surrendered in exchange therefor is registered, it shall bea condition to the issuance of such shares that (i) the Certificate(s) sosurrendered shall be transferable, and shall be properly assigned, endorsed oraccompanied by appropriate stock powers, (ii) such transfer shall otherwise beproper and (iii) the person requesting such transfer shall pay Acquiror, or itsexchange agent, any transfer or other taxes payable by reason of the foregoingor establish to the satisfaction of Acquiror that such taxes have been paid orare not required to be paid. Notwithstanding the foregoing, neither Acquiror nor Target shall beliable to a holder of shares of Target Common Stock or Target Preferred Stockfor shares of Acquiror Common Stock issuable to such holder pursuant to theprovisions of Article II of the Agreement that are delivered to a publicofficial pursuant to applicable abandoned property, escheat or similar laws.

             (c)         In the event any Certificate shall havebeen lost, stolen or destroyed, upon the making of an affidavit of that fact bythe person claiming such Certificate to be lost, stolen or destroyed, Acquirorshall issue in exchange for such lost, stolen or destroyed Certificate theshares of Acquiror Common Stock issuable in exchange therefor pursuant to theprovisions of Article II of the Agreement. The Board of Directors of Acquiror may in its discretion and as acondition precedent to the issuance thereof, require the owner of such lost,stolen or destroyed Certificate to provide to Acquiror an indemnity agreementagainst any claim that may be made against Acquiror with respect to theCertificate alleged to have been lost, stolen or destroyed.

             (d)        The certificate or certificatesrepresenting the shares of Acquiror Common Stock to be issued or paid underthis Agreement shall bear the following legends (as well as any legendsrequired by applicable state and federal corporate and securities laws):

THE SHARES REPRESENTED BY THISCERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVEBEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THESALE OR DISTRIBUTION THEREOF.  NO SUCHSALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATIONSTATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TOTHE ACQUIROR THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF1933.

             Section 2.5       Distributions with Respect toUnexchanged Shares.  Nodividends or other distributions declared or made after the Effective Time withrespect to Acquiror Common Stock with a record date after the Effective Timeshall be paid to the holder of any unsurrendered Certificate with respect tothe shares of Acquiror Common Stock represented thereby and no cash payment inlieu of fractional shares shall be paid to any such holder pursuant to Section2.6 below until the holder of record of such Certificate shall surrender suchCertificate.  Subject to the effect ofapplicable laws, following surrender of any such Certificate, there shall bepaid to the record holder of the certificates representing whole shares ofAcquiror Common Stock issued in exchange therefor, without interest, (i) at thetime of such surrender, the amount of any cash payable in lieu of a fractionalshare of Acquiror Common Stock to which such holder is entitled pursuant toSection 2.6 below and the amount of dividends or other distributions with arecord date after the Effective Time previously paid with respect to such wholeshares of Acquiror Common Stock, and (ii) at the appropriate payment date, theamount of dividends or other distributions with a record date after theEffective Time but prior to surrender and a payment date subsequent tosurrender payable with respect to such whole shares of Acquiror Common Stock.
             Section 2.6       NoFractional Shares.  Nocertificate or scrip representing fractional shares of Acquiror Common Stockshall be issued upon the surrender for exchange of Certificates, and suchfractional share interests will not entitle the owner thereof to vote or to anyrights of a shareholder of Acquiror. Notwithstanding any other provision ofthis Agreement, each holder of shares of Target Common Stock or Target PreferredStock exchanged pursuant to the Merger who would otherwise have been entitledto receive a fraction of a share of Acquiror Common Stock (after taking intoaccount all Certificates delivered by such holder) shall receive, in lieuthereof, cash (without interest) in an amount equal to such fractional part ofa share of Acquiror Common Stock multiplied by the Average Acquiror ClosingPrice.

             Section 2.7       Tax and Accounting Consequences.

             (a)         It is intended by the parties heretothat the Merger shall constitute a “reorganization” within the meaning ofSection 368 of the Code. The parties hereto adopt this Agreement as a “plan ofreorganization” within the meaning of Sections 1.368-2(g) and 1.368-3(a) of theUnited States Income Tax Regulations.

             (b)        It is intended by the parties heretothat the Merger shall qualify for accounting treatment as a purchase.

             Section 2.8       No Further Ownership Rights in TargetCapital Stock.  All shares ofAcquiror Common Stock issued upon the surrender for exchange of shares of TargetCommon Stock and Target Preferred Stock in accordance with the terms hereof(including any cash paid in lieu of fractional shares) shall be deemed to havebeen issued in full satisfaction of all rights pertaining to such shares ofTarget Common Stock, and there shall be no further registration of transfers onthe records of the Surviving Corporation of shares of Target Common Stock andTarget Preferred Stock which were outstanding immediately prior to theEffective Time.  If, after the EffectiveTime, Certificates are presented to the Surviving Corporation for any reason,they shall be canceled and exchanged as provided in this Article II.

             Section 2.9       Taking of Necessary Action; FurtherAction.  If, at any time afterthe Effective Time, any further action is necessary or desirable to carry outthe purposes of this Agreement and to vest the Surviving Corporation with fullright, title and possession to all assets, property, rights, privileges, powersand franchises of Target, the officers and directors of Target are fullyauthorized in the name of their respective corporations or otherwise to take,and will take, all such lawful and necessary action, so long as such action isnot inconsistent with this Agreement.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF TARGET

             Targetrepresents and warrants to Acquiror and Sub that the statements contained inthis Article III are true and correct, except as set forth in the disclosureschedule delivered by Target to Acquiror on or before the date of thisAgreement (the “Target Disclosure Schedule”). The Target Disclosure Schedule shall be arranged in paragraphscorresponding to the numbered and lettered paragraphs contained in this ArticleIII.

             Section 3.1       Organization of Target.  Target is a corporation duly organized,validly existing and in good standing under the laws of the State of Delaware,has all requisite corporate power to own, lease and operate its property and tocarry on its business as now being conducted, and is duly qualified or licensedto do business and is in good standing as a foreign corporation in eachjurisdiction in which the nature of its business or ownership or leasing ofproperties makes such qualification or licensing necessary and where thefailure to be so qualified or licensed would be reasonably likely to result ina Target Material Adverse Effect (as defined below).  The Target Disclosure Schedule contains a true and completelisting of the locations of all sales offices, manufacturing facilities, andany other offices or facilities of Target and a true and complete list of allstates in which Target maintains any employees. The Target Disclosure Schedulecontains a true and complete list of all states in which Target is dulyqualified or licensed to transact business as a foreign corporation.

             “TargetMaterial Adverse Effect” means any change or effect that is materially adverseto the condition (financial or otherwise), assets, liabilities, business orresults of operations of the Target taken as a whole; provided, however, thatnone of the Excluded MAE Factors shall be deemed (either alone or incombination) to constitute, and none of the Excluded MAE Factors shall be takeninto account in determining whether there has been or will be, a TargetMaterial Adverse Effect.
             “ExcludedMAE factors” means, with respect to the Target or Acquiror: (a) any change inthe market price or trading volume of the Target’s or Acquiror’s stock, asapplicable; (b) any failure by the Target or Acquiror, as applicable, to meetinternal projections or forecasts or published revenue or earnings predictions;or (c) any adverse change or effect (including any litigation, loss ofemployees, cancellation of or delay in customer orders, reduction in revenuesor income or disruption of business relationships) arising from or attributableor relating to: (i) the announcement or pendency of the Merger, (ii) conditionsaffecting the industry or industry sector in which the Target or the Acquiror,as applicable, or any of their respective Subsidiaries participates, the U.S.economy as a whole or any foreign economy in any location where the Target orAcquiror, as applicable, or any of its respective Subsidiaries has materialoperations or sales, (iii) conditions affecting third party suppliers of theTarget  or Acquiror, as applicable, (iv)legal, accounting, investment banking or other fees or expenses incurred inconnection with the transactions contemplated by this Agreement, (v) thepayment of any amounts due to, or the provision of any other benefits to, anyofficers or employees under employment contracts, non-competition agreements,employee benefit plans, severance arrangements or other arrangements inexistence as of the date of this Agreement, (vi) compliance with the terms of,or the taking of any action required by, this Agreement, (vii) the taking ofany action approved or consented to by the Target or Acquiror, as applicable,(viii) any change in accounting requirements or principles or any change inapplicable laws, rules or regulations or the interpretation thereof, or (ix)any action required to be taken under applicable laws, rules, regulations oragreements, other than antitrust or unfair competition laws, rules orregulations.

             Section 3.2       Target Capital Structure.

             (a)         The authorized capital stock of Targetconsists of 50,000,000 shares of Target Common Stock, 24,000,000 shares ofTarget non-voting Common Stock and 10,000,000 shares of Target Preferred Stock,of which 250,000 shares are designated as Series A Preferred Stock, 450,000shares are designated as Series B Preferred Stock, 2,000,000 shares aredesignated as Series C Preferred Stock, 2,200,000 shares are designated asSeries D Preferred Stock, 4,400,000 shares are designated as Series E PreferredStock and 325,000 shares are designated as Series F Preferred Stock.  As of the date of this Agreement, thereare:  (i) 942,032 shares of TargetCommon Stock issued and outstanding, all of which are validly issued, fully paidand nonassessable and 37,266 of which are subject to repurchase rights underthe Target Stock Plan or related agreements as described in the TargetDisclosure Schedule; no shares of Target non-voting Common Stock issued oroutstanding; (ii) 250,000 shares of Series A Preferred Stock issued andoutstanding, 333,331 shares of Series B Preferred Stock issued and outstanding,1,502,236 shares of Series C Preferred Stock issued and outstanding, 1,540,449shares of Series D Preferred Stock issued and outstanding, 855,566 shares ofSeries E Preferred Stock issued and outstanding, and 40,322 shares of Series FPreferred Stock issued and outstanding, all of which are validly issued, fullypaid and nonassessable, and all of which are convertible into Target CommonStock on a one share for one share basis; (iii) 4,408,360 shares of TargetCommon Stock reserved for future issuance upon conversion of the TargetPreferred Stock; (iv) 412,249 shares of Target Common Stock reserved for futureissuance pursuant to Target Options granted and outstanding under the TargetStock Plan; (v) 92,500 shares of Target Common Stock reserved for futureissuance pursuant to Target Options granted and outstanding outside of theTarget Stock Plan and (vi) 265,802 shares of Target Common Stock available andreserved for issuance upon exercise of options or pursuant to awards to begranted in the future under the Target Stock Plan.  The issued and outstanding shares of Target Common Stock andTarget Preferred Stock are held of record by the stockholders of Target as setforth and identified in the stockholder list attached as Schedule 3.2(a) to theTarget Disclosure Schedule.  The issuedand outstanding Target Options are held of record by the option holders as setforth and identified on Schedule 3.2(a). The issued and outstanding warrants to acquire Target Common Stock andTarget Preferred Stock are held of record by the warrantholder as set forth andidentified on Schedule 3.2(a) (the “Target Warrants”).  All shares of Target Common Stock and TargetPreferred Stock subject to issuance as specified above, upon issuance on theterms and conditions specified in the instruments pursuant to which they areissuable, shall be duly authorized, validly issued, fully paid andnonassessable.  All shares of TargetCommon Stock issuable upon the exercise of Target Options, upon issuance on theterms and conditions specified in the instrument pursuant to which they areissuable, will be duly authorized, validly issued, fully paid andnonassessable.  Except as otherwise setforth in Schedule 3.2(a), none of the issued and outstanding shares of TargetCommon Stock are subject to contractual rights to repurchase upon thetermination of the employment or consulting services of the holder thereof withTarget or its affiliates.  Alloutstanding shares of Target Common Stock and Target Preferred Stock andoutstanding Target Options (collectively “Target Securities”) were issued incompliance with applicable federal and state securities laws.  Except for the redemption rights of theTarget Preferred Stock provided for in the Certificate of Incorporation, thereare no obligations, contingent or otherwise, of Target to repurchase, redeem orotherwise acquire any shares of Target Common Stock or Target Preferred Stockor make any investment (in the form of a loan, capital contribution orotherwise) in any other entity.  Anupdated Schedule 3.2(a) reflecting changes, if any, permitted by this Agreementin the capitalization of Target between the date hereof and the Effective Timeshall be delivered by Target to Acquiror on the Closing Date.
             (b)        Except as set forth in this Section 3.2,there are no equity securities of any class or series of Target, or anysecurity exchangeable into or exercisable for such equity securities, issued,reserved for issuance or outstanding. Except as set forth in this Section 3.2, there are no options, warrants,equity securities, calls, rights, commitments or agreements of any character towhich Target is a party or by which it is bound obligating Target to issue,deliver or sell, or cause to be issued, delivered or sold, additional shares ofcapital stock of Target or (except as set forth in the stock restrictionagreements, stock option agreements and the Investor Rights Agreements listedin Schedule 3.2) obligating Target to grant, extend, accelerate the vesting ofor enter into any such option, warrant, equity security, call, right,commitment or agreement.  Target is notin discussion, formal or informal, with any person or entity regarding theissuance of any form of additional Target equity that has not been issued orcommitted to prior to the date of this Agreement.  Except as provided in this Agreement and the other TransactionDocuments (as defined in Section 3.3(a)) or any transaction contemplated herebyor thereby, there are no voting trusts, proxies or other agreements orunderstandings with respect to the voting of the shares of capital stock ofTarget.

             (c)         Other than as set forth on Schedule3.2(a), all Target Options have been issued in accordance with the terms of theTarget Stock Plan and pursuant to the standard forms of option agreementpreviously provided to Acquiror or its representatives.  Except as set forth in Schedule 3.2, neitherthe consummation of transactions contemplated by this Agreement or the otherTransaction Documents nor any action taken by Target in connection with suchtransactions will result in (i) any acceleration of vesting in favor of anyoptionee under any Target Option; (ii) any acceleration of vesting in favor ofany stockholder under the Target Stock Plan whose shares are subject to a rightof repurchase on behalf of the Target; (iii) any additional benefits for anyoptionee under any Target Option; or (iv) the inability of Acquiror or Targetafter the Effective Time to exercise any right or benefit held by Target priorto the Effective Time with respect to any Target Option assumed by Acquiror orany stock awards under the Target Stock Plan, including, without limitation,the right to repurchase an optionee’s or stockholder’s unvested shares ontermination of such optionee’s or stockholder’s employment. The assumption byAcquiror of Target Options in accordance with Section 6.5 hereunder will not(i) give the optionees additional benefits which they did not have under theiroptions prior to such assumption (after taking into account the existingprovisions of the options, such as their respective exercise prices and vestingschedules and after taking into account the terms of this Agreement) and (ii)constitute a breach of the Target Stock Plan or any agreement entered intopursuant to such plan.

             Section 3.3       Authority; No Conflict; RequiredFilings and Consents.

             (a)         Target has all requisite corporatepower and authority to enter into this Agreement and all Transaction Documentsto which it is or will become a party and to consummate the transactionscontemplated by this Agreement and such Transaction Documents.  The execution and delivery by Target of thisAgreement and such Transaction Documents and the consummation by Target of thetransactions contemplated by this Agreement and such Transaction Documents havebeen duly authorized by all necessary corporate action on the part of Target(other than the approval of the Merger by Target’s stockholders) under theprovisions of Delaware Law and Target’s Certificate of Incorporation.  This Agreement has been and such TransactionDocuments have been or, to the extent not executed as of the date hereof, willbe duly executed and delivered by Target. This Agreement and each of theTransaction Documents to which Target is a party constitutes, and each of theTransaction Documents to which Target will become a party when executed anddelivered by Target will constitute, assuming the due authorization, executionand delivery by the other parties hereto and thereto, the valid and bindingobligation of Target, enforceable against Target in accordance with theirrespective terms, except to the extent that enforceability may be limited byapplicable bankruptcy, reorganization, insolvency, moratorium or other lawsaffecting the enforcement of creditors’ rights generally and by generalprinciples of equity, regardless of whether such enforceability is consideredin a proceeding at law or in equity. For purposes of this Agreement,“Transaction Documents” means the Certificate of Merger.
             (b)        The execution and delivery by Target ofthis Agreement and the Transaction Documents to which it is or will become aparty does not and the consummation by Target of the transactions contemplatedby this Agreement and the Transaction Documents to which it is or will become aparty will not, (i) conflict with, or result in any violation or breach of anyprovision of the Certificate of Incorporation or Bylaws of Target, (ii) resultin any violation or breach of, or constitute (with or without notice or lapseof time, or both) a default (or give rise to a right of termination,cancellation or acceleration of any obligation or loss of any benefit) underany of the terms, conditions or provisions of any note, bond, mortgage,indenture, lease, contract or other agreement, instrument or obligation towhich Target is a party or by which it or any of its properties or assets maybe bound, or (iii) conflict or violate any permit, concession, franchise,license, judgment, order, decree, statute, law, ordinance, rule or regulation applicableto Target or any of its properties or assets, except in the case of (ii) and(iii) for any such conflicts, violations, defaults, terminations, cancellationsor accelerations which would not have a Target Material Adverse Effect.

             (c)         No consent, approval, order orauthorization of, or registration, declaration or filing with, any court,administrative agency or commission or other governmental authority orinstrumentality (“Governmental Entity”) is required by or with respect toTarget in connection with the execution and delivery of this Agreement or ofany other Transaction Document to which it is or will become a party or theconsummation of the transactions contemplated by this Agreement or suchTransaction Document, except for (i) the filing of the Certificate of Mergerwith the Delaware Secretary of State, (ii) such consents, approvals, orders,authorizations, registrations, declarations and filings as may be requiredunder applicable federal and state securities laws and (iii) such consents, authorizations,filings, approvals and registrations which, if not obtained or made, would notreasonably be expected to have a Target Material Adverse Effect.

             Section 3.4       Financial Statements; Absence ofUndisclosed Liabilities.

             (a)         Target has delivered to Acquiror copiesof Target’s audited balance sheets as of December 31, 2000 and December 31,1999 and the related statements of operations, stockholders’ equity and cashflow for the years then ended and for the period from May 22, 1996 to December31, 2000 (collectively, the “Target Financial Statements”).

             (b)        The Target Financial Statements presentfairly in all material respects the financial position, results of operationsand cash flows of Target as of their historical dates and for the periods indicated.  The Target Financial Statements have beenprepared in accordance with generally accepted accounting principles applied ona consistent basis throughout the periods indicated and with each other.

             (c)         Target has delivered to Acquiror copiesof Target’s balance sheet as of May 31, 2001 (the “Most Recent Balance Sheet”).

             (d)        Target has no debt, liability, orobligation of any nature, whether accrued, absolute, contingent, or otherwise,and whether due or to become due, that is not reflected or reserved against inthe Most Recent Balance Sheet (including any notes thereto), except for(i) those debts, liabilities and obligations that may have been incurredafter the date of the Most Recent Balance Sheet or that would not reasonably berequired, in accordance with generally accepted accounting principles appliedon a basis consistent with prior periods, to be included in a balance sheet orthe notes thereto (ii) liabilities and obligations incurred undercontracts entered into after the date of Most Recent Balance Sheet.  All debts, liabilities, and obligationsincurred after the date of the Most Recent Balance Sheet were incurred in theordinary course of business (except for liabilities or obligations incurred inconnection with the transaction contemplated by this Agreement), and are usualand normal in amount and do not exceed $10,000 individually or $50,000 inaggregate.

             (e)         Target has no liability to SiliconValley Bank pursuant to any loan or security agreements.

             Section3.5       Tax Matters.

             (a)         For purposes of this Section 3.5 andother provisions of this Agreement relating to Taxes, the following definitionsshall apply:
                           (i)          The term “Taxes” shall mean all taxes,however denominated, including any interest, penalties or other additions totax that may become payable in respect thereof, (A) imposed by any federal,territorial, state, local or foreign government or any agency or politicalsubdivision of any such government, which taxes shall include, without limitingthe generality of the foregoing, all income or profits taxes (including but notlimited to, federal income taxes and state income taxes), payroll and employeewithholding taxes, unemployment insurance, social security taxes, sales and usetaxes, ad valorem taxes, excise taxes, franchise taxes, gross receipts taxes,business license taxes, occupation taxes, real and personal property taxes,stamp taxes, environmental taxes, ozone depleting chemicals taxes, transfertaxes, workers’ compensation, Pension Benefit Guaranty Corporation premiums andother governmental charges, and other obligations of the same or of a similarnature to any of the foregoing, which are required to be paid, withheld orcollected, (B) any liability for the payment of amounts referred to in (A) as aresult of being a member of any affiliated, consolidated, combined or unitarygroup, or (C) any liability for amounts referred to in (A) or (B) as a resultof any obligations to indemnify another person.

                           (ii)         The term “Returns” shall mean allreports, estimates, declarations of estimated tax, information statements andreturns relating to, or required to be filed in connection with, any Taxes,including information returns or reports with respect to backup withholding andother payments to third parties.

             (b)        All Returns required to be filed by oron behalf of Target have been duly filed on a timely basis.  All Taxes shown to be payable on suchReturns or on subsequent assessments with respect thereto, and all payments ofestimated Taxes required to be made by or on behalf of Target under Section6655 of the Code or comparable provisions of state, local or foreign law, havebeen paid in full on a timely basis or have been accrued on the Most RecentBalance Sheet, to Target’s knowledge, and no other Taxes are payable by Targetwith respect to items or periods covered by such Returns (whether or not shownon or reportable on such Returns). Target has withheld and paid over all Taxesrequired to have been withheld and paid over, and complied with all informationreporting and backup withholding requirements, including maintenance ofrequired records with respect thereto, in connection with amounts paid or owingto any employee, creditor, independent contractor, or other third party.  There are no liens on any of the assets ofTarget with respect to Taxes, other than liens for Taxes not yet due andpayable or for Taxes that Target is contesting in good faith throughappropriate proceedings and for which appropriate reserves have beenestablished on the Most Recent Balance Sheet. Target has not at any time been (i) a member of an affiliated group ofcorporations filing consolidated, combined or unitary income or franchise taxreturns, or (ii) a member of any partnership or joint venture for a period forwhich the statue of limitations for any Tax potentially applicable as a resultof such membership has not expired.

             (c)         The amount of Target’s liability forunpaid Taxes (whether actual or contingent) for all periods through the date ofthe Most Recent Balance Sheet does not, in the aggregate, exceed the amount ofthe liability accruals for Taxes reflected on the Most Recent Balance Sheet,and the Most Recent Balance Sheet reflects proper accrual in accordance withgenerally accepted accounting principles applied on a basis consistent withprior periods of all liabilities for Taxes payable after the date of the MostRecent Balance Sheet attributable to transactions and events occurring prior tosuch date.  No liability for Taxes hasbeen incurred (or prior to Closing will be incurred) since such date other thanin the ordinary course of business.

             (d)        Acquiror has been furnished by Targetwith true and complete copies of (i) relevant portions of income tax auditreports, statements of deficiencies, closing or other agreements received by oron behalf of Target relating to Taxes, and (ii) all federal and state income orfranchise tax Returns and state sales and use tax Returns for or includingTarget for all periods since the inception of Target.  Target does not do business in, or derive income from or have ataxable nexus with any state other than states for which Returns have been dulyfiled and furnished to Acquiror.

             (e)         The Returns of or including Target havenever been audited by a government or taxing authority, nor is any such auditin process, pending or, to Target’s knowledge, threatened (either in writing orverbally, formally or informally). No deficiencies exist or have been asserted(either in writing or verbally, formally or informally), and Target has notreceived notice (either in writing or verbally, formally or informally) that ithas not filed a Return or paid Taxes required to be filed or paid. Target isneither a party to any action or proceeding for assessment or collection ofTaxes, nor has such event been asserted or threatened (either in writing orverbally, formally or informally) against Target or any of its assets. Nowaiver or extension of any statute of limitations is in effect with respect toTaxes or Returns of Target. Target has disclosed on its federal and stateincome and franchise tax Returns all positions taken therein that could giverise to a substantial understatement penalty within the meaning of Code Section6662 or comparable provisions of applicable state tax laws.
             (f)         Target is not, nor has it ever been, aparty to any tax sharing agreement.

             (g)        Target is not, nor has it been, a UnitedStates real property holding corporation within the meaning of Section897(c)(2) of the Code during the applicable period specified in Section897(c)(1)(A)(ii) of the Code, and Acquiror is not required to withhold tax byreason of Section 1445 of the Code. Target is not a “consenting corporation”under Section 341(f) of the Code. Target has not entered into any compensatoryagreements with respect to the performance of services which payment thereunderwould result in a nondeductible expense to Target pursuant to Section 280G ofthe Code or an excise tax to the recipient of such payment pursuant to Section4999 of the Code.  Target has not agreedto, nor is it required to make any adjustment under Code Section 481(a) byreason of, a change in accounting method. Target is not, nor has it been, a “reporting corporation” subject to theinformation reporting and record maintenance requirements of Section 6038A andthe regulations thereunder. Target is in compliance with the terms andconditions of any applicable tax exemptions, agreements or orders of anyforeign government to which it may be subject or which it may have claimed, andthe transactions contemplated by this Agreement will not have any adverseeffect on such compliance.

             Section 3.6       Absence of Certain Changes or Events.  Since the date of the Most Recent BalanceSheet, Target has not:

             (a)         suffered any change or effect that hashad a Target Material Adverse Effect;

             (b)        granted or agreed to make any increasein the compensation payable or to become payable by Target to its officers oremployees;

             (c)         declared, set aside or paid anydividend or made any other distribution on or in respect of the shares of thecapital stock of Target or declared any direct or indirect redemption,retirement, purchase or other acquisition by Target of such shares;

             (d)        made any change in the accountingmethods or practices it follows, whether for general financial or tax purposes,or any change in depreciation or amortization policies or rates adoptedtherein;

             (e)         sold, leased, abandoned or otherwisedisposed of any real property or any material machinery, equipment or otheroperating property;

             (f)         sold, assigned, transferred, licensedor otherwise disposed of any patent, trademark, trade name, brand name,copyright (or pending application for any patent, trademark or copyright)invention, work of authorship, process, know-how, formula or trade secret orinterest thereunder or other intangible asset, except as set forth in Schedule3.6 or 3.11;

             (g)        permitted or allowed any of its propertyor assets to be subjected to any mortgage, deed of trust, pledge, lien,security interest or other encumbrance of any kind (except those permittedunder Section 3.7);

             (h)        made any capital expenditure orcommitment individually in excess of $10,000 or in the aggregate in excess of$50,000;

             (i)          paid, loaned or advanced any amountto, or sold, transferred or leased any properties or assets to, or entered intoany agreement or arrangement with, any of its Affiliates (as defined in Section3.16), officers, directors or stockholders or any affiliate or associate of anyof the foregoing (except in the case of salaries in the ordinary course ofbusiness);

             (j)          made any amendment to or terminatedany agreement which, if not so amended or terminated, would be required to bedisclosed on the Target Disclosure Schedule; or
             (k)         agreed to take any action described inthis Section 3.6 or outside of its ordinary course of business.

             Section 3.7       Title and Related Matters.  Target has good and marketable title to allthe properties, real and personal, owned by and used in or necessary for theoperation of the business of Target, free and clear of all mortgages, liens,pledges, charges or encumbrances of any kind or character, except the lien ofcurrent taxes not yet due and payable. The equipment of Target used in the operation of its business is, takenas a whole, (i) adequate for the business currently conducted by Target and(ii) in good operating condition and repair, ordinary wear and tearexcepted.  All real or personal propertyleases to which Target is a party are valid, binding, enforceable and effectiveagainst Target in accordance with their respective terms.  To the knowledge of Target, there is notunder any of such leases any existing material default or event of default orevent which, with notice or lapse of time or both, would constitute a materialdefault.  The Target Disclosure Schedulecontains a description of all personal property leased or owned with anindividual net book value in excess of $10,000 and real property leased orowned by Target, describing its interest in said property.  True and correct copies of Target’s realproperty and personal property leases have been provided to Acquiror or itsrepresentatives.

             Section 3.8       ProprietaryRights.

             (a)         The Target Disclosure Schedule setsforth a complete list of each of the following items (i) all patents andpending applications therefor, registrations of trademarks (including servicemarks) and pending applications therefor, and registrations of copyrights andapplications therefor and registered mask works and pending applicationstherefor, that are owned by the Target (collectively, the “Target Owned IP”),(ii) all licenses, agreements and contracts relating to the Target ProprietaryRights (as defined in Section 3.8(b) of this Agreement) pursuant to which theTarget or any of its Subsidiaries are entitled to use any Target ProprietaryRights owned by any third party (the “Third Party Licenses”) and (iii) allagreements under which the Target or any of its Subsidiaries has granted anythird party the right to use any Target Proprietary Rights, including theunexpired material transfer agreements.

             (b)        Except to the extent identified inappropriate sections of the Target Disclosure Schedule, the Target is the ownerof, or is licensed to use, in all jurisdictions as necessary, all intellectualproperty, including, without limitation, all patents and pending patentapplications, supplementary protection certificates, patent reissues,reexaminations, extensions, trademarks and pending trademark applications,trade dress, service marks and service mark registrations, pending service markapplications, domain names, logos, commercial symbols, business nameregistrations, trade names, copyrights and copyright registrations, computerhardware and software, mask works and pending mask work registrationapplications, industrial designs and pending applications for registration ofsuch industrial designs, including, without limitation, any and all pendingapplications for renewal, extensions, reexaminations and reissues of any of theforegoing intellectual property rights where applicable, inventions (whetherpatentable or unpatentable and whether or not reduced to practice), biologicalmaterials, trade secrets, formulae, know-how, technical information, researchdata, research raw data, laboratory notebooks, procedures, designs, proprietarytechnology and information (hereinafter collectively, “Intellectual PropertyRights”) held or used in the business or necessary for the operation of theproperties, assets and businesses of the Target (including, without limitation,the technology, information, databases, data lists, data compilations, and allproprietary rights developed or discovered or used in connection with orcontained in all versions and implementations of  any product or technology which has been or is being marketed,distributed, licensed, used or sold by Target or currently is under developmentby Target (collectively, the “Target Products”)) (hereinafter the “TargetProprietary Rights”), except as would not, individually or in the aggregate,have or reasonably be expected to have, a Target Material Adverse Effect,except for any Intellectual Property Rights the Target reasonably believesafter due investigation to be invalid and except for any Intellectual PropertyRights relating to off-the-shelf software generally available to the public ata cost not exceeding $5,000.

             (c)         Except to the extent identified in theTarget Disclosure Schedule, the Target is the sole legal and beneficial owner of all the Target Proprietary Rights(subject to the Third Party Licenses), except as would not, individually or inthe aggregate, have or reasonably be expected to have, a Target MaterialAdverse Effect.

             (d)        The Target has not entered into anyagreements, licenses or created any mortgages, liens, security interests,leases, pledges, encumbrances, equities, claims, charges, options,restrictions, rights of first refusal, title retention agreements or otherexceptions to title which convey any rights in the Target Proprietary Rights,limit the ability of the Target to enforce or maintain Target Proprietary Rightsor restrict the use by the Target of the Target Proprietary Rights in any way,except as provided in agreements and instruments disclosed in the TargetDisclosure Schedule and furnished to Acquiror prior to the date of thisAgreement.
             (e)         Except as listed in the TargetDisclosure Schedule, to the knowledge of the Target, the Target is incompliance in all material respects with the Third Party Licenses that arematerial to the conduct of the business of the Target.

             (f)         Except as set forth on the Target DisclosureSchedule, (i) the Target is not, and will not be as a result of the execution,delivery or performance of this Agreement, or the consummation of the Merger orthe other transactions contemplated hereby or thereby in breach, violation ordefault of any Third Party Licenses that are material to the conduct of thebusiness of the Target and (ii) the rights of the Target to the TargetProprietary Rights will not be affected by the execution, delivery orperformance of this Agreement or the consummation of the Merger or the othertransactions contemplated hereby or thereby.

             (g)        Except as set forth on the TargetDisclosure Schedule, the Target has the right to license to third parties theuse of all Target Proprietary Rights.

             (h)        Except as listed in the TargetDisclosure Schedule, to the knowledge of the Target, (i) all registrations andfilings relating to the Target Owned IP are in good standing, (ii) allmaintenance and renewal fees necessary to preserve the rights of the Target inrespect of the Target Owned IP have been made and (iii) the registrations andfilings relating to the Target Owned IP are proceeding and there are nomaterial facts which could significantly undermine those registrations orfilings or reduce to a significant extent the scope of protection of anypatents arising from such applications.

             (i)          Except as set forth on the TargetDisclosure Schedule, the practice, manufacturing, marketing, distribution,testing, sale, offer for sale, importation and use of technologies, compounds, products,processes, nucleic acid arrays, methods, software and technologies previouslyused and presently in use by the Target, licensees or sublicensees in thecountries where the Target has conducted or proposes to conduct suchactivities, to the knowledge of the Target, does not and would not infringe anddoes not and will not result in the misappropriation or other unauthorized useof Intellectual Property Rights of any third party that are reasonably believedby the Target after due investigation to be valid, except as would not,individually or in the aggregate, have, or reasonably be expected to have, aTarget Material Adverse Effect.

             (j)          Except for the matters set forth inthe Target Disclosure Schedule, there are no allegations, claims, suits or proceedingsinstituted or pending against the Target, or, to the Target’s knowledge,against any other person, which challenge the rights possessed by the Target touse the Target Proprietary Rights or the ownership (with respect to TargetOwned IP), validity, priority, enforceability, scope or effectiveness of any ofthe Target Proprietary Rights, including without limitation any interferences,oppositions, cancellations or other contested proceedings and, to the knowledgeof the Target, there are no threats of the same.

             (k)         To the knowledge of the Target, exceptfor the matters set forth in the Target Disclosure Schedule, there is nounauthorized use, infringement or misappropriation of the Target ProprietaryRights by any third party, including any employee or former employee of theTarget, except as would not, individually or in the aggregate, have, orreasonably be expected to have, a Target Material Adverse Effect.

             (l)          Except as set forth in the TargetDisclosure Schedule, (i) commercially reasonable measures have been taken tomaintain the confidentiality of the inventions, trade secrets, formulae,know-how, technical information, research data, research raw data, laboratorynotebooks, procedures, designs, proprietary technology and information of the Target,and all other information the value of which to the Target is contingent uponmaintenance of the confidentiality thereof (“Confidential Information”) and(ii) without limiting the generality of the foregoing, each employee, officer,and director of the Target and each consultant to the Target who was involvedin the development of Target Proprietary Rights or Confidential Information whohas had access to Confidential Information of the Target has entered into anagreement suitable to vest all ownership rights to any Target ProprietaryRights (subject to the Third Party Licenses) and has entered into an agreementfor maintaining all confidential information of the Target except for thoseindividuals listed in the Target Disclosure Schedule whose involvement in thebusiness of the Target is described with specificity therein. All use,disclosure or appropriation of Confidential Information not owned by Target hasbeen pursuant to the terms of a written agreement between Target and the ownerof such Confidential Information, or is otherwise lawful.
             (m)        Except as set forth in the TargetDisclosure Schedule, the Target has not entered into any contract or agreementto indemnify any other person for or against any charge of infringement ormisappropriation of, or interference or conflict with respect to, any of theTarget Proprietary Rights.

             (n)        No product liability or warranty claimshave been communicated in writing to or threatened against Target.

             Section 3.9       Employee Benefit Plans.

             (a)         The Target Disclosure Schedule lists,with respect to Target and any trade or business (whether or not incorporated)which is treated as a single employer with Target (an “ERISA Affiliate”) withinthe meaning of Section 414(b), (c), (m) or (o) of the Code, (i) all materialemployee benefit plans (as defined in Section 3(3) of the Employee RetirementIncome Security Act of 1974, as amended (“ERISA”), (ii) each loan to anon-officer employee, loans to officers and directors and any stock option,stock purchase, phantom stock, stock appreciation right, supplementalretirement, severance, sabbatical, medical, dental, vision care, disability,employee relocation, cafeteria benefit (Code Section 125) or dependent care(Code Section 129), life insurance or accident insurance plans, programs orarrangements, (iii) all bonus, pension, profit sharing, savings, deferredcompensation or incentive plans, programs or arrangements, (iv) other fringe oremployee benefit plans, programs or arrangements that apply to seniormanagement of Target and that do not generally apply to all employees, and (v)any current or former employment or executive compensation or severanceagreements, written or otherwise, for the benefit of, or relating to, anypresent or former employee, consultant or director of Target as to which (withrespect to any of items (i) through (v) above) any potential liability is borneby Target (together, the “Target Employee Plans”).

             (b)        Target has delivered to or madeavailable to Acquiror or its representatives a copy of each of the TargetEmployee Plans and related plan documents (including trust documents, insurancepolicies or contracts, employee booklets, summary plan descriptions and otherauthorizing documents, and, to the extent still in its possession, any materialemployee communications relating thereto) and has, with respect to each TargetEmployee Plan which is subject to ERISA reporting requirements, provided copiesof any Form 5500 reports filed for the last three plan years.  Any Target Employee Plan intended to bequalified under Section 401(a) of the Code has either obtained from theInternal Revenue Service a favorable determination letter as to its qualifiedstatus under the Code, including all amendments to the Code effected by the TaxReform Act of 1986 and subsequent legislation, or has applied to the InternalRevenue Service for such a determination letter prior to the expiration of therequisite period under applicable Treasury Regulations or Internal RevenueService pronouncements in which to apply for such determination letter and tomake any amendments necessary to obtain a favorable determination. Target hasalso furnished Acquiror with the most recent Internal Revenue Servicedetermination letter issued with respect to each such Target Employee Plan, andnothing has occurred since the issuance of each such letter which couldreasonably be expected to cause the loss of the tax-qualified status of anyTarget Employee Plan subject to Code Section 401(a).

             (c)         (i) None of the Target Employee Planspromises or provides retiree medical or other retiree welfare benefits to anyperson; (ii) there has been no “prohibited transaction,” as such term isdefined in Section 406 of ERISA and Section 4975 of the Code, with respect toany Target Employee Plan, which could reasonably be expected to have, in theaggregate, a Material Adverse Affect on Target, (iii) each Target Employee Planhas been administered in accordance with its terms and in compliance with therequirements prescribed by any and all statutes, rules and regulations(including ERISA and the Code), except as would not have, in the aggregate, aTarget Material Adverse Effect, and Target and each subsidiary or ERISAAffiliate have performed all material obligations required to be performed bythem under, are not in any material respect in default, under or violation of,and have no knowledge of any material default or violation by any other partyto, any of the Target Employee Plans; (iv) neither Target nor any subsidiary orERISA Affiliate is subject to any material liability or penalty under Sections4976 through 4980 of the Code or Title I of ERISA with respect to any of theTarget Employee Plans; (v) all contributions required to be made by Target orany subsidiary or ERISA Affiliate to any Target Employee Plan have been made onor before their due dates and a reasonable amount has been accrued forcontributions to each Target Employee Plan for the current plan years; (vi)with respect to each Target Employee Plan, no “reportable event” within the meaningof Section 4043 of ERISA (excluding any such event for which the thirty (30)day notice requirement has been waived under the regulations to Section 4043 ofERISA) nor any event described in Section 4062, 4063 or 4041 of ERISA hasoccurred; and (vii) no Target Employee Plan is covered by, and neither Targetnor any subsidiary or ERISA Affiliate has incurred or expects to incur anyliability under Title IV of ERISA or Section 412 of the Code.  With respect to each Target Employee Plansubject to ERISA as either an employee pension plan within the meaning ofSection 3(2) of ERISA or an employee welfare benefit plan within the meaning ofSection 3(1) of ERISA, Target has prepared in good faith and timely filed allrequisite governmental reports (which were true and correct as of the datefiled) and has properly and timely filed and distributed or posted all noticesand reports to employees required to be filed, distributed or posted withrespect to each such Target Employee Plan except as would not give rise, in theaggregate, to a Target Material Adverse Effect.  No suit, administrative proceeding, action or other litigationhas been brought, or to the best knowledge of Target is threatened, against orwith respect to any such Target Employee Plan, including any audit or inquiryby the IRS or United States Department of Labor.  Neither Target nor any ERISA Affiliate is a party to, or has madeany contribution to or otherwise incurred any obligation under, any “multi-employerplan” as defined in Section 3(37) of ERISA.
             (d)        With respect to each Target EmployeePlan, Target has complied with (i) the applicable health care continuation andnotice provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985(“COBRA”) and the proposed regulations thereunder and (ii) the applicablerequirements of the Family Leave Act of 1993 and the regulations thereunder,except to the extent that such failure to comply would not, in the aggregate,have a Target Material Adverse Effect.

             (e)         Except as set forth in the TargetDisclosure Schedule, the consummation of the transactions contemplated by thisAgreement will not (i) entitle any current or former employee or other serviceprovider of Target or any other ERISA Affiliate to severance benefits or anyother payment (including, without limitation, unemployment compensation, goldenparachute or bonus), except as expressly provided in this Agreement, or (ii)accelerate the time of payment or vesting of any such benefits, or (iii)increase or accelerate any benefits or the amount of compensation due any suchemployee or service provider.  Nopayment which will or may be made by Target or any of its subsidiaries to anyemployee will be characterized as an “excess parachute payment” within themeaning of Section 280G(b)(1) of the Code.

             (f)         There has been no amendment to, writteninterpretation or announcement (whether or not written) by Target or otherERISA Affiliate relating to, or change in participation or coverage under, anyTarget Employee Plan which would materially increase the expense of maintainingsuch Plan above the level of expense incurred with respect to that Plan for themost recent fiscal year included in the Target Financial Statements.

             (g)        All Target Options which are treated byTarget as “incentive stock options” under Section 422 of the Code comply withthe requirements of that Section.  AllTarget Options and other equity grants by target have complied with all federaland state securities laws.

             Section3.10     Bank Accounts.  The Target Disclosure Schedule sets forththe names and locations of all banks, trusts, companies, savings and loanassociations, and other financial institutions at which Target maintainsaccounts of any nature and the names of all persons authorized to draw thereonor make withdrawals therefrom.

             Section3.11     Contracts.

             (a)         Exceptas set forth on the Target Disclosure Schedule:

                           (i)          Target has no agreements, contracts orcommitments that provide for the sale, licensing, transfer, assignment,distribution, marketing, promotion or resale by Target of any Target Productsor Target Proprietary Rights, nor has Target granted any license of any Targettrademarks or servicemarks.

                           (ii)         Target has no Third Party Licenses.
                           (iii)        Target has no agreements, contracts orcommitments that call for fixed and/or contingent payments or expenditures byor to Target (including, without limitation, any advertising or revenue sharingarrangement) individually in excess of $10,000.

                           (iv)       Target has no outstanding sales oradvertising contract, commitment or proposal that Target currently expects toresult in any loss to Target upon completion or performance thereof.

                           (v)        Target has no outstanding agreements,contracts or commitments to employ, engage or utilize officers, employees,agents, consultants, advisors, salesmen, sales representatives, distributors ordealers that are not cancelable by Target “at will” and without liability,penalty or premium.

                           (vi)       Target has no employment, independentcontractor or similar agreement, contract or commitment that is not terminableon no more than thirty (30) days’ notice without penalty, liability or premiumof any type, including, without limitation, severance or termination pay.

                           (vii)      Target has no currently effectivecollective bargaining or union agreements, contracts or commitments.

                           (viii)     Target is not restricted by agreement fromcompeting with any person or from carrying on its business anywhere in theworld.

                           (ix)        Target has not guaranteed anyobligations of other persons or made any agreements to acquire or guarantee anyobligations of other persons.

                           (x)         Target has no outstanding loan oradvance to any person; nor is it party to any line of credit, standbyfinancing, revolving credit or other similar financing arrangement of any sortwhich would permit the borrowing by Target of any sum.

                           (xi)        Target has no agreements pursuant towhich Target has agreed to manufacture for, supply to or distribute to anythird party any Target Products or Target Components.

                           (xii)       There are no agreements, understandingsor proposed transactions between the Target and any of its officers, directors,affiliates, any affiliate thereof or any family members thereof.

             Trueand correct copies of each document or instrument listed on the TargetDisclosure Schedule pursuant to this Section 3.11(a) (the “Material Contracts”)have been provided to Acquiror or its representatives.

             (b)        All of the Material Contracts listed onthe Target Disclosure Schedule are valid and binding against Target and, toTarget’s knowledge, in full force and effect, and enforceable by Target inaccordance with their respective terms. As of the date hereof, no party to any such Material Contract hasnotified Target that it intends to cancel, withdraw, modify or amend suchcontract, agreement or arrangement.

             (c)         Target is not in material default underor in material breach or violation of, nor, to Target’s knowledge, is there anyvalid basis for any claim of material default by Target under, or materialbreach or violation by Target of, any Material Contract.  To Target’s knowledge, no other party is inmaterial default under or in material breach or violation of, nor is there anyvalid basis for any claim of material default by any other party under or anymaterial breach or violation by any other party of, any Material Contract.

             (d)        Except as specifically indicated on theTarget Disclosure Schedule, none of the Material Contracts provides forindemnification by Target of any third party. No claims have been made or threatened that would requireindemnification by Target, and Target has not paid any amounts to indemnify anythird party as a result of indemnification requirements of any kind.

             Section3.12     [Reserved]
             Section 3.13     Compliance With Law. Target, with respect to the operation of its business is in compliancein all material respects with all applicable laws and regulations. NeitherTarget nor, to Target’s knowledge, any of its employees has directly orindirectly paid or delivered any fee, commission or other sum of money or item ofproperty, however characterized, to any finder, agent, government official orother party in the United States or any other country, that was or is inviolation of any federal, state, or local statute or law or of any statute orlaw of any other country having jurisdiction. Target has not participated directly or indirectly in any boycotts orother similar practices affecting any of its customers.  Target has complied in all material respectsat all times with any and all applicable federal, state and foreign laws,rules, regulations, proclamations and orders relating to the importation orexportation of its products.

             Section 3.14     Labor Difficulties; No Discrimination.

             (a)         Target is not engaged in any unfairlabor practice and is not in material violation of any applicable lawsrespecting employment and employment practices, terms and conditions ofemployment, and wages and hours.  Thereis no unfair labor practice complaint against Target actually pending or, to theknowledge of Target, threatened before the National Labor Relations Board.There is no strike, labor dispute, slowdown, or stoppage actually pending or,to the knowledge of Target, threatened against Target.  To the knowledge of Target, no union organizingactivities are taking place with respect to the business of Target.  No grievance, nor any arbitration proceedingarising out of or under any collective bargaining agreement is pending and, tothe knowledge of Target, no claims therefor exist.  No collective bargaining agreement that is binding on Targetrestricts it from relocating or closing any of its operations. Target has notexperienced any material work stoppage or other material labor difficulty.

             (b)        There is no, and has not been any, claimagainst Target, or to Target’s knowledge, threatened against Target, based onactual or alleged race, age, sex, disability or other harassment ordiscrimination, or similar tortuous conduct, nor to the knowledge of Target, isthere any basis for any such claim.

             (c)         There are no pending claims againstTarget or any of its subsidiaries under any workers compensation plan or policyor for long term disability.  NeitherTarget nor any of its subsidiaries has any monetary material obligations underCOBRA with respect to any former employees or qualifying beneficiariesthereunder.  There are no proceedingspending or, to the knowledge of Target, threatened, between Target and any oftheir respective employees, which proceedings have or would reasonably beexpected to have a Target Material Adverse Effect.

             Section3.15     [Reserved]

             Section 3.16     Insider Transactions.  To the knowledge of Target, no affiliate (“Affiliate”) as definedin Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the“Exchange Act”) of Target has any interest in any equipment or other property,real or personal, tangible or intangible, including, without limitation, anyTarget Proprietary Rights or any creditor, supplier, customer, manufacturer,agent, representative, or distributor of Target Products; *provided, however,* that no such Affiliateor other person shall be deemed to have such an interest solely by virtue ofthe ownership of less than 1% of the outstanding stock or debt securities ofany publicly-held company, the stock or debt securities of which are traded ona recognized stock exchange or quoted on the National Association of SecuritiesDealers Automated Quotation System.

             Section 3.17     Employees, Independent Contractors andConsultants.  The TargetDisclosure Schedule lists and describes all past and all currently effectivewritten or, to Target’s knowledge, oral consulting, independent contractorand/or employment agreements and other material agreements concluded withindividual employees, independent contractors or consultants to which Target isa party.  True and correct copies of allsuch written agreements have been provided to or made available to Acquiror orits representatives.  All independentcontractors have been properly classified as independent contractors for thepurposes of federal and applicable state tax laws, laws applicable to employeebenefits and other applicable law.  Allsalaries and wages paid by Target are in compliance in all material respectswith applicable federal, state and local laws. Also shown on the Target Disclosure Schedule are the names, positionsand salaries or rates of pay, including bonuses, of all persons presentlyemployed by Target.
             Section3.18     Insurance. The fire,liability and other insurance policies held by Target are set forth onSchedule 3.18.  The Target DisclosureSchedule contains a list of all claims made by Target under such policies.  Target has not done anything, either by wayof action or inaction, that to the knowledge of Target, might invalidate suchpolicies in whole or in part. There is no claim pending under any of suchpolicies or bonds as to which coverage has been questioned, denied or disputedby the underwriters of such policies or bonds. All premiums due and payableunder all such policies and bonds have been paid and Target is otherwise in compliancewith the terms of such policies and bonds in all material respects. Target hasno knowledge of any threatened termination of, or material premium increasewith respect to, any of such policies.

             Section3.19     Litigation. There isno private or governmental action, suit, proceeding, claim, arbitration orinvestigation pending before any agency, court or tribunal, foreign ordomestic, or, to the knowledge of Target, threatened against Target or any ofits properties or any of its officers or directors (in their capacities assuch).  There is no judgment, decree ororder against Target, or, to the knowledge of Target, any of its respectivedirectors or officers (in their capacities as such).  To Target’s knowledge, no circumstances exist that could form avalid basis for a claim against Target relating to any claim of infringement ofany Intellectual Property Right.

             Section 3.20     Governmental Authorizations andRegulations. Target has obtained each federal, state, county, local orforeign governmental consent, license, permit, grant, or other authorization ofa Governmental Entity (i) pursuant to which Target currently operates or holdsany interest in any of its properties or (ii) that is required for theoperation of Target’s business or the holding of any such interest, and all ofsuch authorizations are in full force and effect, except where the failure toobtain or have any such Target authorizations would not reasonably be expectedto have a Target Material Adverse Effect. Target is in compliance in all material respects with all terms andconditions of all such permits, licenses and authorizations.

             Section3.21     Subsidiaries.  Target has no subsidiaries.  Target does not own or control (directly orindirectly) any capital stock, bonds or other securities of, and does not haveany proprietary interest in, any other corporation, general or limitedpartnership, firm, association or business organization, entity or enterprise,and Target does not control (directly or indirectly) the management or policiesof any other corporation, partnership, firm, association or businessorganization, entity or enterprise.

             Section 3.22     Compliance with EnvironmentalRequirements.  Target is notaware of, nor has Target received written notice of, any conditions, circumstances,activities, practices, incidents, or actions which may form a valid basis ofany claim, action, suit, proceeding, hearing, or investigation of, by, againstor relating to Target, based on or related to the manufacture, processing,distribution, use, treatment, storage, disposal, transport, or handling, or theemission, discharge, release or threatened release into the environment, of anypollutant, contaminant, or hazardous or toxic substance, material or waste, orrelating to the safety of employees, workers or other persons.

             Section 3.23     Corporate Documents. Target has furnished to Acquiror or its representatives copies of: (a)its Certificate of Incorporation and Bylaws, as amended to date; (b) its minutebook containing all records required to be set forth of all proceedings,consents, actions, and meetings of the stockholders, the board of directors andany committees thereof; (c) all material permits, orders, and consents issuedby any regulatory agency with respect to Target, or any securities of Target,and all applications for such permits, orders, and consents; and (d) the stocktransfer books of Target setting forth all transfers of any capital stock.  The corporate minute books, stockcertificate books, stock registers and other corporate records of Target arecomplete and accurate, and the signatures appearing on all documents containedtherein are the true signatures of the persons purporting to have signed thesame.  All actions reflected in suchbooks and records were duly and validly taken in compliance with the laws ofthe applicable jurisdiction.

             Section3.24     No Brokers.  Neither Target nor, to Target’s knowledge,any Target stockholder is obligated for the payment of fees or expenses of anybroker or finder in connection with the origin, negotiation or execution ofthis Agreement or the other Transaction Documents or in connection with anytransaction contemplated hereby or thereby other than as set forth in theTarget Disclosure Schedule.

             Section3.25     [Reserved]
             Section 3.26     Target Action.  The Board of Directors of Target, byunanimous written consent or at a meeting duly called and held, has by theunanimous vote of all directors (i) determined that the Merger is fair and inthe best interests of Target and its stockholders, (ii) approved the Merger andthis Agreement in accordance with the provisions of Delaware Law, and (iii)directed that this Agreement and the Merger be submitted to Target stockholdersfor their approval and resolved to recommend that Target stockholders vote infavor of the approval of this Agreement and the Merger.

             Section3.27     Offers.  Target has suspended or terminated, and hasthe legal right to terminate or suspend, all negotiations and discussions ofAcquisition Transactions (as defined in Section 5.6) with parties other thanAcquiror.

             Section 3.28     Information Statement.  The information supplied by Target for inclusion in theinformation statement to be sent to the stockholders of Target in connectionwith the notice required under Section 228(d) and Section 262(d)(2) of DelawareLaw of Target (such information statement as amended or supplemented isreferred to herein as the “Information Statement”) shall not, on the date theInformation Statement is first mailed to Target stockholders contain any statementwhich is false or misleading with respect to any material fact, or omit tostate any material fact necessary in order to make the statements made therein,in light of the circumstances under which they are made, not false ormisleading.  Notwithstanding theforegoing, Target makes no representation, warranty or covenant with respect toany information supplied by or relating to Acquiror or Sub which is containedin any of the foregoing documents.

             Section3.29     [Reserved]

             Section 3.30     Complete Copies of Materials.  Target has delivered or made available trueand complete copies of each document which has been requested by Acquiror orits counsel in connection with their legal and accounting review of Target andits subsidiaries.

             Section 3.31     Export Control Laws. Target has conducted its export transactions in accordance withapplicable provisions of the United States export control laws and regulations,including but not limited to the Export Administration Act and implementingExport Administration Regulations except for violations which would not have aTarget Material Adverse Effect.  Withoutlimiting the foregoing, Target represents and warrants that:

             (a)         Target has obtained all export licensesand other approvals required for its exports of products, software andtechnologies from the United States;

             (b)        Target is in compliance with the termsof all applicable export licenses or other approvals;

             (c)         There are no pending or, to theknowledge of Target, threatened claims against Target with respect to suchexport licenses or other approvals;

             (d)        There are no actions, conditions orcircumstances pertaining to Target’s export transactions that may give rise toany future claims; and

             (e)         No consents or approvals for thetransfer of export licenses to Acquiror are required, or such consents andapprovals can be obtained expeditiously without material cost.

             Section3.32     [Reserved]

             Section3.33     Disclosure.  No statements by Target contained in thisAgreement, its exhibits and schedules nor in any of the certificates ordocuments, including any of the Transaction Documents, delivered or required tobe delivered by Target to Acquiror or Sub under this Agreement contains anyuntrue statement of a material fact or omits (when read together with all suchother statements) to state a material fact necessary in order to make thestatements contained herein or therein not misleading in light of thecircumstances under which they were made.
ARTICLEIVREPRESENTATIONS AND WARRANTIES OF ACQUIROR AND SUB

             Acquirorand Sub represent and warrant to Target and the former Target stockholdersthat, the statements contained in this Article IV are true and correct.

             Section 4.1       Organization of Acquiror and Sub.  Each of Acquiror and its subsidiaries,including Sub, is a corporation duly organized, validly existing and in goodstanding under the laws of its respective jurisdiction of incorporation and hasall requisite corporate power to own, lease and operate its property and tocarry on its business as now being conducted and is duly qualified or licensedto do business and is in good standing in each jurisdiction in which thefailure to be so qualified or licensed would have an Acquiror Material AdverseEffect.

             “AcquirorMaterial Adverse Effect” means any change or effect that is materially adverseto the condition (financial or otherwise), assets, liabilities, business orresults of operations of the Acquiror or its subsidiaries taken as a whole,provided, however, that none of the Excluded MAE Factors shall be deemed (eitheralone or in combination) to constitute, and none of the Excluded MAE Factorsshall be taken into account in determining whether there has been or will be,an Acquiror Material Adverse Effect, and provided, further that no developmentsrelated to Acquiror’s pending litigation with Lexicon Genetics, Inc. shallconstitute an Acquiror Material Adverse Effect.

             Section 4.2       Acquiror and Merger Sub CapitalStructure.  The authorizedcapital stock of Acquiror consists of 75,000,000 shares of Common Stock, parvalue of $0.001 per share (“Acquiror Common Stock”) and 5,000,000 shares ofPreferred Stock, par value $0.001 per share (“Acquiror Preferred Stock”), ofwhich there were issued and outstanding as of the close of business on May 4,2001, 29,895,666 shares of Acquiror Common Stock and no shares of AcquirorPreferred Stock. There are no other outstanding shares of capital stock orvoting securities of Acquiror other than shares of Acquiror Common Stock issuedafter May 4, 2001 under Acquiror’s 2000 Employee Stock Purchase Plan (the“ESPP”) or upon the exercise of options issued under Acquiror’s 1998 StockIncentive Plan or 2000 Stock Incentive Plan. The authorized capital stock of Sub consists of 1,000 shares of CommonStock, all of which are issued and outstanding and are held by Acquiror.  All outstanding shares of Acquiror and Subhave been duly authorized, validly issued, fully paid and are nonassessable andfree of any liens or encumbrances other than any liens or encumbrances createdby or imposed upon the holders thereof. As of the close of business on July 19, 2001, Acquiror has reserved anaggregate of 5,383,921 shares of Common Stock for issuance to employees,directors and independent contractors upon exercise of outstanding options toacquire shares of Acquiror Common Stock issued under the Acquiror stock optionplans and an aggregate of 472,142 shares of Common Stock for issuance uponexercise of outstanding warrants. Other than as contemplated by this Agreementor under the ESPP, and except as described in this Section 4.2, there are noother options, warrants, calls, rights, commitments or agreements to whichAcquiror or Sub is a party or by which either of them is bound obligatingAcquiror or Sub to issue, deliver, sell, repurchase or redeem, or cause to beissued, delivered, sold, repurchased or redeemed, any shares of the capitalstock of Acquiror or Sub or obligating Acquiror or Sub to grant, extend orenter into any such option, warrant, call, right, commitment or agreement.  The shares of Acquiror Common Stock to beissued pursuant to the Merger (including shares of Acquiror Common Stock issuedupon exercise of Target Options assumed by Acquiror) have been reserved forissuance and will be duly authorized, validly issued, fully paid, and non-assessable and issued in compliance with all applicable federal or statesecurities laws.

             Section 4.3       Authority; No Conflict; RequiredFilings and Consents.

             (a)         Each of Acquiror and Sub has allrequisite corporate power and authority to enter into this Agreement and theother Transaction Documents to which it is or will become a party and toconsummate the transactions contemplated by this Agreement and such TransactionDocuments.  The execution and deliveryof this Agreement and such Transaction Documents and the consummation of thetransactions contemplated by this Agreement and such Transaction Documents havebeen duly authorized by all necessary corporate action on the part of Acquirorand Sub under the provisions of Delaware Law and Acquiror’s and Sub’srespective certificates of incorporation. This Agreement has been and such Transaction Documents have been or, tothe extent not executed as of the date hereof, will be duly executed anddelivered by Acquiror and Sub.  ThisAgreement and each of the Transaction Documents to which Acquiror or Sub is aparty constitutes, and each of the Transaction Documents to which Acquiror orSub will become a party when executed and delivered by Acquiror or Sub willconstitute, the valid and binding obligation of Acquiror or Sub, enforceable inaccordance with its terms, except to the extent that enforceability may belimited by applicable bankruptcy, reorganization, insolvency, moratorium orother laws affecting the enforcement of creditors’ rights generally and by generalprinciples of equity, regardless of whether such enforceability is consideredin a proceeding at law or in equity.
             (b)        The execution and delivery by Acquiroror Sub of this Agreement and the Transaction Documents to which it is or willbecome a party does not, and consummation of the transactions contemplated bythis Agreement or the Transaction Documents to which it is or will become aparty will not, (i) conflict with, or result in any violation or breach of anyprovision of the Certificate of Incorporation or Bylaws of Acquiror or Sub,(ii) result in any violation or breach of, or constitute (with or withoutnotice or lapse of time, or both) a default (or give rise to a right oftermination, cancellation or acceleration of any obligation or loss of anymaterial benefit) under any of the terms, conditions or provisions of any note,bond, mortgage, indenture, lease, contract or other agreement, instrument orobligation to which Acquiror or Sub is a party or by which either of them orany of their properties or assets may be bound, or (iii) conflict or violateany permit, concession, franchise, license, judgment, order, decree, statute,law, ordinance, rule or regulation applicable to Acquiror or Sub or any oftheir properties or assets, except in the case of (ii) and (iii) for any suchconflicts, violations, defaults, terminations, cancellations or accelerationswhich would not have an Acquiror Material Adverse Effect.

             (c)         No consent, approval, order orauthorization of, or registration, declaration or filing with, any GovernmentalEntity is required by or with respect to Acquiror or Sub in connection with theexecution and delivery of this Agreement or the Transaction Documents to whichit is or will become a party or the consummation of the transactionscontemplated hereby or thereby, except for (i) the filing of the Certificate ofMerger with the Delaware Secretary of State, (ii) such consents, approvals,orders, authorizations, registrations, declarations and filings as may berequired under applicable federal and state securities laws and the laws of anyforeign country, and (iii) such other consents, authorizations, filings,approvals and registrations which, if not obtained or made, would notreasonably be expected to have an Acquiror Material Adverse Effect.

             Section 4.4       Commission Filings; FinancialStatements.

             (a)         Acquiror has filed with the Commissionand made available to Target or its representatives all forms, reports anddocuments required to be filed by Acquiror with the Commission since August 2,2000 (collectively, the “Acquiror Commission Reports”). The Acquiror CommissionReports constitute all of the documents required to be filed by the Acquirorunder Section 13 or 14 of the Exchange Act with the Commission since August 2,2000. The Acquiror Commission Reports (i) at the time filed, (or if amended orsuperseded by a filing prior to the date of this Agreement, then on the date ofsuch filing) complied in all material respects with the applicable requirementsof the Securities Act of 1933, as amended, (the “Securities Act”), and theExchange Act, as the case may be, and (ii) did not at the time they were filed(or if amended or superseded by a filing prior to the date of this Agreement,then on the date of such filing) contain any untrue statement of a materialfact or omit to state a material fact required to be stated in such AcquirorCommission Reports or necessary in order to make the statements in suchAcquiror Commission Reports, in the light of the circumstances under which theywere made, not misleading.

             (b)        Each of the financial statements(including, in each case, any related notes) contained in the AcquirorCommission Reports, including any Acquiror Commission Reports filed after thedate of this Agreement until the Closing, complied or will comply as to form inall material respects with the applicable published rules and regulations ofthe Commission with respect thereto, was prepared in accordance with generallyaccepted accounting principles applied on a consistent basis throughout theperiods involved (except as may be indicated in the notes to such financialstatements or, in the case of unaudited statements, as permitted by Form 10-Qof the Commission) and fairly presented the consolidated financial position ofAcquiror and its subsidiaries as at the respective dates and the consolidatedresults of its operations and cash flows for the periods indicated, except thatthe unaudited interim financial statements were or are subject to normal andrecurring year-end adjustments which were not or are not expected to bematerial in amount.
             Section 4.5       Absence of Certain Changes or Events.  Except as otherwise disclosed in theAcquiror Commission Reports, since March 31, 2001, Acquiror and itssubsidiaries have conducted their business in the ordinary course and, sincesuch date, Acquiror has not suffered any change or effect that has resulted inan Acquiror Material Adverse Effect (other than any change in the business ofAcquiror occurring as a result of the execution or announcement of thisAgreement and provided that changes in the trading prices of Acquiror CommonStock shall not in and of itself constitute a change with respect to Acquiror).

             Section 4.6       Compliancewith Laws.  Acquiror hascomplied with, is not in violation of, and has not received any notices ofviolation with respect to, any federal, state or local statute, law orregulation with respect to the conduct of its business, or the ownership oroperation of its business, except for failures to comply or violations whichwould not reasonably be expected to have an Acquiror Material Adverse Effect.

             Section 4.7       Interim Operations of Sub.  Sub was formed solely for the purpose ofengaging in the transactions contemplated by this Agreement, has engaged in noother business activities and has conducted its operations only as contemplatedby this Agreement.

             Section4.8       Disclosure.  No statements by Acquiror contained in thisAgreement, its exhibits and schedules, or any of the certificates or documents,including any of the Transaction Documents, required to be delivered byAcquiror or Sub to Target under this Agreement contain any untrue statement ofmaterial fact or omits (when read together with all such other statements) tostate a material fact necessary in order to make the statements containedherein or therein not misleading in light of the circumstances under which theywere made.

             Section 4.9       Stockholders Consent.  No consent or approval of the shareholders of Acquiror isrequired or necessary for Acquiror to enter into this Agreement or theTransaction Documents or to consummate the transactions contemplated hereby andthereby.

             Section4.10     Litigation.  Except as otherwise disclosed in theAcquiror Commission Reports, (i) there is no private or governmental action,suit, proceeding, claim, arbitration or investigation pending before anyagency, court or tribunal, foreign or domestic, or, to the knowledge ofAcquiror or any of its subsidiaries, threatened against Acquiror or any of itsproperties or any of its officers or directors (in their capacities as such),which, if determined adversely to Acquiror, would have an Acquiror MaterialAdverse Effect, and (ii) there is no judgment, decree or order againstAcquiror, or, to the knowledge of Acquiror, any of its respective directors orofficers (in their capacities as such) relating to the business of Acquiror,the presence of which would have an Acquiror Material Adverse Effect.  To Acquiror’s knowledge, no circumstancesexist that could form a valid basis for a claim against Acquiror as a result ofthe conduct of Acquiror’s business (including, without limitation, any claim ofinfringement of any intellectual property right) that would have an AcquirorMaterial Adverse Effect.

ARTICLE VPRECLOSING COVENANTS OF TARGET

             Duringthe period from the date of this Agreement until the Effective Time, Targetcovenants and agrees as follows:

             Section 5.1       Notice to Target Stockholders.  Prior to the Effective Time, Target willsend to all stockholders who have not consented to the Merger Agreement thenotice required under Section 228(e) and Section 262(d)(2) of Delaware Law,along with the Information Statement. The notice and the Information Statement shall comply in all materialrespects with all applicable requirements of law and the rules and regulationspromulgated thereunder.  The InformationStatement shall contain the unanimous recommendation of the Board of Directorsof Target that the Target stockholders approve the Merger and this Agreementand the conclusion of the Board of Directors that the terms and conditions ofthe Merger are fair and reasonable to the stockholders of Target.  Anything to the contrary contained hereinnotwithstanding, Target shall not include in the Information Statement anyinformation with respect to Acquiror or its affiliates or associates, the formand content of which information shall not have been approved by Acquiror priorto such inclusion.

             Section5.2       Advice of Changes.  Target will promptly advise Acquiror inwriting of any event occurring subsequent to the date of this Agreement whichwould render any representation or warranty of Target contained in thisAgreement, if made on or as of the date of such event or the Closing Date,untrue or inaccurate in any material respect.
             Section 5.3       Operation of Business.  During the period from the date of this Agreement and continuinguntil the earlier of the termination of the Agreement or the Effective Time,Target agrees (except to the extent that Acquiror shall otherwise consent inwriting), to carry on its business in the usual, regular and ordinary course insubstantially the same manner as previously conducted, to pay its debts andtaxes when due, subject to good faith disputes over such debts or taxes, to theextent commercially reasonable to pay or perform other obligations when due,and, to the extent consistent with such business, use commercially reasonableefforts consistent with past practices and policies to preserve intact itspresent business organization, keep available the services of its presentofficers and key employees and preserve its relationships with customers,suppliers, distributors, licensors, licensees, and others having businessdealings with it.  Target shall promptlynotify Acquiror of any event or occurrence not in the ordinary course ofbusiness of Target.  Except as expresslycontemplated by this Agreement, Target shall not, without the prior writtenconsent of Acquiror:

             (a)         Accelerate, amend or change the periodof exercisability or the vesting schedule of options or restricted stockgranted under any employee stock plan or agreements or authorize cash paymentsin exchange for any Target Option or any options granted under any of suchplans except as specifically required by the terms of such plans or any relatedagreements or any such agreements in effect as of the date of this Agreementand disclosed in the Target Disclosure Schedule;

             (b)        Declare or pay any dividends on or makeany other distributions (whether in cash, stock or property) in respect of anyof its capital stock, or split, combine or reclassify any of its capital stockor issue or authorize the issuance of any other securities (other than withrespect to the exercise of Target Options or Target Warrants or the conversionof Target Preferred Stock) in respect of, in lieu of or in substitution forshares of capital stock of such party, or purchase or otherwise acquire,directly or indirectly, any shares of its capital stock except from formeremployees, directors and consultants in accordance with agreements providingfor the repurchase of shares in connection with any termination of service bysuch party;

             (c)         Issue, deliver or sell or authorize orpropose the issuance, delivery or sale of, or purchase or propose the purchaseof, any shares of its capital stock or securities convertible into shares ofits capital stock, or subscriptions, rights, warrants or options to acquire, orother agreements or commitments of any character obligating it to issue anysuch shares or other convertible securities, other than (i) the issuance of (A)shares of Target Common Stock issuable upon exercise of Target Options orpursuant to other commitments that are outstanding on the date of thisAgreement and set forth in Schedule 3.2, (B) shares of Target Common Stock issuableupon conversion of shares of Target Preferred Stock or (C) shares ofTarget Common Stock or Target Preferred Stock upon the exercise of TargetWarrants or (ii) the repurchase of shares of Common Stock from terminatedemployees pursuant to the terms of outstanding stock restriction or similaragreements;

             (d)        Acquire or agree to acquire by mergingor consolidating with, or by purchasing a substantial equity interest in orsubstantial portion of the assets of, or by any other manner, any business orany corporation, partnership or other business organization or division, orotherwise acquire or agree to acquire any assets;

             (e)         Sell, lease, license or otherwisedispose of any of its properties or assets which are material, individually orin the aggregate, to the business of Target, except in the ordinary course ofbusiness;

             (f)         Except as set forth in Section 3.6 ofthe Disclosure Schedule, (i) increase or agree to increase the compensationpayable or to become payable to its officers or employees, except for increasesin salary or wages of non-officer employees in accordance with past practices,(ii) grant any additional severance or termination pay to, or enter into anyemployment or severance agreements with, officers, (iii) grant any severance ortermination pay to, or enter into any employment or severance agreement, withany non- officer employee, except in accordance with past practices, (iv) enterinto any collective bargaining agreement, or (v) establish, adopt, enter intoor amend in any material respect any bonus, profit sharing, thrift,compensation, stock option, restricted stock, pension, retirement, deferredcompensation, employment, termination, severance or other plan, trust, fund,policy or arrangement for the benefit of any directors, officers or employees;
             (g)        Revalue any of its assets, includingwriting down the value of inventory or writing off notes or accountsreceivable;

             (h)        Incur any indebtedness for borrowedmoney or guarantee any such indebtedness or issue or sell any debt securitiesor warrants or rights to acquire any debt securities or guarantee any debtsecurities of others;

             (i)          Amend or propose to amend itsCertificate of Incorporation or Bylaws;

             (j)          Incur or commit to incur any capitalexpenditures in excess of $50,000 in the aggregate or in excess of $10,000 asto any individual matter;

             (k)         Lease, license, sell, transfer orencumber or permit to be encumbered any asset, Target Proprietary Right orother property associated with the business of Target (including sales ortransfers to Affiliates of Target) except for license agreements entered intoin the ordinary course of business.

             (l)          Enter into any lease or contract forthe purchase or sale of any property, real or personal, except in the ordinarycourse of business;

             (m)        Fail to maintain its equipment and otherassets in good working condition and repair according to the standards it hasmaintained up to the date of this Agreement, subject only to ordinary wear andtear;

             (n)        Change accounting methods;

             (o)        Amend or terminate any materialcontract, agreement or license to which it is a party except in the ordinarycourse of business;

             (p)        Loan any amount to any person or entity,or guaranty or act as a surety for any obligation;

             (q)        Waive or release any material right orclaim, except in the ordinary course of business;

             (r)         Make or change any Tax or accountingelection, change any annual accounting period, adopt or change any accountingmethod, file any amended Return, enter into any closing agreement, settle anyTax claim or assessment relating to Target, surrender any right to claim refundof Taxes or consent to any extension or waiver of the limitation periodapplicable to any Tax claim or assessment relating to Target if any suchelection, adoption, change, amendment, agreement, settlement, surrender,consent or other similar action or omission would have the effect of increasingthe Tax liability of Target or Acquiror;

             (s)         Take any action, or fail to take anyaction, that would cause a Target Material Adverse Effect;

             (t)         Enter into any agreement in which theobligation of Target exceeds $10,000 or shall not terminate or be subject totermination for convenience within 180 days following execution;

             (u)        Enter into any agreement not in theordinary course of business (including without limitation any materiallicenses, any exclusive agreements of any kind, or any agreements providing forobligations that would extend beyond six months of the date of this Agreement);or

             (v)        Take, or agree in writing or otherwiseto take, any of the actions described in Sections (a) through (u) above, or anyaction which is reasonably likely to make any of Target’s representations orwarranties contained in this Agreement untrue or incorrect in any materialrespect on the date made (to the extent so limited) or as of the EffectiveTime.
             Section 5.4       Access to Information.  Until the Closing, Target shall allow Acquiror and its agentsreasonable free access during normal business hours upon reasonable notice toits files, books, records, and offices, including, without limitation, any andall information relating to taxes, commitments, contracts, leases, licenses,and personal property and financial condition. Until the Closing, Target shall cause its accountants to cooperate withAcquiror and its agents in making available all financial informationrequested, including without limitation the right to examine all working paperspertaining to all financial statements prepared or audited by such accountants.No information or knowledge obtained in any investigation pursuant to thisSection shall effect or be deemed to modify any representation or warrantycontained in this Agreement or its exhibits and schedules.  All such access shall be subject to theterms of the Confidentiality Agreement (as defined in Section 7.1).

             Section 5.5       Satisfaction of Conditions Precedent.  Target will use its best efforts to satisfyor cause to be satisfied all the conditions precedent which are set forth inSections 8.1 and 8.2, and Target will use commercially reasonable efforts tocause the transactions contemplated by this Agreement to be consummated, and,without limiting the generality of the foregoing, to obtain all consents andauthorizations of third parties and to make all filings with, and give all noticesto, third parties which may be necessary or reasonably required on its part inorder to effect the transactions contemplated by this Agreement.  Target shall use commercially reasonableefforts to obtain any and all consents necessary with respect to those MaterialContracts listed on Schedule 5.5 of the Target Disclosure Schedule inconnection with the Merger (the “Material Consents”).

             Section 5.6       OtherNegotiations.  Target will not(and it will not permit any of its officers, directors, employees, agents andAffiliates on its behalf to) take any action to solicit, initiate, seek,encourage or support any inquiry, proposal or offer from, furnish anyinformation to, or participate in any negotiations with, any corporation,partnership, person or other entity or group (other than Acquiror) regardingany acquisition of Target, any merger or consolidation with or involvingTarget, or any acquisition of any material portion of the stock or assets ofTarget or any material license of Target Proprietary Rights, except for licenseagreements entered into in the ordinary course of business (any of theforegoing being referred to in this Agreement as an “Acquisition Transaction”)or enter into an agreement concerning any Acquisition Transaction with any partyother than Acquiror.  If between thedate of this Agreement and the termination of this Agreement pursuant toSection 9.1, Target receives from a third party any offer or indication ofinterest regarding any Acquisition Transaction, or any request for informationregarding any Acquisition Transaction, Target shall (i) notify Acquirorimmediately (orally and in writing) of such offer, indication of interest orrequest, including the identity of such party and a summary of the terms of anyproposal therein, and (ii) notify such third party of Target’s obligationsunder this Agreement.

ARTICLEVIPRECLOSING AND OTHER COVENANTS OF ACQUIROR AND SUB

             Section6.1       Advice of Changes.  Acquiror and Sub will promptly advise Targetin writing of any event occurring subsequent to the date of this Agreementwhich would render any representation or warranty of Acquiror or Sub containedin this Agreement, if made on or as of the date of such event or the ClosingDate, untrue or inaccurate in any material respect.

             Section 6.2       Reservation of Acquiror Common Stock.  Acquiror shall reserve for issuance, out ofits authorized but unissued capital stock, the maximum number of shares ofAcquiror Common Stock as may be issuable upon consummation of the Merger,including shares of Acquiror Common Stock that will be issued upon exercise ofTarget Options assumed by Acquiror.

             Section 6.3       Satisfaction of Conditions Precedent.  Acquiror and Sub will use commerciallyreasonable efforts to satisfy or cause to be satisfied all the conditionsprecedent which are set forth in Sections 8.1 and 8.3, and Acquiror and Subwill use commercially reasonable efforts to cause the transactions contemplatedby this Agreement to be consummated, and, without limiting the generality ofthe foregoing, to obtain all consents and authorizations of third parties andto make all filings with, and give all notices to, third parties which may benecessary or reasonably required on its part in order to effect thetransactions contemplated hereby.

             Section 6.4       Nasdaq National Market Listing.  Acquiror shall cause the shares of AcquirorCommon Stock issuable to the stockholders of Target in the Merger, includingshares of Acquiror Common Stock issuable upon exercise of Acquiror Options, tobe authorized for listing on the Nasdaq National Market prior to the Closing.
             Section6.5       Stock Options.

             (a)         (i) At the Effective Time, eachoutstanding Target Option, whether vested or unvested, shall be assumed byAcquiror and deemed to constitute an option (an “Acquiror Option”) to acquire,on the same terms and conditions as were applicable under the Target Option,the number of shares of Acquiror Common Stock equal to the number of sharesthat the holder of such Target Option would have been entitled to receivepursuant to such option multiplied by the Exchange Ratio (rounded down to thenearest whole number), at a price per share (rounded up to the nearest wholecent) equal to the per share exercise price for the shares of Target CommonStock otherwise purchasable pursuant to such Target Option divided by theExchange Ratio; and (ii) at the time that any Earn Out Shares are paid pursuantto Section 2.1(e) hereof, each Acquiror Option will be adjusted to include thenumber of shares of Acquiror Common Stock equal to the number of shares ofTarget that the holder of such Target Option would have been entitled toreceive pursuant to such Target Option immediately prior to the Effective Time(assuming for purposes of this calculation that all such Target Options werefully vested) multiplied by the Earn Out Exchange Ratio then applicable(rounded down to the nearest whole number), at a price per share (rounded up tothe nearest whole cent) equal to the per share exercise price for the shares ofTarget Common Stock otherwise purchasable pursuant to such Target Optiondivided by the Earn Out Exchange Ratio then applicable, and notice of suchadjustment will be provided to the holders of such Target Options; *provided, however,* that, in the case ofany Target Option to which Section 422 of the Code applies (“incentive stockoptions”), the option price, the number of shares purchasable pursuant to suchoption and the terms and conditions of exercise of such option shall bedetermined in order to comply with Section 424(a) of the Code. The term,exercisability, vesting schedule, acceleration events, status as an “incentivestock option” under Section 422 of the Code, if applicable, and all of theother terms of the option shall otherwise remain unchanged.

             (b)        As soon as practicable (and in any eventwithin 5 business days) after the Effective Time, Acquiror shall deliver to theparticipants in the Target Stock Plan or other holders of Target Optionsappropriate notice setting forth such participants’ rights pursuant thereto andthe grants pursuant to the Target Stock Plan or otherwise shall continue ineffect on the same terms and conditions (subject to the adjustments required bythis Section 6.5 after giving effect to the Merger). Acquiror shall comply withthe terms of the Target Stock Plan and use commercially reasonable efforts toensure, to the extent required by, and subject to the provisions of, suchTarget Stock Plan and Sections 422 and 424(a) of the Code, that Target Optionswhich qualified as incentive stock options prior the Effective Time continue toqualify as incentive stock options after the Effective Time.

             (c)         Acquiror shall take all corporateaction necessary to reserve for issuance a sufficient number of shares ofAcquiror Common Stock for delivery upon exercise of Target Options assumed inaccordance with this Section 6.5. As soon as practicable after the EffectiveTime and in any event no later than 10 days after the Closing Date, Acquirorshall file a registration statement on Form S-8 (or any successor or otherappropriate forms) under the Securities Act or another appropriate form withrespect to the shares of Acquiror Common Stock subject to such options andshall use its commercially reasonable efforts to maintain the effectiveness ofsuch registration statement or registration statements (and maintain thecurrent status of the prospectus or prospectuses contained therein) for so longas such options remain outstanding.

             Section 6.6       Registration of Shares Issued in theMerger.

             (a)         Registrable Shares. For purposesof this Agreement, “Registrable Shares” shall mean the shares of AcquirorCommon Stock issued in the Merger, including any and all Escrow Shares, butexcluding shares of Acquiror Common Stock issued in the Merger that have beensold or otherwise transferred without the consent of Acquiror (which shall notbe unreasonably withheld) by the stockholders of Target who initially receivedsuch shares in the Merger prior to the effective date of the RegistrationStatement (as defined below) (collectively, the “Holders”) and excluding sharesof Acquiror Common Stock issuable upon exercise of Target Options (the issuanceof which will be registered on Form S-8); provided however, that a distributionof shares of Acquiror Common Stock issued in the Merger without additionalconsideration, to underlying beneficial owners (such as the general and limitedpartners, stockholders or trust beneficiaries of a Holder) shall not be deemedsuch a sale or transfer for purposes of this Section 6.6 and such underlyingbeneficial owners shall be entitled to the same rights under this Section 6.6as the initial Holder from which the Registrable Shares were received and shallbe deemed Holders for the purposes of this Section 6.6.
             (b)        Required Registration. Acquirorshall prepare and file with the Commission a registration statement on Form S-3(or such successor or other appropriate form that Acquiror is eligible to use)under the Securities Act with respect to the Registrable Shares (the“Registration Statement”) by the later of (i) 10 days after the date itbecomes eligible to register shares on Form S-3, (ii) 10 days after theEffective Time or (iii) August 14, 2001, and to effect all such registrations,qualifications and compliances in connection therewith (including, without limitation,filing any Exchange Act reports or Financial Statements with the Commission andobtaining appropriate qualifications under applicable state securities or “bluesky” laws and compliance with any other applicable governmental requirements orregulations) as any selling Holder may reasonably request and that would permitor facilitate the public sale of Registrable Shares (provided however thatAcquiror shall not be required in connection therewith to qualify to dobusiness or to file a general consent to service of process in any such stateor jurisdiction), in each case so that such Registration Statement and allother such registrations, qualifications and compliances may become effectiveas soon as possible thereafter, but in any event no later than 30 days afterthe filing thereof, or as soon as practicable thereafter in the event suchRegistration Statement becomes subject to review by the Commission Staff.

             (c)         Effectiveness; Trading Window;Suspension Right.

                           (i)          Acquiror will use its commercially reasonableefforts to maintain the effectiveness of the Registration Statement and otherapplicable registrations, qualifications and compliances for one (1) year fromthe Closing Date (the “Registration Effective Period”), and from time to timewill amend or supplement the Registration Statement and the prospectuscontained therein as and to the extent necessary to comply with the SecuritiesAct, the Exchange Act and any applicable state securities statute orregulation, subject to the following limitations and qualifications.

                           (ii)         Following the date on which theRegistration Statement is first declared effective and subject to therestrictions set forth in the Restricted Stock Agreement and the SaleRestriction Agreement, the Holders will be permitted (subject in all cases toSection 6.7 below) to offer and sell Registrable Shares under the RegistrationStatement during the Registration Effective Period in the manner described inthe Registration Statement provided that the Registration Statement remains effectiveand has not been suspended; *provided,however,* that such offers and sales may only occur during the periodthat begins at the close of business on the second trading day following thedate of public disclosure of the Acquiror’s financial results for a particularfiscal quarter or year and ending on the close of business on the later of(i) 30 days after such date, and (ii) the last day of the secondmonth of the next fiscal quarter.

                           (iii)        Notwithstanding any other provision ofthis Section 6.6, Acquiror shall have the right pursuant to its insider tradingpolicy, at any time to require that all Holders suspend further open marketoffers and sales of Registrable Shares whenever, and for such period of time asthere is material undisclosed information or events with respect to Acquirorthe disclosure of which would be seriously detrimental to the Acquiror;provided, however, that Acquiror shall also suspend further open market offersand sales of its shares by those persons or entities then subject to Acquiror’sinsider trading policy.  Acquiror willpromptly give the Holders notice of any such suspension.

             (d)        Expenses. Acquiror shall bear allcosts and expenses for purposes of this Section 6.6, including, withoutlimitation, printing expenses (including a reasonable number of prospectusesfor circulation by the selling Holders), reasonable legal fees anddisbursements of counsel for Acquiror and one counsel for the selling Holders(up to $5,000), “blue sky” expenses, accounting fees and filing fees, but shallnot include underwriting commissions or similar charges, legal fees anddisbursements of other counsel for the selling Holders.

 

             (e)         Indemnification.

                           (i)          To the extent permitted by law,Acquiror will indemnify and hold harmless each Holder, any underwriter (asdefined in the Securities Act) for such Holder, its officers, directors,stockholders or partners and each person, if any, who controls such Holder orunderwriter within the meaning of the Securities Act or the Exchange Act,against any losses, claims, damages, or liabilities (joint or several) to whichthey may become subject under the Securities Act, the Exchange Act or otherfederal or state law, insofar as such losses, claims, damages, or liabilities(or actions in respect thereof) arise out of or are based upon any of thefollowing statements, omissions or violations (collectively a “Violation”): (A)any untrue statement or alleged untrue statement of a material fact containedin the Registration Statement, including any preliminary prospectus or finalprospectus contained therein or any amendments or supplements thereto, (B) theomission or alleged omission to state therein a material fact required to bestated therein, or necessary to make the statements therein not misleading, or(C) any violation or alleged violation by Acquiror of the Securities Act, theExchange Act, any state securities law or any rule or regulation promulgatedunder the Securities Act, the Exchange Act or any state securities law; andAcquiror will pay to each such Holder (and its officers, directors,stockholders or partners), underwriter or controlling person, any legal orother expenses reasonably incurred by them in connection with investigating ordefending any such loss, claim, damage, liability, or action; provided,however, that the indemnity agreement contained in this Section 6.6(e)(i) shallnot apply to amounts paid in settlement of any such loss, claim, damage,liability, or action if such settlement is effected without the consent ofAcquiror; nor shall Acquiror be liable in any such case for any such loss,claim, damage, liability, or action to the extent that it arises out of or isbased upon (a) a Violation which occurs in reliance upon and in conformity withinformation furnished expressly for use in the Registration Statement by anysuch Holder, or (b) a Violation that would not have occurred if such Holder haddelivered to the purchaser the version of the Prospectus most recently providedby Acquiror to the Holder as of the date of such sale.

                           (ii)         To the extent permitted by law, eachselling Holder will indemnify and hold harmless Acquiror, each of itsdirectors, each of its officers who has signed the Registration Statement, eachperson, if any, who controls Acquiror within the meaning of the Securities Act,any underwriter, any other Holder selling securities pursuant to theRegistration Statement and any controlling person of any such underwriter orother Holder, against any losses, claims, damages, or liabilities (joint orseveral) to which any of the foregoing persons may become subject, under theSecurities Act, the Exchange Act or other federal or state law, insofar as suchlosses, claims, damages, or liabilities (or actions in respect thereto) ariseout of or are based upon any Violation (which includes without limitation thefailure of the Holder to comply with the prospectus delivery requirements underthe Securities Act, and the failure of the Holder to deliver the most currentprospectus provided by Acquiror prior to such sale), in each case to the extent(and only to the extent) that such Violation occurs in reliance upon and inconformity with written information furnished by such Holder expressly for usein the Registration Statement or such Violation is caused by the Holder’sfailure to deliver to the purchaser of the Holder’s Registrable Shares aprospectus (or amendment or supplement thereto) that had been made available tothe Holder by Acquiror; and each such Holder will pay any legal or otherexpenses reasonably incurred by any person intended to be indemnified pursuantto this Section 6.6(e)(ii) in connection with investigating or defending anysuch loss, claim, damage, liability, or action; provided, however, that theindemnity agreement contained in this Section 6.6(e)(ii) shall not apply toamounts paid in settlement of any such loss, claim, damage, liability or actionif such settlement is effected without the consent of such Holder, whichconsent shall not be unreasonably withheld. The aggregate indemnification and contribution liability of each Holderunder this Section 6.6(e)(ii) shall not exceed the net proceeds received bysuch Holder in connection with sale of shares pursuant to the RegistrationStatement.

                           (iii)        Each person entitled to indemnificationunder this Section 6.6(e) (the “Indemnified Party”) shall give notice to theparty required to provide indemnification (the “Indemnifying Party”) promptlyafter such Indemnified Party has actual knowledge of any claim as to whichindemnity may be sought and shall permit the Indemnifying Party to assume thedefense of any such claim and any litigation resulting therefrom, provided thatcounsel for the Indemnifying Party who conducts the defense of such claim orany litigation resulting therefrom shall be approved by the Indemnified Party(whose approval shall not unreasonably be withheld), and the Indemnified Partymay participate in such defense at such party’s expense, and *provided further* that the failure of anyIndemnified Party to give notice as provided herein shall not relieve theIndemnifying Party of its obligations under this Section 6.6 unless theIndemnifying Party is materially prejudiced thereby. No Indemnifying Party, inthe defense of any such claim or litigation, shall (except with the consent ofeach Indemnified Party) consent to entry of any judgment or enter into anysettlement that does not include as an unconditional term thereof the giving bythe claimant or plaintiff to such Indemnified Party of a release from allliability in respect to such claim or litigation. Each Indemnified Party shallfurnish such information regarding itself or the claim in question as anIndemnifying Party may reasonably request in writing and as shall be reasonablyrequired in connection with the defense of such claim and litigation resultingtherefrom.
                           (iv)       To the extent that the indemnificationprovided for in this Section 6.6(e) is held by a court of competentjurisdiction to be unavailable to an Indemnified Party with respect to anyloss, liability, claim, damage or expense referred to herein, then theIndemnifying Party, in lieu of indemnifying such Indemnified Party hereunder,shall contribute to the amount paid or payable by such Indemnified Party as aresult of such loss, liability, claim, damage or expense in such proportion asis appropriate to reflect the relative fault of the Indemnifying Party on theone hand and of the Indemnified Party on the other in connection with thestatements or omissions which resulted in such loss, liability, claim, damageor expense, as well as any other relevant equitable considerations. Therelative fault of the Indemnifying Party and of the Indemnified Party shall bedetermined by reference to, among other things, whether the untrue or allegeduntrue statement of a material fact or the omission or alleged omission tostate a material fact relates to information supplied by the Indemnifying Partyor by the Indemnified Party and the parties’ relative intent, knowledge, accessto information and opportunity to correct or prevent such statement oromission.

             (f)         Current Public Information.  Until the earlier of the first anniversaryof the Closing Date (or, if any Holder is an affiliate of Acquiror, the secondanniversary of the Closing Date) or the date all shares of Acquiror CommonStock subject to this Section 6.6 have been sold, Acquiror will timely file allreports required to be filed by it under the Exchange Act, and the rules andregulations adopted by the Commission thereunder, all to the extent required toenable such Holders to sell their shares pursuant to Rule 144 and theRegistration Statement.  Upon writtenrequest, Acquiror will deliver to such Holders a written statement as towhether it has complied with such requirements.

             Section 6.7       Procedures for Sale of Shares UnderRegistration Statement.

             (a)         Delivery of Prospectus.  For any offer or sale of any of theRegistrable Shares by a Holder in a transaction that is not exempt under theSecurities Act, the Holder, in addition to complying with any other federalsecurities laws, shall deliver a copy of the final prospectus (or amendment ofor supplement to such prospectus) of Acquiror covering the Registrable Sharesin the form furnished to the Holder by Acquiror to the purchaser of any of theRegistrable Shares on or before the settlement date for the purchase of suchRegistrable Shares.

             (b)        Copies of Prospectuses. Acquirorshall, upon the effectiveness of the Registration Statement and within two (2)trading days following any request, furnish to such Holder a reasonable numberof copies of a supplement to or an amendment of such prospectus as may benecessary so that, as thereafter delivered to the purchasers of suchRegistrable Shares, such prospectus shall not as of the date of delivery to theHolder include an untrue statement of a material fact or omit to state amaterial fact required to be stated therein or necessary to make the statementstherein not misleading or incomplete in the light of the circumstances underwhich they were made.

             Section 6.8       Certain Employee Benefit Matters.  From and after the Effective Time, employeesof Target at the Effective Time will be provided with employee benefits by theSurviving Corporation or Acquiror which in the aggregate are no less favorableto such employees than those provided from time to time by Acquiror tosimilarly situated employees.  If anyemployee of Target becomes a participant in any employee benefit plan, program,policy or arrangement of Acquiror, such employee shall be given credit for allservice prior to the Effective Time with Target to the extent permissible undersuch plan, program, policy or arrangement. All Target Options assumed by Acquiror at the Effective Time pursuant tothe terms of Section 6.5(a) shall remain outstanding following the Effective onthe same terms and conditions as prior to the Effective Time, subject to theadjustments contemplated by such Section 6.5. Employees of Target as of theEffective Time shall be permitted to participate in the ESPP commencing on thefirst enrollment date following the Effective Time, subject to compliance withthe eligibility and other provisions of such plan.

             Section 6.9       Indemnity of Target Affiliates.

             (a)         Acquiror shall not, for a period of sixyears after the Effective Time, take any action to alter or impair any exculpatoryor indemnification provisions now existing in the Certificate of Incorporationor By-laws of Target for the benefit of any individual who served as a directoror officer of Target at any time prior to the Effective Time (the “IndemnifiedExecutives”), except for any changes which do not affect the application ofsuch provisions to acts or omissions of such individuals prior to the EffectiveTime.
ARTICLE VIIOTHER AGREEMENTS

             Section7.1       Confidentiality.  Each party acknowledges Acquiror and Targethave previously executed a Mutual Non-Disclosure Agreement dated February 22,2001 (the “Confidentiality Agreement”), which agreement shall continue in fullforce and effect in accordance with its terms.

             Section 7.2       No Public Announcement.  The parties have agreed upon the form and substances of a jointpress release announcing the consummation of the Merger, which shall be issuedat a time and in a manner mutually agreed upon. Other than such joint pressrelease, the parties shall make no public announcement concerning thisAgreement, their discussions or any other memoranda, letters or agreementsbetween the parties relating to the Merger; *provided,however*, that either of the parties, but only after reasonableconsultation with the other, may make disclosure if required under applicablelaw.

             Section 7.3       Regulatory Filings; Consents;Reasonable Efforts.  Subject tothe terms and conditions of this Agreement, Target and Acquiror shall usecommercially reasonable efforts to (i) make all necessary filings with respectto the Merger and this Agreement under the Exchange Act and applicable blue skyor similar securities laws and obtain required approvals and clearances withrespect thereto and supply all additional information requested in connectiontherewith; (ii) make merger notification or other appropriate filings withfederal, state or local governmental bodies or applicable foreign governmentalagencies and obtain required approvals and clearances with respect thereto andsupply all additional information requested in connection therewith; (iii)obtain all consents, waivers, approvals, authorizations and orders required inconnection with the authorization, execution and delivery of this Agreement andthe consummation of the Merger; and (iv) take, or cause to be taken, allappropriate action, and do, or cause to be done, all things necessary, properor advisable to consummate and make effective the transactions contemplated bythis Agreement as promptly as practicable.

             Section 7.4       FurtherAssurances.  Prior to theClosing, each party agrees to cooperate fully with the other parties and toexecute such further instruments, documents and agreements and to give suchfurther written assurances, as may be reasonably requested by any other partyto better evidence and reflect the transactions described herein andcontemplated hereby and to carry into effect the intents and purposes of thisAgreement.

             Section7.5       Escrow Agreement.  On or before the Effective Date, Acquirorshall, and the parties hereto shall exercise commercially reasonable efforts tocause the Escrow Agent (as defined in Section 10.2) and the Stockholders’ Agent(as defined in Section 10.9) to enter into an Escrow Agreement in the formattached hereto as Exhibit C.

             Section7.6       FIRPTA.  Target shall, prior to the Closing Date,provide Acquiror with a properly executed Foreign Investment and Real PropertyTax Act of 1980 (“FIRPTA”) FIRPTA Notification Letter which states that sharesof capital stock of Target do not constitute “United States real propertyinterests” under Section 897(c) of the Code, for purposes of satisfyingAcquiror’s obligations under Treasury Regulation Section 1.1445-2(c)(3).  In addition, simultaneously with delivery ofsuch FIRPTA Notification Letter, Target shall provide to Acquiror, as agent forTarget, a form of notice to the Internal Revenue Service in accordance with therequirements of Treasury Regulation Section 1.897-2(h)(2), along with writtenauthorization for Acquiror to deliver such notice form to the Internal RevenueService on behalf of Target upon the Closing of the Merger.

             Section7.7       Blue Sky Laws.  Acquiror shall take such steps as may benecessary to comply with the securities and blue sky laws of all jurisdictionswhich are applicable to the issuance of the Acquiror Common Stock in connectionwith the Merger.  Target shall use itsbest efforts to assist Acquiror as may be necessary to comply with thesecurities and blue sky laws of all jurisdictions which are applicable inconnection with the issuance of Acquiror Common Stock in connection with theMerger.

             Section7.8       Other Filings.  As promptly as practicable after the date ofthis Agreement, Target and Acquiror will prepare and file any other filingsrequired under the Exchange Act, the Securities Act or any other Federal,foreign or state securities or blue sky laws relating to the Merger and thetransactions contemplated by this Agreement (the “Other Filings”).  The Other Filings will comply in allmaterial respects with all applicable requirements of law and the rules andregulations promulgated thereunder. Whenever any event occurs which is required to be set forth in anamendment or supplement to any Other Filing, Target or Acquiror, as the casemay be, will promptly inform the other of such occurrence and cooperate inmaking any appropriate amendment or supplement, and/or mailing to stockholdersof Target, such amendment or supplement.
ARTICLE VIIICONDITIONS TO MERGER

             Section 8.1       Conditions to Each Party’s Obligationto Effect the Merger. The respective obligations of each party to thisAgreement to effect the Merger shall be subject to the satisfaction prior tothe Closing Date of the following conditions:

             (a)         No Injunctions or Restraints;Illegality.  No temporaryrestraining order, preliminary or permanent injunction or other order issued byany court of competent jurisdiction or other legal or regulatory restraint orprohibition preventing the consummation of the Merger shall have been issued,nor shall any proceeding brought by a domestic administrative agency orcommission or other domestic Governmental Entity or other third party, seekingany of the foregoing be pending; nor shall there be any action taken, or anystatute, rule, regulation or order enacted, entered, enforced or deemed applicableto the Merger which makes the consummation of the Merger illegal.

             (b)        The issuance of Acquiror Common Stock inthe Merger shall be exempt from registration pursuant to Regulation Dpromulgated under the Securities Act.

             Section 8.2       Additional Conditions to Obligationsof Acquiror and Sub. The obligations of Acquiror and Sub to effect theMerger are subject to the satisfaction of each of the following conditions, anyof which may be waived in writing exclusively by Acquiror and Sub:

             (a)         Conversion of Preferred Stock;Dissenting Stockholders. Holders of not more than 5% of Target’s issued andoutstanding capital stock as of the Closing shall have elected to exercisedissenters’ or appraisal rights under Delaware Law as to such shares.

             (b)        Escrow Agreement.  The Escrow Agent and Stockholders’ Agenthave executed and delivered to Acquiror the Escrow Agreement and such agreementshall remain in full force and effect.

             (c)         Investor Questionnaire. Eachstockholder of Target who is not an “affiliate” of Target and who has executeda written consent in favor of the Merger shall have executed and delivered toAcquiror an investor questionnaire.

             (d)        Ancillary Agreements.  Each of the Restricted Stock Agreement,Employment Agreements, Sale Restriction Agreement and  Support Agreements executed and delivered concurrently with theexecution of this Agreement shall remain in full force and effect.  Each of the Restricted Stock Agreement andthe Noncompetition Agreement shall be executed and delivered concurrently withthe Closing.

             (e)         Opinion of Target’s Counsel.  Acquiror shall have received an opiniondated the Closing Date of Cooley Godward LLP, counsel to Target, as to thematters in the form attached hereto as Exhibit D.

             (f)         Approvals. All authorizations,consents (including the Material Consents), or approvals of, or notificationsto any third party, required by Target’s contracts, agreements or otherobligations in connection with the consummation of the Merger shall haveoccurred or been obtained except for any the absence of which is not reasonablylikely to have a Target Material Adverse Effect (it being agreed that theabsence of consents listed on Schedule 3.3 would not have a Target MaterialAdverse Effect).
             (g)        Termination of Agreements.  The following agreements between Target andcertain of its stockholders shall have been terminated:  (i) the Securities Purchase Agreement datedJuly 16, 1997, among Warburg, Dr. Howard M. Goodman and Target, (ii) theSecurities Purchase Agreement dated September, 1998, among Warburg, LedbetterDavidson International, Inc., Kevin Kinsella and Target, (iii)  the Securities Purchase Agreement dated July12, 2000, by and among Warburg and Target and (iv) the Equity Line of Credit Agreementdated April 20, 2001, by and among Warburg and Target.

             (h)        Board Resignations. Target shallhave received written letters of resignation from each of the current membersof the Target Board of Directors and from each officer of Target, in each caseeffective at the Effective Time.

             (i)          Material Adverse Effect. Sincethe date hereof, there shall not have occurred any event or events, which hashad, individually or in the aggregate, or would reasonably be expected to have,a Target Material Adverse Effect.

             (j)          Warrant Exercise.  All outstanding warrants to purchase TargetCommon Stock or Target Preferred Stock shall have been exercised or cancelled.

             (k)          Termination of Target’s 401(k) Plan.  If Target maintains or sponsors a plansubject to Section 401(k) of the Code, Target’s Board of Directors shall haveadopted a resolution terminating such plan contingent on the Closing andeffective as of at least one calendar day prior to the Effective Time.

             (l)          Representations, Warranties andCovenants.  (i) Except for therepresentations and warranties contained in Sections 3.5(c) and 3.33, eachof the representations and warranties of Target in this Agreement that isexpressly qualified by a reference to materiality shall be true in all respectsas so qualified, and each of the representations and warranties of Target inthis Agreement that is not so qualified shall be true and correct in allmaterial respects, on and as of the Closing Date as though such representationor warranty had been made on and as of the Closing (except that those representationsand warranties which address matters only as of a particular date shall remaintrue and correct as of such date, and (ii) Target shall have performed andcomplied in all material respects with all covenants, obligations andconditions of this Agreement required to be performed and complied with byTarget as of the Closing.

             (m)        Target’s Officer Certificate.  A certificate, dated the Closing Date, of anofficer of Target (i) attaching copies of the Articles of Incorporation andBylaws, and any amendments thereto, of Target, (ii) attaching a good standingcertificate of Target, duly certified by the Secretary of State of the State ofDelaware, (iii) certifying (A) that attached thereto are true and correctcopies of action by written consent or resolutions duly adopted by the Board ofDirectors, of Target and continuing in effect, which authorize the execution,delivery and performance by Target of this Agreement and the Certificate ofMerger and the consummation of the transactions contemplated hereby andthereby; and (B) that there are no proceedings for the dissolution orliquidation of Target, and (iv) certifying the incumbency, signatures andauthority of the officers of Target authorized to execute, deliver and performthis Agreement and the Certificate of Merger and all other documents,instruments or agreements related thereto executed or to be executed by Target.

             Section 8.3       Additional Conditions to Obligationsof Target.  The obligation of Targetto effect the Merger is subject to the satisfaction of each of the followingconditions, any of which may be waived, in writing, exclusively by Target:

             (a)         Opinion of Acquiror’s Counsel.  Target shall have received an opinion datedthe Closing Date of Orrick, Herrington & Sutcliffe LLP, counsel to Acquiror,as to the matters attached hereto as Exhibit E.

             (b)        Material Adverse Effect. Sincethe date hereof, there shall not have occurred any event or events, whichcould, individually or in the aggregate, have or reasonably be expected tohave, an Acquiror Material Adverse Effect.

             (c)         Shareholder Consent.  This Agreement and the Merger shall havebeen duly approved and adopted by the holders of a majority of the shares ofthe capital stock of Target outstanding as of the date hereof.
             (d)        Nasdaq.  Acquiror shall have filed with the Nasdaq National Market aNotification Form For Change in Number of Shares Outstanding with respect tothe shares of Acquiror Common Stock issuable upon conversion of the TargetCapital Stock in the Merger (including pursuant to the assumption of TargetOptions).

             (e)         Representations, Warranties andCovenants.  (i) Each of therepresentations and warranties of Acquiror and Sub in this Agreement that isexpressly qualified by a reference to materiality shall be true in all respectsas so qualified, and each of the representations and warranties of Acquiror andSub in this Agreement that is not so qualified shall be true and correct in allmaterial respects, on and as of the Closing Date as though such representationor warranty had been made on and as of the Closing (except that thoserepresentations and warranties which address matters only as of a particulardate shall remain true and correct as of such date), and (ii) each of Acquirorand Sub shall have performed and complied in all material respects with allcovenants, obligations and conditions of this Agreement required to beperformed and complied with by Acquiror and Sub as of the Closing.

             (f)         Acquiror’s Officer Certificate.  A certificate, dated the Closing Date, of anofficer of Acquiror (i) attaching copies of the Articles of Incorporation andBylaws, and any amendments thereto, of Acquiror, (ii) attaching a good standingcertificate of Acquiror, duly certified by the Secretary of State of the Stateof Delaware, (iii)  certifying (A) thatattached thereto are true and correct copies of action by written consent orresolutions duly adopted by the Board of Directors, of Acquiror and continuingin effect, which authorize the execution, delivery and performance by Acquirorof this Agreement and the consummation of the transactions contemplated hereby;and (B) that there are no proceedings for the dissolution or liquidation ofAcquiror, and (iv) certifying the incumbency, signatures and authority of theofficers of Acquiror authorized to execute, deliver and perform this Agreementand all other documents, instruments or agreements related thereto executed orto be executed by Acquiror.

             (g)        Merger Sub’s Officer Certificate.  A certificate, dated the Closing Date, of anofficer of Merger Sub (i) attaching copies of the Articles of Incorporation andBylaws, and any amendments thereto, of Merger Sub, (ii) attaching a goodstanding certificate of Merger Sub, duly certified by the Secretary of State ofthe State of Delaware, (iii)  certifying(A) that attached thereto are true and correct copies of action by writtenconsent or resolutions duly adopted by the Board of Directors, of Merger Suband continuing in effect, which authorize the execution, delivery andperformance by Merger Sub of this Agreement and the Certificate of Merger andthe consummation of the transactions contemplated hereby and thereby; and (B)that there are no proceedings for the dissolution or liquidation of Merger Sub,and (iv) certifying the incumbency, signatures and authority of the officers ofMerger Sub authorized to execute, deliver and perform this Agreement and theCertificate of Merger and all other documents, instruments or agreementsrelated thereto executed or to be executed by Merger Sub.

ARTICLE IXTERMINATION AND AMENDMENT

             Section9.1       Termination.  This Agreement may be terminated at any timeprior to the Effective Time:

             (a)         by mutual written consent of Acquirorand Target;

             (b)        by either Acquiror or Target, by givingwritten notice to the other party, if a court of competent jurisdiction orother Governmental Entity shall have issued a nonappealable final order, decreeor ruling or taken any other action, in each case having the effect ofpermanently restraining, enjoining or otherwise prohibiting the Merger, except,if such party relying on such order, decree or ruling or other action shall nothave complied with its respective obligations under Sections 5.5 or 6.3 of thisAgreement, as the case may be;

             (c)         by Acquiror, by giving written noticeto Target, if the Closing shall not have occurred on or before 11:59 p.m.(Pacific Standard Time) on August 24, 2001 (the “Deadline”) by reason of thefailure of any condition precedent under Section 8.1 or 8.2 (unless the failureresults primarily from a breach by Acquiror of any representation, warranty, orcovenant of Acquiror contained in this Agreement or Acquiror’s failure tofulfill a condition precedent to closing or other default); or
             (d)        by Target, by giving written notice toAcquiror, if the Closing shall not have occurred on or before the Deadline byreason of the failure of any condition precedent under Section 8.1 or 8.3(unless the failure results primarily from a breach by Target of anyrepresentation, warranty, or covenant of Target contained in this Agreement orTarget’s failure to fulfill a condition precedent to closing or other default).

             Section 9.2       Effect of Termination.  In the event of termination of this Agreement as provided inSection 9.1, this Agreement shall immediately become void and there shall be noliability or obligation on the part of Acquiror, Target, Sub or theirrespective officers, directors, stockholders or Affiliates, except as set forthin Section 9.3 and further except to the extent that such termination resultsfrom the willful breach by any such party of any of its representations,warranties or covenants set forth in this Agreement.

             Section9.3       Fees and Expenses.  If the Merger is consummated, all legal,accounting, investment banking, broker’s and finder’s fees and expensesincurred by Target or its stockholders in connection with the Merger shall bedeemed expenses of the stockholders of Target and shall be deemed to betransaction expenses and shall reduce the merger consideration pursuant toSection 2.1(c) and will not become obligations of Target.  Any amount of such fees or expenses inexcess of the amounts set forth on Schedule 2.1(c) shall be borne by the formerTarget stockholders and shall not become obligations of the SurvivingCorporation.

ARTICLE XESCROW AND INDEMNIFICATION

             Section10.1     Indemnification.  From and after the Effective Time andsubject to the limitations contained in Section 10.2, Acquiror shall beindemnified and held harmless against any loss, expense, liability or otherdamage, including attorneys’ fees, to the extent of the amount of such loss,expense, liability or other damage (collectively “Damages”) that Acquiror hasincurred by reason of (i) the breach by Target of any representation, warranty,covenant or agreement of Target contained in this Agreement that occurs orbecomes known to Acquiror during the Escrow Period (as defined in Section 10.4below), (ii) any claims relating to the information set forth in Section 3.14of the Target Disclosure Schedule, (iii) any claims relating to the informationset forth in Sections 3.8(b) (other than the cost of obtaining the Licenses setforth in Section 2.1 above) and 3.8(j) of the Target Disclosure Schedule or(iv) any claims for the fees of Target’s Scientific Advisory Board for periods endingprior to January 1, 2001 that are not waived by members of Target’s ScientificAdvisory Board within sixty (60) days of the date hereof.  Such indemnification shall be Acquiror’ssole and exclusive remedy for any such breach by Target, for any such claimsrelating to Sections 3.8 and 3.14 of the Target Disclosure Schedule or for anysuch claims for the fees of Target’s Scientific Advisory Board for periodsending prior to January 1, 2001. Acquiror acknowledges that, with respect to the evaluation of the TargetFinancial Statements for purposes of making any claim under this Section 10.1for a breach of the representations and warranties set forth in Section 3.4(b),Acquiror has had the opportunity to review Target’s accounting policies andmethods and underlying assumptions inherent in the Target Financial Statementsand, accordingly, Acquiror shall be required to consistently apply theaccounting policies, methods and assumptions in the audited Target FinancialStatements.

             Section10.2     Escrow Fund.  As security for the indemnities in Section10.1, the Escrow Shares shall be deposited with, Wells Fargo Bank, NationalAssociation (or such other institution selected by Acquiror with the reasonableconsent of Target) as escrow agent (the “Escrow Agent”) in accordance withSection 2.2, such deposit to constitute the Escrow Fund (the “EscrowFund”) and to be governed by the terms set forth in this Article X and in theEscrow Agreement.  Notwithstanding theforegoing, the indemnification rights afforded to Acquiror pursuant to thisArticle X shall be limited to the Escrow Fund and Acquiror shall not beentitled to pursue any claims for indemnification under this Article X orotherwise against any former Target stockholder directly or personally and thesole recourse of Acquiror shall be to make claims against the Escrow Fund inaccordance with the terms of the Escrow Agreement.

             Section10.3     Damage Threshold.  Notwithstanding the foregoing, Acquiror maynot receive any shares from the Escrow Fund unless and until the total amountof Damages incurred by Acquiror exceeds $25,000, *provided, however*,that after Acquiror has incurred an aggregate of $25,000 in Damages, Acquirorshall be entitled to receive Escrow Shares equal in value to the full amount ofDamages.
             Section10.4     Escrow Periods.  The escrow shall commence on the ClosingDate and terminate one year thereafter (the period from the Closing to suchdate referred to as the “Escrow Period”), *provided,however,* that if there are any unsatisfied claims for Damagesspecified in any Officer’s Certificate theretofore delivered to the EscrowAgent and the Stockholders’ Agent (as defined in Section 10.9) prior totermination of the Escrow Period with respect to facts and circumstancesexisting  prior to expiration of theEscrow Period, then all Escrow Shares shall remain in the Escrow Fund untilsuch claims have been finally resolved.

             Section 10.5     Claims Upon Escrow Fund. In the event Acquirorsuffers any Damages, then on or before the last day of the Escrow Period, itshall deliver a certificate signed by any appropriately authorized officer ofAcquiror (an “Officer’s Certificate”)

                           (i)          Stating the aggregate amount ofAcquiror’s Damages or an estimate thereof, in each case to the extent known ordeterminable at such time, and,

                           (ii)         Specifying in reasonable detail theindividual items of such Damages included in the amount so stated, the dateeach such item was paid or properly accrued or arose, and the nature of themisrepresentation, breach or claim to which such item is related.

             Section10.6     Valuation. For thepurpose of compensating Acquiror for its Damages pursuant to this Agreement,the value per share of the Escrow Shares shall be the average closing price ofAcquiror’s Common Stock as quoted on the Nasdaq National Stock Market for theten trading days ending on (A) the last day of the thirty (30) day period setforth in Section 10.7, (B) the date of delivery to the Escrow Agent of amemorandum pursuant to Section 10.8(a) or (C) the date of delivery to theEscrow Agent of a court decision pursuant to Section 10.8(b).

             Section 10.7     Objections to Claims. At the time of delivery of anyOfficer’s Certificate to the Escrow Agent, a duplicate copy of such Officer’sCertificate shall be delivered to the Stockholders’ Agent (as defined inSection 10.9 below) and for a period of thirty (30) days after such delivery,the Escrow Agent shall make no delivery of Escrow Shares pursuant to the EscrowAgreement unless the Escrow Agent shall have received written authorizationfrom the Stockholders’ Agent to make such delivery. After the expiration ofsuch thirty (30) day period, the Escrow Agent shall make delivery of the EscrowShares in the Escrow Fund in accordance with the Escrow Agreement, providedthat no such delivery may be made if the Stockholders’ Agent shall object in awritten statement to the claim made in the Officer’s Certificate, and suchstatement shall have been delivered to the Escrow Agent and to Acquiror priorto the expiration of such thirty (30) day period.

             Section 10.8     Resolution of Conflicts.

             (a)         In case the Stockholders’ Agent shallso object in writing to any claim or claims by Acquiror made in any Officer’sCertificate, Acquiror shall have thirty (30) days to respond in a writtenstatement to the objection of the Stockholders’ Agent.  If after such thirty (30) day period thereremains a dispute as to any claims, the Stockholders’ Agent and Acquiror shallattempt in good faith for thirty (30) days to agree upon the rights of therespective parties with respect to each of such claims. If the Stockholders’Agent and Acquiror should so agree, a memorandum setting forth such agreementshall be prepared and signed by both parties and shall be furnished to theEscrow Agent. The Escrow Agent shall be entitled to rely on any such memorandumand shall distribute the Escrow Shares from the Escrow Fund in accordance withthe terms of the memorandum.

             (b)        If no such agreement can be reachedafter good faith negotiation, the Escrow Agent shall only be entitled to act inaccordance with the decision of a court of competent jurisdiction and make orwithhold payments out of the Escrow Fund in accordance with such decision.

 

             Section 10.9     Stockholders’ Agent.

             (a)         Jonathan Leff shall be constitutedand appointed as agent (the “Stockholders’ Agent”) for and on behalf of theformer Target stockholders to give and receive notices and communications, toauthorize delivery to Acquiror of the Escrow Shares or other property from theEscrow Fund in satisfaction of claims by Acquiror, to object to suchdeliveries, to agree to, negotiate, enter into settlements and compromises of,and demand arbitration and comply with orders of courts and awards ofarbitrators with respect to such claims, and to take all actions necessary orappropriate in the judgment of the Stockholders’ Agent for the accomplishmentof the foregoing.  Such agency may bechanged by the holders of a majority in interest of the Escrow Shares from timeto time upon not less than ten (10) days’ prior written notice toAcquiror.  No bond shall be required ofthe Stockholders’ Agent, and the Stockholders’ Agent shall receive nocompensation for services; provided that the Stockholders’ Agent shall beentitled to reimbursement of all expenses incurred in the satisfaction of itsduties hereunder and shall be reimbursed out of the Escrow Fund.  Notices or communications to or from theStockholders’ Agent shall constitute notice to or from each of the formerTarget stockholders.

             (b)        The Stockholders’ Agent shall not beliable for any act done or omitted hereunder as Stockholders’ Agent whileacting in good faith and in the exercise of reasonable judgment, and any actdone or omitted pursuant to the advice of counsel shall be conclusive evidenceof such good faith. The former Target stockholders shall severally and prorata, in accordance with their Pro Rata Portion, indemnify the Stockholders’Agent and hold him harmless against any loss, liability or expense incurredwithout gross negligence or bad faith on the part of the Stockholders’ Agentand arising out of or in connection with the acceptance or administration ofhis duties under this Agreement or the Escrow Agreement.

             (c)         The Stockholders’ Agent shall havereasonable access to information about Target and Acquiror and the reasonableassistance of Target’s and Acquiror’s officers and employees for purposes ofperforming his duties and exercising the rights under this Article X, *provided* that the Stockholders’ Agentshall treat confidentially and not disclose any nonpublic information from orabout Target or Acquiror to anyone (except on a need to know basis toindividuals who agree to treat such information confidentially).

             Section 10.10   Actions of the Stockholders’ Agent.A decision, act, consent or instruction of the Stockholders’ Agent shallconstitute a decision of all of the former Target stockholders for whom sharesof Acquiror Common Stock otherwise issuable to them are deposited in the EscrowFund and shall be final, binding and conclusive upon each such former Targetstockholder, and the Escrow Agent and Acquiror may rely upon any decision, act,consent or instruction of the Stockholders’ Agent as being the decision, act,consent or instruction of each and every such former Target stockholder. TheEscrow Agent and Acquiror are hereby relieved from any liability to any personfor any acts done by them in accordance with such decision, act, consent orinstruction of the Stockholders’ Agent.

             Section 10.11   Third-Party Claims.

             (a)         If any third party shall notify Acquiroror its affiliates with respect to any matter (hereinafter referred to as a “ThirdParty Claim”), which may result in Damages, then Acquiror shall give promptnotice to Stockholders’ Agent (and in any event within 10 business days) ofAcquiror becoming aware of any such Third Party Claim or of facts upon whichany such Third Party Claim will be based setting forth such materialinformation with respect to the Third Party Claim as is reasonably available toAcquiror; provided, however, that no delay or failure on the part of Acquirorin notifying Stockholders’ Agent shall relieve Stockholders from any obligationhereunder unless Stockholders are thereby prejudiced (and then solely to theextent of such prejudice).

             (b)        In case any Third Party Claim is assertedagainst Acquiror or its affiliates, Stockholders’ Agent will be entitled, if heso elects by written notice delivered to Acquiror within 30 days afterreceiving Acquiror’s notice under Section 10.11(a), to assume the defensethereof, at the expense of Stockholders’ Agent, so long as

                           (i)          Acquiror has reasonably determinedthat Damages which may be incurred as a result of the Third Party Claim do notexceed either individually, or when aggregated with all other Third PartyClaims, the total dollar value of the Escrow Shares determined in accordancewith the Escrow Agreement; and

                           (ii)         the Third Party Claim involves onlymoney damages and does not seek an injunction or other equitable relief; and

                           (iii)        counsel selected by Stockholders’ Agentis reasonably acceptable to Acquiror.
             IfStockholders’ Agent so assumes any such defense, he shall conduct the defenseof the Third Party Claim actively and diligently. Stockholders’ Agent shall notcompromise or settle such Third Party Claim or consent to entry of any judgmentin respect thereof without the prior written consent of Acquiror.

             (c)         In the event that Stockholders’ Agentassumes the defense of the Third Party Claim in accordance with Section10.11(b) above, Acquiror or its affiliates may retain separate counsel andparticipate in the defense of the Third Party Claim, but the fees and expensesof such counsel shall be at the expense of Acquiror unless Acquiror or itsaffiliates shall reasonably determine that there is a material conflict ofinterest between or among Acquiror or its affiliates and Stockholders withrespect to such Third Party Claim, in which case the reasonable fees andexpenses of such counsel will be reimbursed out of the Escrow Fund. Acquiror orits affiliates will not consent to the entry of any judgment or enter into anysettlement with respect to the Third Party Claim without the prior writtenconsent of Stockholders’ Agent which shall not be unreasonably withheld.Acquiror will cooperate in the defense of the Third Party Claim and willprovide full access to documents, assets, properties, books and recordsreasonably requested by Stockholders’ Agent and material to the claim and willmake available all officers, directors and employees reasonably requested byStockholders’ Agent for investigation, depositions and trial.

             (d)        In the event that Stockholders’ Agentfails or elects not to assume the defense of Acquiror or its affiliates againstsuch Third Party Claim, which Stockholders’ Agent had the right to assume underSection 10.11(b) above, (i) Acquiror or its affiliates shall have the right toundertake the defense and (ii) Acquiror shall not compromise or settle suchThird Party Claim or consent to entry of any judgment in respect thereofwithout the prior written consent of Stockholders’ Agent which shall not beunreasonably withheld. In the event that the Stockholders’ Agent is notentitled to assume the defense of Acquiror or its affiliates against such ThirdParty Claim pursuant to Section 10.11(b) above, (i) Acquiror or its affiliatesshall have the right to undertake the defense and (ii) Acquiror shall notcompromise or settle such Third Party Claim or consent to entry of any judgmentin respect thereof without the prior written consent of Stockholders’ Agentwhich shall not be unreasonably withheld. In each case, Acquiror or itsaffiliates shall conduct the defense of the Third Party Claim actively anddiligently, and Stockholders’ Agent will cooperate with Acquiror or itsaffiliates in the defense of that claim and will use its reasonable efforts tomake available all individuals reasonably requested by Acquiror forinvestigation, depositions and trial.

ARTICLE XIMISCELLANEOUS

             Section 11.1     Survival of Representations andCovenants.  All representationsand warranties of Target, Acquiror and Sub contained in this Agreement shallsurvive the Closing and any investigation at any time made by or on behalf ofAcquiror or Target until the end of the Escrow Period; provided that themaximum amount recoverable under this Agreement by the former Targetstockholders for a breach of the representations and warranties of Acquiror orSub shall be an amount equal to 10% of the total number of shares of AcquirorCommon Stock issued in the Merger multiplied by the average closing price of Acquiror’sCommon Stock for the ten trading days prior to execution hereof.  If Escrow Shares or other assets areretained in the Escrow Fund beyond expiration of the period specified in theEscrow Agreement, then (notwithstanding the expiration of such time period) therepresentation, warranty, covenant or agreement applicable to such claim shallsurvive until, but only for purposes of, the resolution of the claim to whichsuch retained Escrow Shares or other assets relate.  All covenants and agreements of Target, Acquiror and Sub shallcontinue in effect in accordance with their terms.

             Section11.2     Notices.  All notices and other communicationshereunder shall be in writing and shall be deemed given if deliveredpersonally, telecopied (which is confirmed) or two business days after beingmailed by registered or certified mail (return receipt requested) to theparties at the following addresses (or at such other address for a party asshall be specified by like notice):
             with a copy to:

             (a)         if to Acquiror or Sub:

Deltagen,Inc.1003 Hamilton AvenueMenlo Park, CA  94025Attention:  PresidentFax No.:  (650) 752-0202Telephone No.:  (650) 752-0200

witha copy at the same address to the attention of the General Counsel andSecretary and with a copy to:

Orrick,Herrington & Sutcliffe LLP400 Sansome StreetSan Francisco, CA  94111Attention:  Alan Talkington, Esq.Fax No.  (415) 773-5759Telephone No.:  (415) 773-5762

             (b)        if to Target, to:

Arcaris,Inc.615 Arapeen DriveSuite 300Salt Lake City, UT  84108Attention:  PresidentFax No:  (801) 303-0333Telephone No.:  (801) 303-0300

             witha copy to:

CooleyGodward LLP4365 Executive DriveSuite 1100San Diego, CA  92121-2128Attention:  Carl Sanchez, Esq.Fax No:  (858) 453-3555Telephone No.:  (858) 550-6042

             (c)         if to Stockholders’ Agent, to:

JonathanLeffE.M. Warburg Pincus & Co. LLC466 Lexington AvenueNew York, New York 10017Fax No:  (212) 878-9361Telephone No.:  (212) 878-0817

             Section11.3     Interpretation.  When a reference is made in this Agreementto Sections, such reference shall be to a Section of this Agreement unlessotherwise indicated.  The table ofcontents and headings contained in this Agreement are for reference purposesonly and shall not affect in any way the meaning or interpretation of thisAgreement.  Whenever the words“include,” “includes” or “including” are used in this Agreement they shall bedeemed to be followed by the words “without limitation.”  The phrase “made available” in thisAgreement shall mean that the information referred to has been made availableif requested by the party to whom such information is to be made available.References to the “knowledge of Target” or “Target’s knowledge” or any similarexpression shall mean the actual knowledge, after reasonable inquiry, of AlexanderKamb, Laura Handley, Danielle Hayes and any other individual who is anexecutive officer of Target.
             Section11.4     Counterparts.  This Agreement may be executed in two ormore counterparts, all of which shall be considered one and the same agreementand shall become effective when two or more counterparts have been signed byeach of the parties and delivered to the other parties, it being understoodthat all parties need not sign the same counterpart.

             Section 11.5     Entire Agreement; No Third Party Beneficiaries.  This Agreement (including the documents andthe instruments referred to herein), the Confidentiality Agreement, and theTransaction Documents (a) constitute the entire agreement and supersedes allprior agreements and understandings, both written and oral, among the partieswith respect to the subject matter hereof, and (b) are not intended to conferupon any person other than the parties hereto (including without limitation anyTarget employees) any rights or remedies hereunder; provided that theprovisions in Article II concerning issuance of shares of Acquiror Common Stockin the Merger, the representations and warranties in Article IV and theprovisions in Section 6.6 concerning registration rights are intended for thebenefit of all Target stockholders and may be enforced by them; and theprovisions in Section 6.9 concerning indemnification of directors and officersare intended for the benefit of such individuals and may be enforced by them.

             Section11.6     Governing Law.  This Agreement shall be governed andconstrued in accordance with the laws of the State of California without regardto any applicable conflicts of law.

             Section11.7     Assignment.  Neither this Agreement nor any of therights, interests or obligations hereunder shall be assigned by any of theparties hereto (whether by operation of law or otherwise) without the priorwritten consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon,inure to the benefit of and be enforceable by the parties and their respectivesuccessors and assigns.

             Section11.8     Amendment.  This Agreement may be amended by the partieshereto, at any time before or after approval of matters presented in connectionwith the Merger by the stockholders of Target, but after any such stockholderapproval, no amendment shall be made which by law requires the further approvalof stockholders without obtaining such further approval.  This Agreement may not be amended except byan instrument in writing signed on behalf of each of the parties hereto.

             Section11.9     Extension; Waiver.  At any time prior to the Effective Time, theparties hereto may, to the extent legally allowed, (i) extend the time for theperformance of any of the obligations or the other acts of the other partieshereto, (ii) waive any inaccuracies in the representations or warrantiescontained herein or in any document delivered pursuant hereto and (iii) waivecompliance with any of the agreements or conditions contained herein. Anyagreement on the part of a party hereto to any such extension or waiver shallbe valid only if set forth in a written instrument signed on behalf of suchparty.

             Section 11.10   Specific Performance. The parties hereto agree that irreparable damage would occur in theevent that any of the provisions of this Agreement were not performed inaccordance with their specific terms or were otherwise breached.  It is accordingly agreed that the partiesshall be entitled to injunctive relief to prevent breaches of this Agreementand to enforce specifically the terms and provisions hereof in any court of theUnited States or any state having jurisdiction, this being in addition to anyother remedy to which they are entitled at law or in equity.

[SignaturePage Follows]
             INWITNESS WHEREOF, Acquiror, Sub and Target have caused this Agreement and Planof Merger and Reorganization to be signed by their respective officersthereunto duly authorized as of the date first written above.
 DELTAGEN,  INC.   By:  /s/  Augustine G. Yee Name:  Augustine G. Yee Title:  General Counsel   WINTER  GAMES ACQUISITION CORPORATION   By:  /s/ Augustine G. Yee Name:  Augustine G. Yee Title:  General  Counsel   ARCARIS,  INC.   By:  /s/ Alexander Kamb Name:  Alexander  Kamb Title:  President  and CEO
 

 

 

 

 

 

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