**TABLE OF CONTENTS**       **Page****ARTICLE I**  **THE MERGER******  2Section 1.1  Effective Time of the Merger  2Section 1.2  Closing  2Section 1.3  Effects of the Merger  2Section 1.4  Directors and Officers  3**ARTICLE II**  **CONVERSION OF SECURITIES******  3Section 2.1  Conversion of Capital Stock  3Section 2.2  Escrow Agreement  7Section 2.3  Dissenting Shares  8Section 2.4  Exchange of Certificates  8Section 2.5  Distributions with Respect to Unexchanged Shares  10Section 2.6  No Fractional Shares  10Section 2.7  Tax Consequences  10Section 2.8  No Further Ownership Rights in Target Capital Stock  10Section 2.9  Taking of Necessary Action; Further Action  11**ARTICLE III**  **REPRESENTATIONS AND WARRANTIES OF TARGET******  11Section 3.1  Organization of Target  11Section 3.2  Subsidiaries  12Section 3.3  Target Capital Structure  12Section 3.4  Authority; No Conflict; Required Filings and Consents  13Section 3.5  Financial Statements; Absence of Undisclosed Liabilities  15Section 3.6  Tax Matters  15Section 3.7  Absence of Certain Changes or Events  17Section 3.8  Title and Related Matters  18Section 3.9  Proprietary Rights  19Section 3.10  Employee Benefit Plans  21Section 3.11  Bank Accounts  23Section 3.12  Contracts  23Section 3.13  Certain Agreements Affected by the Merger  25Section 3.14  Compliance With Law  25Section 3.15  Labor Difficulties; No Discrimination  25Section 3.16  Trade Regulation  26Section 3.17  Insider Transactions  26Section 3.18  Employees, Independent Contractors and Consultants  26Section 3.19  Insurance  27Section 3.20  Litigation  27Section 3.21  Restrictions on Business Activities  27Section 3.22  Governmental Authorizations and Regulations  27Section 3.23  Compliance with Environmental Requirements  27Section 3.24  Export Control Laws.  28Section 3.25  Assets  28Section 3.26  Corporate Documents  28Section 3.27  No Brokers  29Section 3.28  Vote Required  29Section 3.29  Target Action  29Section 3.30  Offers  29Section 3.31  Information Statement  29i 
**TABLE OF CONTENTS** **(continued)**      **Page**Section 3.32  Complete Copies of Materials  29Section 3.33  Disclosure  29**ARTICLE IV**  **REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND SUB******  30Section 4.1  Organization of Acquiror and Sub  30Section 4.2  Acquiror and Sub Capital Structure  30Section 4.3  Authority; No Conflict; Required Filings and Consents  31Section 4.4  Commission Filings; Financial Statements  32Section 4.5  Absence of Certain Changes or Events  32Section 4.6  Compliance with Laws  32Section 4.7  Interim Operations of Sub  33Section 4.8  Disclosure  33Section 4.9  Stockholders Consent  33Section 4.10  Litigation  33**ARTICLE V**  **PRECLOSING COVENANTS OF TARGET******  33Section 5.1  Notice to Target Stockholders  33Section 5.2  Advice of Changes  34Section 5.3  Operation of Business  34Section 5.4  Access to Information  36Section 5.5  Satisfaction of Conditions Precedent  37Section 5.6  Other Negotiations  37**ARTICLE VI**  **PRECLOSING AND OTHER COVENANTS OF ACQUIROR AND SUB******  37Section 6.1  Advice of Changes  37Section 6.2  Reservation of Acquiror Common Stock  37Section 6.3  Satisfaction of Conditions Precedent  38Section 6.4  Nasdaq National Market Listing  38Section 6.5  Stock Options and Warrants  38Section 6.6  Registration of Shares Issued in the Merger  38Section 6.7  Procedures for Sale of Shares Under Registration Statement  41Section 6.8  Certain Employee Benefit Matters  42Section 6.9  Indemnity of Target Affiliates  42**ARTICLE VII**  **OTHER AGREEMENTS******  42Section 7.1  Confidentiality  42Section 7.2  No Public Announcement  42Section 7.3  Regulatory Filings; Consents; Reasonable Efforts  43Section 7.4  Further Assurances  43Section 7.5  Escrow Agreement  43Section 7.6  FIRPTA  43Section 7.7  Blue Sky Laws  43Section 7.8  Other Filings  44**ARTICLE VIII**  **CONDITIONS TO MERGER******  44Section 8.1  Conditions to Each Party’s Obligation to Effect the Merger  44Section 8.2  Additional Conditions to Obligations of Acquiror and Sub  44Section 8.3  Additional Conditions to Obligations of Target  47ii 
**TABLE OF CONTENTS** **(continued)**      **Page****ARTICLE IX**  **TERMINATION AND AMENDMENT******  49Section 9.1  Termination  49Section 9.2  Effect of Termination  49Section 9.3  Fees and Expenses  49**ARTICLE X**  **ESCROW AND INDEMNIFICATION******  50Section 10.1  Indemnification  50Section 10.2  Escrow Fund  50Section 10.3  Damage Threshold  50Section 10.4  Escrow Periods  50Section 10.5  Claims Upon Escrow Fund  51Section 10.6  Valuation  51Section 10.7  Objections to Claims  51Section 10.8  Resolution of Conflicts  51Section 10.9  Stockholders’ Agent  52Section 10.10  Actions of the Stockholders’ Agent  52Section 10.11  Third-Party Claims  53**ARTICLE XI**  **MISCELLANEOUS******  54Section 11.1  Survival of Representations and Covenants  54Section 11.2  Notices  54Section 11.3  Interpretation  56Section 11.4  Counterparts  56Section 11.5  Entire Agreement; No Third Party Beneficiaries  56Section 11.6  Severability  56Section 11.7  Remedies Cumulative  56Section 11.8  Governing Law  56Section 11.9  Rules of Construction  57Section 11.10  Assignment  57Section 11.11  Amendment  57Section 11.12  Extension; Waiver  57Section 11.13  Specific Performance  57iii 
**TABLE OF CONTENTS** **(continued)** **Exhibits**  **Page**EXHIBIT A-1– FORM OF SALK LICENSE AMENDMENT*   EXHIBIT A-2 – FORM OF BAYLOR LICENSE AMENDMENT*   EXHIBIT A-3 – FORM OF SYDNEY LICENSE AMENDMENT*   EXHIBIT B-1 – SCHRADER CONSULTING AGREEMENT*   EXHIBIT B-2 – WEI CONSULTING AGREEMENT*   EXHIBIT B-3 – AJA CONSULTING AGREEMENT*   EXHIBIT C – MOORE CONSULTING AGREEMENT*   EXHIBIT D – NONCOMPETITION AGREEMENT*   EXHIBIT E – RESTRICTED STOCK AGREEMENT*   EXHIBIT F – SALE RESTRICTION AGREEMENT*   EXHIBIT G – SUPPORT AGREEMENT*   EXHIBIT H – ESCROW AGREEMENT*   EXHIBIT I – SUBJECT MATTER OF OPINION OF COUNSEL TO TARGET*   EXHIBIT J – SUBJECT MATTER OF OPINION OF COUNSEL TO ACQUIROR*    SCHEDULES*  * The schedules and exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. iv 
 **AGREEMENT AND PLAN OF MERGER AND REORGANIZATION** THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION dated as of January 15, 2002 (this “**Agreement**”), is entered into by and amongDeltagen, Inc., a Delaware corporation (“**Acquiror**”), XP Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Acquiror (“**Sub**”), and XenoPharm, Inc., a Delaware corporation(“**Target**”).  **RECITALS:** A.    The Boards of Directors of Acquiror, Sub and Target deem it advisable and in the best interests of each corporation and their respective stockholders thatAcquiror and Target combine to advance the long-term business interests of Acquiror and Target;  B.    Thecombination of Acquiror and Target shall be effected by the terms of this Agreement through a transaction in which Sub will merge with and into Target, Target will become a wholly-owned subsidiary of Acquiror and the stockholders of Target willbecome stockholders of Acquiror (the “**Merger**”);  C.    For Federal income tax purposes, itis intended that the Merger shall qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “**Code**”);  D.    As a further condition and inducement to Acquiror’s willingness to enter into this Agreement, Target will prior to the closing of the transactionscontemplated by this Agreement execute and deliver amendments to its license agreements with The Salk Institute for Biological Studies dated December 1, 2000 (the “**Salk License**”), Baylor College of Medicine dated July 6, 2001 (the“**Baylor License**”) and the University of Sydney dated June 28, 2001 (the “**Sydney License**”) in the forms attached hereto as Exhibits A-1, A-2 and A-3, respectively, or as such forms may be amended with theprior written approval of Acquiror (collectively, the “**License Amendments**”); *provided*, that Acquiror shall not unreasonably delay in responding to requests for such approval;  E.    As a further condition and inducement to Acquiror’s willingness to enter into this Agreement, William Schrader, Ping Weiand Teresa Aja, employees of Target who are also either stockholders or optionholders of Target, have, concurrently with the execution of this Agreement, executed and delivered Consulting Agreements in the forms attached hereto as Exhibits B-1,B-2 and B-3, which agreements shall only become effective at the Effective Time (as defined in Section 1.1 below); David Moore, a stockholder of Target, has, concurrently with the execution of this Agreement, executed and delivered a ConsultingAgreement in the form attached hereto as Exhibit C, which agreement shall only become effective at the Effective Time; and each of Jay Lichter, William Schrader, Ron Evans, David Moore and Kevin Kinsella have, concurrently with the executionof this Agreement, executed and delivered to Acquiror Noncompetition Agreements in the form attached hereto as Exhibit D (the “**Noncompetition Agreements**”), which agreements shall only become effective at the EffectiveTime;**** F.    As a further condition and inducement to Acquiror’s willingness to enter into thisAgreement, William Schrader has, concurrently with the execution of this Agreement, executed 
and delivered to Acquiror a restricted stock agreement in the form attached hereto as Exhibit E (the “**Restricted Stock Agreement**”),which agreement shall only become effective at the Effective Time;**** G.    As a further condition andinducement to Acquiror’s willingness to enter into this Agreement, certain of Target’s significant stockholders, including Jay Lichter, William Schrader, Ron Evans, David Moore and Kevin Kinsella, have, concurrently with the execution ofthis Agreement, executed and delivered to Acquiror sale restriction agreements in the form attached hereto as Exhibit F (the “**Sale Restriction Agreement**”); and**** H.    As a further condition and inducement to Acquiror’s willingness to enter into this Agreement, certain holders of Target’s Common Stock orTarget’s Preferred Stock, including Jay Lichter, William Schrader, Ron Evans, David Moore, Kevin Kinsella and Scott Salka, have, concurrently with the execution of this Agreement, executed and delivered to Acquiror support agreements in theform attached hereto as Exhibit G (the “**Support Agreements**”).**** NOW, THEREFORE, in considerationof the foregoing and the respective representations, warranties, covenants and agreements set forth below, the parties agree as follows:  **ARTICLE I** **THE 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 mutually acceptable form as is required by the relevant provisions of the Delaware General Corporation Law (“**Delaware Law**”) shall be duly executed by the Surviving Corporation (asdefined in Section 1.3) and thereafter delivered to the Secretary of State of the State of Delaware for filing on the Closing Date (as defined in Section 1.2). The Merger shall become effective upon the filing of the Certificate of Merger with theSecretary 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 by Acquiror and Target, which shall be no laterthan the second business day after the satisfaction or waiver of the last of the conditions set forth in Article VIII to be satisfied or waived (the “**Closing Date**”), at the offices of Orrick, Herrington & Sutcliffe LLP, 400Sansome Street, San Francisco, California unless another date, time or place is agreed to in writing by Acquiror and Target.  Section 1.3    Effects of the Merger.  (a)    At the Effective Time (i) theseparate existence of Sub shall cease and Sub shall be merged with and into Target (Sub and Target are sometimes referred to herein as the “**Constituent Corporations**” and Target following consummation of the Merger is sometimesreferred to herein as the “**Surviving Corporation**”), (ii) subject to Section 6.9 of this Agreement, the Certificate of Merger shall provide that the Restated Certificate of Incorporation of the Target as amended and restated asset forth in such Certificate of Merger shall become the 2 
 Certificate of Incorporation of the Surviving Corporation, until the same shall thereafter be altered, amended orrepealed in accordance with applicable law or such Certificate of Incorporation and (iii) subject to Section 6.9 of this Agreement, the Bylaws of Sub as in effect immediately prior to the Effective Time shall be the Bylaws of the SurvivingCorporation.  (b)    At the Effective Time, the effect of the Merger shall be as provided in this Agreementand in the applicable provisions of Delaware Law. Without limiting the generality of the foregoing, at and after the Effective Time, the Surviving Corporation shall possess all the rights, privileges, powers and franchises of a public as well as ofa private nature, and be subject to all the restrictions, disabilities and duties of each of the Constituent Corporations.  Section 1.4    Directors and Officers.    The directors of Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office inaccordance with the Certificate of Incorporation and Bylaws of the Surviving Corporation, and the officers of Sub immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, in each case until their respectivesuccessors are duly elected or appointed.  **ARTICLE II** **CONVERSION OF SECURITIES** Section2.1    Conversion of Capital Stock.    At the Effective Time, by virtue of the Merger and 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 capital stock of Sub, the following shall occur:  (a)    Capital Stock of Sub.    Each issued and outstanding share of the capital stock of Sub shall be converted into and become one fully paid and nonassessable share of Common Stock, $0.001par value, of the Surviving Corporation.  (b)    Cancellation of Acquiror-Owned and Target-OwnedStock.    Any shares of Target Common Stock that are owned by Acquiror, Sub, Target or any other direct or indirect wholly-owned Subsidiary (as defined below) of Acquiror or Target shall be canceled and retired and shallcease to exist 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 other organization, whetherincorporated or unincorporated, of which (i) such party or any other Subsidiary of such party is a general partner (excluding partnerships, the general partnership interests of which held by such party or any Subsidiary of such party do not have amajority of the voting interest in such partnership) or (ii) at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the Board of Directors or others performing similar functionswith respect to such corporation or other organization or a majority of the profit interests in such other organization is directly or indirectly owned or controlled by such party or by any one or more of its subsidiaries, or by such party and oneor more of its subsidiaries. 3 
 (c)    Conversion of Outstanding Target Capital Stock  Shares issued at Closing:  (i)    Subject to Sections 2.1(b), 2.2 and 2.3, and in addition to any shares of Acquiror Common Stock to be received pursuant to Section 2.1(e), at the Effective Time, each issued and outstandingshare 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 CommonStock 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 (x) the Total Merger Shares, by (y) the Diluted Target Capitalization. The “**Total Merger Shares**” shall beequal 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 (x) $4,000,000, minus (y) (1) the total amount ofThird Party Expenses (as defined in Section 9.3), including, without limitation, all fees, costs and expenses of services provided to Target as listed on **Schedule 2.1(c)**, (2) the amount of Accrued Legal Expenses (as defined below) to be paidpursuant to Section 8.3(a), (3) outstanding Third Party Expenses representing reasonable legal fees incurred by the Target for services provided by Cooley Godward LLP not paid by Acquiror prior to the Effective Time pursuant to Section 8.3(a), and(4) the excess, if any, of the total amount of all liabilities, other than Third Party Expenses and Accrued Legal Expenses, outstanding at Closing, including, without limitation, severance obligations and deferred compensation, over theTarget’s cash balance at Closing. For purposes of this Agreement, “**Accrued Legal Expenses**” shall mean reasonable expenses, other than Third Party Expenses, incurred but not paid by Target prior to the Effective Time for legalservices provided to the Target by Cooley Godward LLP. The “**10-Day Average Acquiror Closing Price**” shall be equal to the average closing price of Acquiror Common Stock (as quoted on the Nasdaq National Market as reported in *TheWall Street Journal*) for the 10 trading day period immediately prior to the Closing Date. The “**Average Acquiror Closing Price**” shall be equal to the 10-Day Average Acquiror Closing Price, subject to the following limitation: ifthe 10-Day Average Acquiror Closing Price is less than $7.50, then the Average Acquiror Closing Price shall be $7.50; *provided, however*, if the 10-Day Average Acquiror Closing Price is less than $5.50, the Target shall have the right toterminate this Agreement. Examples of the calculation of the Average Acquiror Closing Price are set forth on **Schedule 2.1(c)(ii)**. The “**Diluted Target Capitalization**” shall be equal to the aggregate number of shares of TargetCommon Stock outstanding as of immediately prior to the Effective Time (assuming for such calculation the conversion of all shares of Target Preferred Stock).  (iii)    All shares of Target Common 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 shallautomatically 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 andany 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. 4 
 (d)    In addition to any Merger Shares to be received by the stockholdersof the Target pursuant to Section 2.1(c), if any Earn-Out Shares are required to be paid by the Acquiror pursuant to Section 2.1(e), then  (i)    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 fractionof 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)(ii); it being understood that if any Earn Out Shares are issued prior to the end of the EscrowPeriod, then 10% of any Earn Out Shares to be issued hereunder shall be placed in escrow in accordance with Section 2.2(a).  (ii)    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 thenrequired to be paid, divided by (2) the Diluted Target Capitalization.  (e)    Earn OutShares.    Subject to Section 2.2, upon satisfaction of one or more of the conditions set forth in clauses (i) through (v) of this Section 2.1(e), Acquiror shall be required to issue to the former security holders of Targetup to an aggregate number of shares of Acquiror Common Stock equal to $11,000,000 divided by the Average Acquiror Closing Price (such aggregate number of shares being referred to herein as the “**Earn Out Shares**”), which shall bedistributed to the former holders of Target securities in accordance with Section 2.1(d).  (i)    withinthirty (30) days after the payment or payments under an agreement, contract or other instrument or series of agreements, contracts or other instruments relating to or providing for the use of the XenoPharm Technology (as defined below), includingbut not limited to a [ * ], which results in [ * ] or other payments all paid within [ * ] of the Effective Time of (A) $[ * ], that number of Earn Out Shares equal to $[ * ] divided by the Average Acquiror Closing Price will be paid out inaccordance with Section 2.1(d) and (B) an additional $[ * ] million for an aggregate of $[ * ] million in [ * ] or other payments, an additional number of Earn Out Shares equal to $[ * ] divided by the Average Acquiror Closing Price will be paid outin accordance with Section 2.1(d);  (ii)    within thirty (30) days after the second anniversary date of theEffective Time provided there has not been any [ * ] (collectively, “**Patent Litigation**”), that number of Earn Out Shares equal to $[ * ] divided by the Average Acquiror Closing Price will be paid out in accordance with Section2.1(d);  (iii)    upon the issuance of U.S. patents, as demonstrated by notification in the *OfficialGazette of the United States Patent and Trademark Office,* containing claims relating to (i) [ * ], and (ii) [ * ], that number of Earn Out Shares equal to $[ * ] divided by the Average Acquiror Closing Price will be paid out in accordance withSection 2.1(d), such claims     ***** **Confidential portions of this document have been omitted pursuant to a confidential treatment request and have been filed separately with the Securities and ExchangeCommission.**5 
 to read as follows, or to be equivalent, in Acquiror’s discretion and judgment, in scope to the following claims: (1)    [ * ]:  (A)    A [ * ]; and  (B)    A [ * ]; and  (2)    [ * ];  (iv)    upon the issuance of U.S. patents, as demonstrated by notification in the *Official Gazette of the UnitedStates Patent and Trademark Office,* containing claims relating to [ * ], that number of Earn Out Shares equal to $[ * ] divided by the Average Acquiror Closing Price will be paid out in accordance with Section 2.1(d), such claims to read asfollows, or to be equivalent, in Acquiror’s discretion and judgment, in scope to the following claims:  (1)    A method of [ * ]; and  (2)    An assay for [ * ];  (v)    upon the issuance of U.S. patents, as demonstrated by notification in the *Official Gazette of the United StatesPatent and Trademark Office,* containing claims relating to [ * ], that number of Earn Out Shares equal to $[ * ] divided by the Average Acquiror Closing Price will be paid out in accordance with Section 2.1(d), such claims to read as follows, orto be equivalent, in Acquiror’s discretion and judgment, in scope to the following claims: [ * ] (as defined in the claims above), said [ * ]; and**** (vi)    Acquiror shall use commercially reasonable efforts to (1) enter into agreements and exploit the XenoPharm Technology as contemplated in clause (i), and (2) prosecute and cause to be issuedthe patents underlying the patent applications referenced in clauses (iii), (iv) and (v) above.  For purposes of this Section2.1(e), the term “**XenoPharm Technology**” shall mean [ * ].**** (f)    Target Optionsand Warrants.  (i)    Target Options. In connection with the Merger, Acquiror shall not assume orsubstitute similar stock awards for any outstanding options, whether vested or unvested, to purchase Target Common Stock (the “**Target Stock Options**”) under Target’s 2000 Equity Incentive Plan (the “**Target StockPlan**”). Pursuant to the terms of the Target Stock Plan, the vesting and exercisability of such Target Stock Options, held by participants whose continuous service has not terminated, shall be accelerated in full, and the Target StockOptions shall terminate if not exercised at or prior to the Effective Time.     ***** **Confidential portions of this document have been omitted pursuant to a confidential treatment request and have been filed separately with the Securities and ExchangeCommission.**6 
 (ii)    Target Warrants. Effective immediately prior to the Effective Timeand contingent upon consummation of the Merger, all outstanding warrants to purchase Target Capital Stock (the “**Target Warrants**”) shall terminate unexercised by virtue of the Merger and without any action on the part of the holderthereof.  (g)    Restricted Shares. Shares of Target Common Stock which are subject to repurchase byTarget in the event the holder thereof ceases to be employed by Target (“**Target Restricted Shares**”) shall be converted into Acquiror Common Stock on the same basis as provided in Section 2.1(c) above and shall be registered in suchholder’s name, but shall be held by Target or Acquiror pursuant to the existing agreements in effect on the date of this Agreement. Holders of the Target Restricted Shares are identified on **Schedule 2.1(g)** together with the vestingschedules associated with such shares.  Section 2.2    Escrow Agreement.    Atthe Effective Time, or such later time as is determined in accordance with Section 2.3(b), Acquiror shall (i) deliver to each holder of capital stock of Target a certificate representing that number of Merger Shares equal to 90% of the total numberof Merger Shares to which such holder is entitled to receive pursuant to Section 2.1(c), and (ii) deliver to the Escrow Agent, to be held in escrow, a certificate representing that number of Merger Shares equal to 10% of the total number of MergerShares to which such holder is entitled to receive pursuant to Section 2.1(c). In addition, at any time prior to the end of the Escrow Period that Acquiror is required to pay to the former holders of Target capital stock any Earn Out Shares pursuantto Section 2.1(d), upon such date of payment, Acquiror shall (i) deliver to each such stockholder a certificate representing that number of Earn Out Shares to be paid at such time equal to 90% of the total number of Earn Out Shares then required tobe paid, and (ii) deliver to the Escrow Agent, to be held in escrow, that number of Earn Out Shares to be paid at such time equal to 10% of the total number of Earn Out Shares then required to be paid. The aggregate number of Merger Shares to beplaced in escrow and any Earn Out Shares placed in escrow from time to time pursuant to this Section 2.2 shall be collectively referred to herein as the “**Escrow Shares**”. The Escrow Shares shall be held as security for theindemnification rights of Acquiror under Article X and pursuant to the provisions of an escrow agreement in the form attached hereto as Exhibit H (the “**Escrow Agreement**”) executed pursuant to Section 7.5.  Section 2.3    Dissenting Shares.  (a)    Notwithstanding any provision of this Agreement to the contrary, any shares of Target Common Stock held by a holder who has exercised, or who still has theright to exercise, such holder’s dissenter’s rights in accordance with Section 262 of Delaware Law or Section 1300 of the California Corporations Code (“**California Law**”) (“**Dissenting Shares**”), shall not beconverted into or represent a right to receive Acquiror Common Stock pursuant to Section 2.1, but the holder of the Dissenting Shares shall only be entitled to such rights as are granted by Section 262 of Delaware Law and Section 1300 of CaliforniaLaw.  (b)    Notwithstanding the provisions of Section 2.3(a), if any holder of shares of Target CommonStock who does not vote in favor of the Merger Agreement or who demands his dissenter’s rights with respect to such shares under Section 2.1 shall effectively withdraw or lose (through failure to perfect or otherwise) his rights to receivepayment for the fair market value of such shares under Delaware Law and California Law, then, as of the later of the 7 
 Effective Time or the occurrence of such event, such holder’s shares shall automatically be converted into andrepresent only the right to receive Acquiror Common Stock and payment for fractional shares as provided in Section 2.1(c) and 2.6, without interest, upon surrender of the certificate or certificates representing such shares; *provided* that ifsuch holder effectively withdraws or loses his right to receive payment for the fair market value of such shares after the Effective Time, then, at such time Acquiror will deposit in escrow certificates representing 10% of the shares of AcquirorCommon Stock which such holder would otherwise be entitled to receive.  (c)    Target shall give Acquiror(i) prompt notice of any written demands for payment with respect to any shares of capital stock of Target pursuant to Section 262 of Delaware Law or Section 1300 of California Law, withdrawals of such demands, and any other instruments servedpursuant to Delaware Law or California Law and received by the Target and (ii) the opportunity to participate in all negotiations and proceedings with respect to demands for dissenter’s rights under Delaware Law and California Law. Target shallnot, except with the prior written consent of Acquiror, voluntarily make any payment with respect to any demands for dissenter’s rights with respect to Target Common Stock or offer to settle or settle any such demands.  Section 2.4    Exchange of Certificates.  (a)    From and after the Effective Time, each holder of an outstanding certificate or certificates (“**Certificates**”) which represented shares ofTarget Common Stock immediately prior to the Effective Time shall, upon the surrender of such Certificate to Acquiror (or at Acquiror’s option, an exchange agent to be appointed by Acquiror), receive in exchange for all Certificates held bysuch holder a certificate representing the number of whole shares of Acquiror Common Stock (other than the Escrow Shares attributable to such holder) into which the Target Common Stock evidenced by the Certificates so surrendered shall have beenconverted pursuant to the provisions of Article II of this Agreement. The surrender of Certificates shall be accompanied by duly completed and executed Letters of Transmittal, which (along with appropriate instructions) shall be sent byAcquiror’s Transfer Agent to the former Target stockholders promptly but in any event with ten business days thereafter following the Closing Date. Until surrendered, each outstanding Certificate which prior to the Effective Time representedshares of Target Common Stock shall be deemed for all corporate purposes to evidence ownership of the number of whole shares of Acquiror Common Stock into which the shares of Target Common 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 and after the Effective Time, the holders of shares of Target Common Stock shall ceaseto have any rights in respect of such shares and their rights shall be solely in respect of the Acquiror Common Stock into which such shares of Target Common Stock have been converted. From and after the Effective Time, there shall be no furtherregistration of transfers on the records of Target of shares of Target Common Stock outstanding immediately prior to the Effective Time.  (b)    If any shares of Acquiror Common Stock are to be issued in the name of a person other than the person in whose name the Certificate(s) surrendered in exchange therefor is registered, it shall be a condition to theissuance of such shares that (i) the Certificate(s) so 8 
surrendered shall be transferable, and shall be properly assigned, endorsed or accompanied by appropriate stock powers, (ii) such transfer shall otherwise beproper and (iii) the person requesting such transfer shall pay Acquiror, or its exchange agent, any transfer or other taxes payable by reason of the foregoing or establish to the satisfaction of Acquiror that such taxes have been paid or are notrequired to be paid. Notwithstanding the foregoing, neither Acquiror nor Target shall be liable to a holder of shares of Target Common Stock for shares of Acquiror Common Stock issuable to such holder pursuant to the provisions of Article II of theAgreement that are delivered to a public official pursuant to applicable abandoned property, escheat or similar laws.  (c)    In the event any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificate to be lost, stolen or destroyed, Acquiror shall issue inexchange for such lost, stolen or destroyed Certificate the shares of Acquiror Common Stock issuable in exchange therefor pursuant to the provisions 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 agreement against any claim that may be made against Acquiror with respect to the Certificate alleged tohave been lost, stolen or destroyed.  (d)    The certificate or certificates representing the shares ofAcquiror Common Stock to be issued or paid under this Agreement shall bear the following legends (as well as any legends required by applicable state and federal corporate and securities laws):  THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE ORDISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO THE ACQUIROR THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THESECURITIES ACT OF 1933.  Section 2.5    Distributions with Respect to UnexchangedShares.    No dividends or other distributions declared or made after the Effective Time with respect to Acquiror Common Stock with a record date after the Effective Time shall be paid to the holder of any unsurrenderedCertificate with respect to the shares of Acquiror Common Stock represented thereby and no cash payment in lieu of fractional shares shall be paid to any such holder pursuant to Section 2.6 below until the holder of record of such Certificate shallsurrender such Certificate. Subject to the effect of applicable laws, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of Acquiror Common Stock issued in exchangetherefor, without interest, (i) at the time of such surrender, the amount of any cash payable in lieu of a fractional share of Acquiror Common Stock to which such holder is entitled pursuant to Section 2.6 below and the amount of dividends or otherdistributions with a record date after the Effective Time previously paid with respect to such whole shares of Acquiror Common Stock, and (ii) at the appropriate payment date, the amount of dividends or other distributions with a record date afterthe Effective Time but prior to surrender 9 
 and a payment date subsequent to surrender payable with respect to such whole shares of Acquiror Common Stock. Section 2.6    No Fractional Shares.    No certificate or scrip representingfractional shares of Acquiror Common Stock shall be issued upon the surrender for exchange of Certificates, and such fractional share interests will not entitle the owner thereof to vote or to any rights of a stockholder of Acquiror. Notwithstandingany other provision of this Agreement, each holder of shares of Target Common Stock exchanged pursuant to the Merger who would otherwise have been entitled to receive a fraction of a share of Acquiror Common Stock (after taking into account allCertificates delivered by such holder) shall receive, in lieu thereof, cash (without interest) in an amount equal to such fractional part of a share of Acquiror Common Stock multiplied by the Average Acquiror Closing Price.  Section 2.7    Tax Consequences.    It is intended by the parties hereto that the Merger shall constitutea “reorganization” within the meaning of Section 368 of the Code. The parties hereto adopt this Agreement as a “plan of reorganization” within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Income TaxRegulations.  Section 2.8    No Further Ownership Rights in Target CapitalStock.    All shares of Acquiror Common Stock issued upon the surrender for exchange of shares of Target Common Stock in accordance with the terms hereof (including any cash paid in lieu of fractional shares) shall be deemedto have been issued in full satisfaction of all rights pertaining to such shares of Target Common Stock, and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Target Common Stock which wereoutstanding immediately prior to the Effective Time. If, after the Effective Time, 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; Further Action.    If, at any time after the Effective Time,any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of Target, theofficers and directors of Target are fully authorized 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 is not inconsistent with this Agreement. **ARTICLE III** **REPRESENTATIONS AND WARRANTIES OF TARGET** Target represents and warrants to Acquiror and Sub, except asset forth in the disclosure schedule arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article III and delivered by Target to Acquiror on or before the date of this Agreement (the “**TargetDisclosure Schedule**”), as follows:**** Section 3.1    Organization ofTarget.    Target is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has all requisite 10 
 corporate power to own, lease and operate its property and to carry on its business as now being conducted, and is dulyqualified or licensed to do business and is in good standing as a foreign corporation in each jurisdiction in which the nature of its business or ownership or leasing of properties makes such qualification or licensing necessary, except where thefailure to be so qualified or licensed would be reasonably likely to result in a Target Material Adverse Effect (as defined below). Target does not have any sales offices, manufacturing facilities, or any other offices or facilities nor anyemployees in any location other than San Diego, California. California is the only state in which Target is duly qualified or licensed to transact business as a foreign corporation.  “**Target Material Adverse Effect**” means any change or effect that is materially adverse to the condition (financial or otherwise), assets, liabilities, business orresults of operations of the Target taken as a whole; *provided, however,* that none of the Excluded MAE Factors shall be deemed (either alone or in combination) to constitute, and none of the Excluded MAE Factors shall be taken into account indetermining whether there has been or will be, a Target Material Adverse Effect.  “**Excluded MAE factors**” means,with respect to the Target or Acquiror: (a) any change in the market price or trading volume of the Target’s or Acquiror’s stock, as applicable; (b) any failure by the Target or Acquiror, as applicable, to meet internal projections orforecasts or published revenue or earnings predictions; or (c) any adverse change or effect (including any litigation, loss of employees, cancellation of or delay in customer orders, reduction in revenues or income or disruption of businessrelationships) arising from or attributable or relating to: (i) the announcement or pendency of the Merger, (ii) conditions affecting the industry or industry sector in which the Target or the Acquiror, as applicable, or any of their respectiveSubsidiaries participates, the U.S. economy as a whole or any foreign economy in any location where the Target or Acquiror, as applicable, or any of its respective Subsidiaries has material operations or sales, (iii) conditions affecting third partysuppliers of the Target or Acquiror, as applicable, (iv) legal, accounting, investment banking or other fees or expenses incurred in connection with the transactions contemplated by this Agreement, (v) the payment of any amounts due to, or theprovision of any other benefits to, any officers or employees under employment contracts, non-competition agreements, employee benefit plans, severance arrangements or other arrangements in existence as of the date of this Agreement, (vi) compliancewith the terms of, or the taking of any action required by, this Agreement, (vii) the taking of any action approved or consented to by the Target or Acquiror, as applicable, (viii) any change in accounting requirements or principles or anychange in applicable laws, rules or regulations or the interpretation thereof, or (ix) any action required to be taken under applicable laws, rules, regulations or agreements, other than antitrust or unfair competition laws, rules orregulations.**** Section 3.2    Subsidiaries.    Target has no subsidiaries.Target does not own or control (directly or indirectly) any capital stock, bonds or other securities of, and does not have any proprietary interest in, any other corporation, general or limited partnership, firm, association or businessorganization, entity or enterprise, and Target does not control (directly or indirectly) the management or policies of any other corporation, partnership, firm, association or business organization, entity or enterprise. 11 
 Section 3.3    Target Capital Structure.  (a)    The authorized capital stock of Target consists of 20,000,000 shares of Target Common Stock and 10,000,000 shares ofPreferred Stock, $0.001 par value (the “Target Preferred Stock), of which 7,500,000 shares are designated as Series A Preferred Stock. As of the date of this Agreement, there are: (i) 7,060,000 shares of Target Common Stock issued andoutstanding, all of which are validly issued, fully paid and nonassessable and 3,808,441 of which are subject to repurchase rights under the Target Stock Plan or related agreements as described in the Target Disclosure Schedule; (ii) 6,622,698shares of Series A Preferred Stock issued and outstanding, all of which are validly issued, fully paid and nonassessable, and all of which are convertible into Target Common Stock on a one share for one share basis; (iii) 450,000 shares of TargetSeries A Stock reserved for future issuance upon exercise of warrants to purchase Series A Stock, (iv) 10,000,000 shares of Target Common Stock reserved for future issuance upon conversion of the Target Preferred Stock; (v) 820,000 shares of TargetCommon Stock reserved for future issuance pursuant to Target Options granted and outstanding under the Target Stock Plan; and (vi) 3,080,000 shares of Target Common Stock available and reserved for issuance upon exercise of options or pursuant toawards to be granted in the future under the Target Stock Plan. As of the date hereof, the issued and outstanding shares of Target Common Stock and Target Preferred Stock are held of record by the stockholders of Target as set forth and identifiedin the stockholder list attached as **Schedule 3.3(a)** to the Target Disclosure Schedule. Prior to the Effective Time, all outstanding shares of Target Preferred Stock shall have converted into Target Common Stock. As of the date hereof, theissued and outstanding Target Options are held of record by the option holders as set forth and identified on **Schedule 3.3(a)**. The issued and outstanding warrants to acquire Target Common Stock and Target Preferred Stock are held of record bythe warrantholders as set forth and identified on **Schedule 3.3(a)** (the “**Target Warrants**”). All shares of Target Common Stock and Target Preferred Stock subject to issuance as specified above, upon issuance on the terms andconditions specified in the instruments pursuant to which they are issuable, shall be duly authorized, validly issued, fully paid and nonassessable. All shares of Target Common Stock issuable upon the exercise of Target Options, upon issuance on theterms and conditions specified in the instrument pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and nonassessable. Except as otherwise set forth in **Schedule 3.3(a)**, none of the issued and outstandingshares of Target Common Stock are subject to contractual rights to repurchase upon the termination of the employment or consulting services of the holder thereof with Target or its affiliates. All outstanding shares of Target Common Stock and TargetPreferred Stock and outstanding Target Options and Target Warrants (collectively **“Target Securities**”) were issued in compliance with applicable federal and state securities laws. There are no obligations, contingent or otherwise, ofTarget to repurchase, redeem or otherwise acquire any shares of Target Common Stock or Target Preferred Stock or make any investment (in the form of a loan, capital contribution or otherwise) in any other entity. An updated **Schedule 3.3(a)**reflecting changes, if any, permitted by this Agreement in the capitalization of Target between the date hereof and the Effective Time shall be delivered by Target to Acquiror on the Closing Date.  (b)    Except as set forth in this Section 3.3, there are no equity securities of any class or series of Target, or any securityexchangeable into or exercisable for such equity securities, issued, reserved for issuance or outstanding. Except as set forth in this Section 3.3, there are no options, warrants, equity securities, calls, rights, commitments or agreements of anycharacter to which 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 of capital stock of Target or 12 
 (except as set forth in the stock restriction agreements, stock option agreements and the Investor Rights Agreementslisted in the Target Disclosure Schedule) obligating Target to grant, extend, accelerate the vesting of or enter into any such option, warrant, equity security, call, right, commitment or agreement. Target is not in discussion, formal or informal,with any person or entity regarding the issuance of any form of additional Target equity that has not been issued or committed to prior to the date of this Agreement. Except as provided in this Agreement and the other Transaction Documents (asdefined in Section 3.4(a)) or any transaction contemplated hereby or thereby, there are no voting trusts, proxies or other agreements or understandings with respect to the voting of the shares of capital stock of Target.  (c)    Other than as set forth on **Schedule 3.3(a)**, all Target Options have been issued in accordance with the terms of theTarget Stock Plan and pursuant to the standard forms of option agreement previously provided to Acquiror or its representatives. Such agreements and instruments have not been amended, modified or supplemented, and there are no agreements to amend,modify or supplement such agreements or instruments in any case from the form made available to Acquiror. The terms of the Target Stock Plan, including Section 11(c) thereof, permit the cancellation of the Target Stock Options as provided in thisAgreement, without the consent or approval of the holders of such securities, the Target stockholders, or otherwise.  Section3.4    Authority; No Conflict; Required Filings and Consents.  (a)    Target hasall requisite corporate power and authority to enter into this Agreement and all Transaction Documents to which it is or will become a party and to consummate the transactions contemplated by this Agreement and such Transaction Documents. Theexecution and delivery by Target of this Agreement and such Transaction Documents and the consummation by Target of the transactions contemplated by this Agreement and such Transaction Documents have been duly authorized by all necessary corporateaction on the part of Target (other than the approval of the Merger by Target’s stockholders) under the provisions of Delaware Law and Target’s Certificate of Incorporation. This Agreement has been and such Transaction Documents have beenor, to the extent not executed as of the date hereof, will be duly executed and delivered by Target. This Agreement and each of the Transaction Documents to which Target is a party constitutes, and each of the Transaction Documents to which Targetwill become a party when executed and delivered by Target will constitute, assuming the due authorization, execution and delivery by the other parties hereto and thereto, the valid and binding obligation of Target, enforceable against Target inaccordance with their respective terms, except to the extent that enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or other laws affecting the enforcement of creditors’ rights generally and bygeneral principles of equity, regardless of whether such enforceability is considered in a proceeding at law or in equity. For purposes of this Agreement, “**Transaction Documents**” means the Certificate of Merger and the LicenseAmendments.  (b)    The execution and delivery by Target of this Agreement and the Transaction Documents towhich it is or will become a party does not and the consummation by Target of the transactions contemplated by this Agreement and the Transaction Documents to which it is or will become a party will not, (i) conflict with, or result in any violationor breach of any provision of the Certificate of Incorporation or Bylaws of Target, (ii) result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise 13 
 to a right of termination, cancellation or acceleration of any obligation or loss of any benefit) under any of theterms, conditions or provisions of any note, bond, mortgage, indenture, lease, contract or other agreement, instrument or obligation to which Target is a party or by which it or any of its properties or assets may be bound, or (iii) conflict orviolate any permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Target or any of its properties or assets, except in the case of (ii) and (iii) for any such conflicts,violations, defaults, terminations, cancellations or accelerations which would not have a Target Material Adverse Effect.  (c)    No consent, approval, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality(“**Governmental Entity**”) is required by or with respect to Target in connection with the execution and delivery of this Agreement or of any other Transaction Document to which it is or will become a party or the consummation of thetransactions contemplated by this Agreement or such Transaction Document or the continuation of the business activities of Target following consummation of the Merger, except for (i) the filing of the Certificate of Merger with the DelawareSecretary of State, (ii) such consents, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities laws and (iii) such consents, authorizations, filings, approvals andregistrations which, if not obtained or made, would not reasonably be expected to have a Target Material Adverse Effect.  (d)    Except as set forth on **Schedule 3.4(d)** of the Target Disclosure Schedule, no consent or approval is needed from any third party in order to effect the Merger, this Agreement or any of the transactionscontemplated hereby.  Section 3.5    Financial Statements; Absence of Undisclosed Liabilities. (a)    **Schedule 3.5** of the Target Disclosure Schedule contains a true, correct and complete copy ofTarget’s unaudited financial statements for the fiscal years ended December 31, 2000 and 2001 (balance sheet, statement of operations and statement of cash flows) (collectively, the “**Target Financial Statements**”).  (b)    The Target Financial Statements present fairly in all material respects the financial position, results ofoperations and cash flows of Target as of their historical dates and for the periods indicated. The Target Financial Statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughoutthe periods indicated and with each other.  (c)    Target has delivered to Acquiror copies of Target’sbalance sheet as of December 31, 2001 (the “**Most Recent Balance Sheet**”).  (d)    Target hasno debt, liability, or obligation of any nature, whether accrued, absolute, contingent, or otherwise, and whether due or to become due, that is not reflected or reserved against in the Most Recent Balance Sheet (including any notes thereto), exceptfor (i) those debts, liabilities and obligations that may have been incurred after the date of the Most Recent Balance Sheet or that would not reasonably be required, in accordance with generally 14 
 accepted accounting principles applied on a basis consistent with prior periods, to be included in a balance sheet orthe notes thereto and (ii) liabilities and obligations under Material Contracts (as defined in Section 3.12(d)) and Target Employee Plans (as defined in Section 3.10(a)) and incurred under contracts entered into after the date of Most Recent BalanceSheet. Except as set forth in the Target Disclosure Schedule, all debts, liabilities, and obligations incurred after the date of the Most Recent Balance Sheet were incurred in the ordinary course of business (except for liabilities or obligationsincurred in connection with the transaction contemplated by this Agreement), and are usual and normal in amount and do not exceed $10,000 individually or $50,000 in aggregate.  Section 3.6    Tax Matters.  (a)    For purposes of this Section 3.6 and other provisions of this Agreement relating to Taxes, the following definitions shall apply:  (i)    The term “**Taxes**” shall mean all taxes, however denominated, including any interest, penalties or other additions to tax that may becomepayable in respect thereof, imposed by any federal, territorial, state, local or foreign government or any agency or political subdivision of any such government, which taxes shall include, without limiting the generality of the foregoing, (A) allincome or profits taxes (including but not limited to, federal income taxes and state income taxes), payroll and employee withholding taxes, unemployment insurance, social security taxes, sales and use taxes, 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, transfer taxes, workers’ compensation, Pension BenefitGuaranty Corporation premiums and other governmental charges, and other obligations of the same or of a similar nature to any of the foregoing, which are required to be paid, withheld or collected, (B) any liability for the payment of amountsreferred to in (A) as a result of being a member of any affiliated, consolidated, combined or unitary group, or (C) any liability for amounts referred to in (A) or (B) as a result of any obligations to indemnify another person.  (ii)    The term “**Returns**” shall mean all reports, estimates, declarations of estimated tax, informationstatements and returns relating to, or required to be filed in connection with, any Taxes, including information returns or reports with respect to backup withholding and other payments to third parties.  (b)    All Returns required to be filed by or on behalf of Target have been duly filed on a timely basis. All Taxes shown to bepayable on such Returns or on subsequent assessments with respect thereto, and all payments of estimated Taxes required to be made by or on behalf of Target under Section 6655 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 Recent Balance Sheet, and no other Taxes are payable by Target with respect to items or periods covered by such Returns (whether or not shown on or reportable on such Returns).Target has withheld and paid over all Taxes required to have been withheld and paid over, and complied with all information reporting and backup withholding requirements, including maintenance of required records with respect thereto, in connectionwith amounts paid or owing to any employee, creditor, independent contractor, or other third party. There are no liens on any of the 15 
 assets of Target with respect to Taxes, other than liens for Taxes not yet due and payable or for Taxes that Target iscontesting in good faith through appropriate proceedings and for which appropriate reserves have been established on the Most Recent Balance Sheet. Target has not at any time been (i) a member of an affiliated group of corporations filingconsolidated, combined or unitary income or franchise tax returns, or (ii) a member of any partnership or joint venture for a period for which the statue of limitations for any Tax potentially applicable as a result of such membership has notexpired.  (c)    The amount of Target’s liability for unpaid Taxes (whether actual or contingent) forall periods through the date of the Most Recent Balance Sheet does not, in the aggregate, exceed the amount of the liability accruals for Taxes reflected on the Most Recent Balance Sheet, and the Most Recent Balance Sheet reflects proper accrual inaccordance with generally accepted accounting principles applied on a basis consistent with prior periods of all liabilities for Taxes payable after the date of the Most Recent Balance Sheet attributable to transactions and events occurring prior tosuch date. No liability for Taxes has been incurred (or prior to Closing will be incurred) since such date other than in the ordinary course of business.  (d)    Acquiror has been furnished by Target with true and complete copies of (i) relevant portions of income tax audit reports, statements of deficiencies, closing or other agreements received byor on behalf of Target relating to Taxes, and (ii) all federal and state income or franchise tax Returns and state sales and use tax Returns for or including Target for all periods since the inception of Target. Target does not do business in, orderive income from or have a taxable nexus with any state other than states for which Returns have been duly filed and furnished to Acquiror.  (e)    The Returns of or including Target have never been audited by a government or taxing authority, nor is any such audit in process, pending or, to Target’s knowledge, threatened (eitherin writing or verbally, formally or informally). No deficiencies exist or have been asserted (either in writing or verbally, formally or informally), and Target has not received 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 is neither a party to any action or proceeding for assessment or collection of Taxes, nor has such event been asserted or threatened (either in writing or verbally, formallyor informally) against Target or any of its assets. No waiver or extension of any statute of limitations is in effect with respect to Taxes or Returns of Target. Target has disclosed on its federal and state income and franchise tax Returns allpositions taken therein that could give rise to a substantial understatement penalty within the meaning of Code Section 6662 or comparable provisions of applicable state tax laws.  (f)    Target is not, nor has it ever been, a party to any tax sharing agreement.  (g)    Target is not, nor has it been, a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicableperiod specified in Section 897(c)(1)(A)(ii) of the Code, and Acquiror is not required to withhold tax by reason of Section 1445 of the Code. Target is not a “consenting corporation” under Section 341(f) of the Code. Except as set forth onthe Target Disclosure Schedule, Target has not entered into any compensatory agreements with respect to the performance of services which payment thereunder would result in a nondeductible expense to Target pursuant to Section 280G of the16 
 Code or an excise tax to the recipient of such payment pursuant to Section 4999 of the Code. Target has not agreed to,nor is it required to make any adjustment under Code Section 481(a) by reason of, a change in accounting method. Target is not, nor has it been, a “reporting corporation” subject to the information reporting and record maintenancerequirements of Section 6038A and the regulations thereunder. Target is in compliance with the terms and conditions of any applicable tax exemptions, agreements or orders of any foreign government to which it may be subject or which it may haveclaimed, and the transactions contemplated by this Agreement will not have any adverse effect on such compliance.  Section3.7    Absence of Certain Changes or Events.    Since the date of the Most Recent Balance Sheet, Target has not:  (a)    suffered any change or effect that has had a Target Material Adverse Effect;  (b)    granted or agreed to make any increase in the compensation payable or to become payable by Target to its officers or employees;  (c)    declared, set aside or paid any dividend or made any other distribution on or in respect of the shares of the capital stock of Target or declared any direct orindirect redemption, retirement, purchase or other acquisition by Target of such shares;  (d)    made anychange in the accounting methods or practices it follows, whether for general financial or tax purposes, or any change in depreciation or amortization policies or rates adopted therein;  (e)    sold, leased, abandoned or otherwise disposed of any real property or any material machinery, equipment or other operating property;  (f)    sold, assigned, transferred, licensed or otherwise disposed of any patent, trademark, trade name, brand name, copyright (orpending application for any patent, trademark or copyright) invention, work of authorship, process, know-how, formula or trade secret or interest thereunder or other intangible asset, except as set forth in **Schedule 3.9**;  (g)    permitted or allowed any of its property or assets to be subjected to any mortgage, deed of trust, pledge, lien,security interest or other encumbrance of any kind (except those permitted under Section 3.8);  (h)    madeany capital expenditure or commitment individually in excess of $10,000 or in the aggregate in excess of $50,000;  (i)    paid, loaned or advanced any amount to, or sold, transferred or leased any properties or assets to, or entered into any agreement or arrangement with, any of its Affiliates (as defined in Section 3.17), officers,directors or stockholders or any affiliate or associate of any of the foregoing (except in the case of salaries and reimbursement for travel and other business expenses in the ordinary course of business); 17 
 (j)    made any amendment to or terminated any agreement which, if not soamended or terminated, would be required to be disclosed on the Target Disclosure Schedule; or  (k)    agreed to take any action described in this Section 3.7 or outside of its ordinary course of business.  Section 3.8    Title and Related Matters.    Target has good and marketable title to all the 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 of current taxes not yet due and payable. The equipment of Target used in the operation of itsbusiness is, taken as a whole, (i) adequate for the business currently conducted by Target and (ii) in good operating condition and repair, ordinary wear and tear excepted. All real or personal property leases to which Target is a party are valid,binding, enforceable and effective against Target and, to the knowledge of Target, the other parties thereto in accordance with their respective terms. To the knowledge of Target, there is not under any of such leases any existing default or eventof default or event which, with notice or lapse of time or both, would constitute a default. The Target Disclosure Schedule contains a description of all personal property leased or owned with an individual net book value in excess of $10,000 andreal property leased or owned by Target, describing its interest in said property. True and correct copies of Target’s real property and personal property leases have been provided to Acquiror or its representatives.  Section 3.9    Proprietary Rights.  (a)    The Target Disclosure Schedule sets forth a complete list of each of the following items (i) all patents and pending applications therefor, registrations of trademarks (including servicemarks) and pending applications therefor, and registrations of copyrights and applications therefor and registered mask works and pending applications therefor, that are owned by the Target (collectively, the “**Target Owned IP**”),(ii) all licenses, agreements and contracts relating to the Target Proprietary Rights (as defined in Section 3.9(b) of this Agreement) pursuant to which the Target or any of its Subsidiaries are entitled to use any Target Proprietary Rights owned byany third party (the “**Third Party Licenses**”) and (iii) all agreements under which the Target or any of its Subsidiaries has granted any third party the right to use any Target Proprietary Rights, including the unexpired materialtransfer agreements.  (b)    Except to the extent identified in appropriate sections of the TargetDisclosure Schedule, the Target is the owner of, or is licensed to use, in all jurisdictions as necessary, all intellectual property, including, without limitation, all patents and pending patent applications, supplementary protection certificates,patent reissues, reexaminations, extensions, trademarks and pending trademark applications, trade dress, service marks and service mark registrations, pending service mark applications, domain names, logos, commercial symbols, business nameregistrations, trade names, copyrights and copyright registrations, computer hardware and software, mask works and pending mask work registration applications, industrial designs and pending applications for registration of such industrial designs,including, without limitation, any and all pending applications for renewal, extensions, reexaminations and reissues of any of the foregoing intellectual property rights where applicable, inventions (whether patentable or unpatentable and whether ornot reduced to practice), biological materials, trade 18 
 secrets, formulae, know-how, technical information, research data, research raw data, laboratory notebooks, procedures,designs, proprietary technology and information (hereinafter collectively, “**Intellectual Property Rights**”) held or used in the business or necessary for the operation of the properties, assets and businesses of the Target(including, without limitation, the technology, information, databases, data lists, data compilations, and all proprietary rights developed or discovered or used in connection with or contained in all versions and implementations of any product ortechnology which has been or is being marketed, distributed, licensed, used or sold by Target or currently is under development by Target (collectively, the “**Target Products**”)) (hereinafter the “**Target ProprietaryRights**”).  (c)    Except to the extent identified in the Target Disclosure Schedule, the Target isthe sole legal and beneficial owner of all the Target Proprietary Rights (subject to the Third Party Licenses), except as would not, individually or in the aggregate, have or reasonably be expected to have, a Target Material Adverse Effect. (d)    The Target has not entered into any agreements, licenses or created any mortgages, liens, securityinterests, leases, pledges, encumbrances, equities, claims, charges, options, restrictions, rights of first refusal, title retention agreements or other exceptions to title which convey any rights in the Target Proprietary Rights, limit the abilityof the Target to enforce or maintain Target Proprietary Rights or restrict the use by the Target of the Target Proprietary Rights in any way, except as provided in agreements and instruments disclosed in the Target Disclosure Schedule and furnishedto Acquiror prior to the date of this Agreement.  (e)    Except as listed in the Target Disclosure Schedule,to the knowledge of the Target, the Target is in compliance in all material respects with the Third Party Licenses that are material to the conduct of the business of the Target.  (f)    Except as set forth on the Target Disclosure Schedule, (i) the Target is not, and will not be as a result of the execution, delivery or performance of thisAgreement, or the consummation of the Merger or the other transactions contemplated hereby or thereby in breach, violation or default of any Third Party Licenses that are material to the conduct of the business of the Target and (ii) the rights ofthe Target to the Target Proprietary Rights will not be affected by the execution, delivery or performance of this Agreement or the consummation of the Merger or the other transactions contemplated hereby or thereby.  (g)    Except as set forth on the Target Disclosure Schedule, the Target has the right to license to third parties the use of allTarget Proprietary Rights.  (h)    Except as listed in the Target Disclosure Schedule, to the knowledge ofthe Target, (i) all registrations and filings relating to the Target Owned IP are in good standing, (ii) all maintenance and renewal fees necessary to preserve the rights of the Target in respect of the Target Owned IP have been made and (iii) theregistrations and filings relating to the Target Owned IP are proceeding and there are no material facts which could significantly undermine those registrations or filings or reduce to a significant extent the scope of protection of any patentsarising from such applications. 19 
 (i)    Except as set forth on the Target Disclosure 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 previously used and presently in use by the Target,licensees or sublicensees in the countries where the Target has conducted or proposes to conduct such activities, to the knowledge of the Target, does not and would not infringe and does not and will not result in the misappropriation or otherunauthorized use of Intellectual Property Rights of any third party that are reasonably believed by 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 in the Target Disclosure Schedule,there are no allegations, claims, suits or proceedings instituted or pending against the Target, or, to the Target’s knowledge, against any other person, which challenge the rights possessed by the Target to use the Target Proprietary Rights orthe ownership (with respect to Target Owned IP), validity, priority, enforceability, scope or effectiveness of any of the Target Proprietary Rights, including without limitation any interferences, oppositions, cancellations or other contestedproceedings and, to the knowledge of the Target, there are no threats of the same.  (k)    To the knowledgeof the Target, except for the matters set forth in the Target Disclosure Schedule, there is no unauthorized use, infringement or misappropriation of the Target Proprietary Rights by any third party, including any employee or former employee of theTarget, except as would not, individually or in the aggregate, have, or reasonably be expected to have, a Target Material Adverse Effect.  (l)    Except as set forth in the Target Disclosure Schedule, (i) commercially reasonable measures have been taken to maintain the confidentiality of the inventions, trade secrets, formulae,know-how, technical information, research data, research raw data, laboratory notebooks, 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 who has had access to Confidential Information of the Target has entered into an agreement suitable to vest all ownership rights to any Target Proprietary Rights (subject tothe Third Party Licenses) and has entered into an agreement for maintaining all confidential information of the Target except for those individuals listed in the Target Disclosure Schedule whose involvement in the business of the Target is describedwith specificity therein. All use, disclosure or appropriation of Confidential Information not owned by Target has been pursuant to the terms of a written agreement between Target and the owner of such Confidential Information, or is otherwiselawful.  (m)    Except as set forth in the Target Disclosure Schedule, the Target has not entered into anycontract or agreement to indemnify any other person for or against any charge of infringement or misappropriation of, or interference or conflict with respect to, any of the Target Proprietary Rights. 20 
 (n)    No product liability or warranty claims have been communicated inwriting to or threatened against Target.  Section 3.10    Employee Benefit Plans.  (a)    The Target Disclosure Schedule lists, with respect to Target and any trade or business (whether or notincorporated) which is treated as a single employer with Target (an “**ERISA Affiliate**”) within the meaning of Section 414(b), (c), (m) or (o) of the Code, (i) all material employee benefit plans (as defined in Section 3(3) of theEmployee Retirement Income Security Act of 1974, as amended (“**ERISA**”), (ii) each loan to a non-officer employee, loans to officers and directors and any stock option, stock purchase, phantom stock, stock appreciation right,supplemental retirement, 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, deferred compensation or incentive plans, programs or arrangements, (iv) other fringe or employee benefit plans, programs or arrangements that apply to senior management of Target andthat do not generally apply to all employees, and (v) any current or former employment or executive compensation or severance agreements, written or otherwise, for the benefit of, or relating to, any present or former employee, consultant ordirector of Target as to which (with respect to any of items (i) through (v) above) any potential liability is borne by Target (together, the “**Target Employee Plans**”).  (b)    Target has delivered to or made available to Acquiror or its representatives a copy of each of the Target Employee Plans and related plan documents (includingtrust documents, insurance policies or contracts, employee booklets, summary plan descriptions and other authorizing documents, and, to the extent still in its possession, any material employee communications relating thereto) and has, with respectto each Target Employee Plan which is subject to ERISA reporting requirements, provided copies of any Form 5500 reports filed for the last three plan years. Any Target Employee Plan intended to be qualified under Section 401(a) of the Code haseither obtained from the Internal Revenue Service a favorable determination letter as to its qualified status under the Code, including all amendments to the Code effected by the Tax Reform Act of 1986 and subsequent legislation, or has applied tothe Internal Revenue Service for such a determination letter prior to the expiration of the requisite period under applicable Treasury Regulations or Internal Revenue Service pronouncements in which to apply for such determination letter and to makeany amendments necessary to obtain a favorable determination. Target has also furnished Acquiror with the most recent Internal Revenue Service determination letter issued with respect to each such Target Employee Plan, and nothing has occurred sincethe issuance of each such letter which could reasonably be expected to cause the loss of the tax-qualified status of any Target Employee Plan subject to Code Section 401(a).  (c)    (i)  None of the Target Employee Plans promises or provides retiree medical or other retiree welfare benefits to any person; (ii) there has been no“prohibited transaction,” as such term is defined in Section 406 of ERISA and Section 4975 of the Code, with respect to any Target Employee Plan, which could reasonably be expected to have, in the aggregate, a Material Adverse Affect onTarget, (iii) each Target Employee Plan has been administered in accordance with its terms and in compliance with the requirements prescribed by any and all statutes, rules and regulations (including ERISA and the Code), except as would not21 
 have, in the aggregate, a Target Material Adverse Effect, and Target and each subsidiary or ERISA Affiliate haveperformed all material obligations required to be performed by them 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 party to, any of the TargetEmployee Plans; (iv) neither Target nor any subsidiary or ERISA Affiliate is subject to any material liability or penalty under Sections 4976 through 4980 of the Code or Title I of ERISA with respect to any of the Target Employee Plans; (v) allcontributions required to be made by Target or any subsidiary or ERISA Affiliate to any Target Employee Plan have been made on or before their due dates and a reasonable amount has been accrued for contributions to each Target Employee Plan for thecurrent plan years; (vi) with respect to each Target Employee Plan, no “reportable event” within the meaning of Section 4043 of ERISA (excluding any such event for which the thirty (30) day notice requirement has been waived under theregulations to Section 4043 of ERISA) nor any event described in Section 4062, 4063 or 4041 of ERISA has occurred; and (vii) no Target Employee Plan is covered by, and neither Target nor any subsidiary or ERISA Affiliate has incurred or expects toincur any liability under Title IV of ERISA or Section 412 of the Code. With respect to each Target Employee Plan subject to ERISA as either an employee pension plan within the meaning of Section 3(2) of ERISA or an employee welfare benefit planwithin the meaning of Section 3(1) of ERISA, Target has prepared in good faith and timely filed all requisite governmental reports (which were true and correct as of the date filed) and has properly and timely filed and distributed or posted allnotices and reports to employees required to be filed, distributed or posted with respect to each such Target Employee Plan except as would not give rise, in the aggregate, to a Target Material Adverse Effect. No suit, administrative proceeding,action or other litigation has been brought, or to the best knowledge of Target is threatened, against or with respect to any such Target Employee Plan, including any audit or inquiry by the IRS or United States Department of Labor. Neither Targetnor any ERISA Affiliate is a party to, or has made any contribution to or otherwise incurred any obligation under, any “multi-employer plan” as defined in Section 3(37) of ERISA.  (d)    With respect to each Target Employee Plan, Target has complied with (i) the applicable health care continuation and notice provisions of the ConsolidatedOmnibus Budget Reconciliation Act of 1985 (“**COBRA**”) and the proposed regulations thereunder and (ii) the applicable requirements of the Family Leave Act of 1993 and the regulations thereunder, except to the extent that such failureto comply would not, in the aggregate, have a Target Material Adverse Effect.  (e)    Except as set forth inthe Target Disclosure Schedule, the consummation of the transactions contemplated by this Agreement will not (i) entitle any current or former employee or other service provider of Target or any other ERISA Affiliate to severance benefits or anyother payment (including, without limitation, unemployment compensation, golden parachute 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 oraccelerate any benefits or the amount of compensation due any such employee or service provider. No payment which will or may be made by Target or any of its subsidiaries to any employee will be characterized as an “excess parachutepayment” within the meaning of Section 280G(b)(1) of the Code.  (f)    There has been no amendment to,written interpretation or announcement (whether or not written) by Target or other ERISA Affiliate relating to, or change in participation 22 
 or coverage under, any Target Employee Plan which would materially increase the expense of maintaining such Plan abovethe level of expense incurred with respect to that Plan for the most recent fiscal year included in the Target Financial Statements.  (g)    All Target Options which are treated by Target as “incentive stock options” under Section 422 of the Code comply with the requirements of that Section. All Target Options and other equity grants bytarget have complied with all federal and state securities laws.  Section 3.11    BankAccounts.    The Target Disclosure Schedule sets forth the names and locations of all banks, trusts, companies, savings and loan associations, and other financial institutions at which Target maintains accounts of any natureand the names of all persons authorized to draw thereon or make withdrawals therefrom.  Section3.12    Contracts.  (a)    Except as set forth on the Target Disclosure Schedule: (i)    Target has no agreements, contracts or commitments that provide for the sale, licensing, transfer,assignment, distribution, marketing, promotion or resale by Target of any Target Products or Target Proprietary Rights, nor has Target granted any license of any Target trademarks or servicemarks.  (ii)    Target has no Third Party Licenses.  (iii)    Target has no agreements, contracts or commitments that call for fixed and/or contingent payments or expenditures by or to Target (including, withoutlimitation, any advertising or revenue sharing arrangement) individually in excess of $10,000.  (iv)    Target has no outstanding sales or advertising contract, commitment or proposal that Target currently expects to result 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 or dealers that are not cancelable by Target “at will” and without liability, penalty or premium.  (vi)    Target has no employment, independent contractor or similar agreement, contract or commitment that is not terminable on no more than thirty (30) days’notice without penalty, liability or premium of any type, including, without limitation, severance or termination pay.  (vii)    Target has no currently effective collective bargaining or union agreements, contracts or commitments.  (viii)    Target is not restricted by agreement from competing with any person or from carrying on its business anywhere in the world. 23 
 (ix)    Target has not guaranteed any obligations of other persons or madeany agreements to acquire or guarantee any obligations of other persons.  (x)    Target has no outstandingloan or advance to any person; nor is it party to any line of credit, standby financing, revolving credit or other similar financing arrangement of any sort which would permit the borrowing by Target of any sum.  (xi)    Target has no agreements pursuant to which Target has agreed to manufacture for, supply to or distribute to any third partyany Target Products or Target Components.  (xii)    There are no agreements, understandings or proposedtransactions between the Target and any of its officers, directors, affiliates, any affiliate thereof or any family members thereof.  True and correct copies of each document or instrument listed on the Target Disclosure Schedule pursuant to this Section 3.12(a) (the “**Material Contracts**”) have been provided to Acquiror or its representatives. (b)    All of the Material Contracts listed on the Target Disclosure Schedule are valid and binding againstTarget, in full force and effect, and enforceable by Target in accordance with their respective terms. As of the date hereof, no party to any such Material Contract has notified Target that it intends to cancel, withdraw, modify or amend suchcontract, agreement or arrangement.  (c)    Target is not in material default under or in material breach orviolation of, nor, to Target’s knowledge, is there any valid basis for any claim of material default by Target under, or material breach or violation by Target of, any Material Contract. To Target’s knowledge, no other party is in materialdefault under or in material breach or violation of, nor is there any valid basis for any claim of material default by any other party under or any material breach or violation by any other party of, any Material Contract.  (d)    Except as specifically indicated on the Target Disclosure Schedule, none of the Material Contracts provides forindemnification by Target of any third party. No claims have been made or threatened that would require indemnification by Target, and Target has not paid any amounts to indemnify any third party as a result of indemnification requirements of anykind.  Section 3.13    Certain Agreements Affected by the Merger.    Except asset forth on the Target Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment (including, without limitation, severance, unemploymentcompensation, golden parachute, bonus or otherwise) becoming due to any director or employee of Target, (ii) materially increase any benefits otherwise payable by Target, or (iii) result in the acceleration of the time of payment or vesting ofany such benefits.  Section 3.14     Compliance With Law.    Target, with respectto the operation of its business is in compliance in all material respects with all applicable laws and regulations. 24 
 Neither Target nor, to Target’s knowledge, any of its employees has directly or indirectly paid or delivered anyfee, commission or other sum of money or item of property, however characterized, to any finder, agent, government official or other party in the United States or any other country, that was or is in violation of any federal, state, or local statuteor law or of any statute or law of any other country having jurisdiction. Target has not participated directly or indirectly in any boycotts or other similar practices affecting any of its customers. Target has complied in all material respects atall times with any and all applicable federal, state and foreign laws, rules, regulations, proclamations and orders relating to the importation or exportation of its products.  Section 3.15    Labor Difficulties; No Discrimination.  (a)    Target is not engaged in any unfair labor practice and is not in material violation of any applicable laws respecting employment and employment practices, terms and conditions of employment,wages, hours and occupational safety and health and employment practices. There is no unfair labor practice complaint against Target actually pending or, to the knowledge of Target, threatened before the National Labor Relations Board. There is nostrike, labor dispute, slowdown, or stoppage actually pending or, to the knowledge of Target, threatened against Target. To the knowledge of Target, no union organizing activities are taking place with respect to the business of Target. Nogrievance, nor any arbitration proceeding arising out of or under any collective bargaining agreement is pending and, to the knowledge of Target, no claims therefor exist. No collective bargaining agreement that is binding on Target restricts itfrom relocating or closing any of its operations. Target has not experienced any material work stoppage or other material labor difficulty.  (b)    There is no, and has not been any, claim against Target, or to Target’s knowledge, threatened against Target, based on actual or alleged race, age, sex, disability or other harassmentor discrimination, or similar tortuous conduct, nor to the knowledge of Target, is there any basis for any such claim.  (c)    There are no pending claims against Target or any of its subsidiaries under any workers compensation plan or policy or for long term disability. Neither Target nor any of its subsidiaries has any monetary materialobligations under COBRA with respect to any former employees or qualifying beneficiaries thereunder. There are no proceedings pending or, to the knowledge of Target, threatened, between Target and any of their respective employees, which proceedingshave or would reasonably be expected to have a Target Material Adverse Effect.  Section 3.16    TradeRegulation.    All of the prices charged by Target in connection with the marketing or sale of any products or services have been in compliance with all applicable laws and regulations. No claims have been communicated orthreatened in writing against Target with respect to wrongful termination of any dealer, distributor or any other marketing entity, discriminatory pricing, price fixing, unfair competition, false advertising, or any other violation of any laws orregulations relating to anti-competitive practices or unfair trade practices of any kind, and to Target’s knowledge, no specific situation, set of facts, or occurrence provides any basis for any such claim. 25 
 Section 3.17    Insider Transactions.    Exceptas set forth on the Target Disclosure Schedule, to the knowledge of Target, no affiliate (“**Affiliate**”) as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “**Exchange Act**”) of Targethas any interest in any equipment or other property, real or personal, tangible or intangible, including, without limitation, any Target Proprietary Rights or any creditor, supplier, customer, manufacturer, agent, representative, or distributor ofTarget Products; *provided, however,* that no such Affiliate or other person shall be deemed to have such an interest solely by virtue of the ownership of less than 1% of the outstanding stock or debt securities of any publicly-held company,the stock or debt securities of which are traded on a recognized stock exchange or quoted on the National Association of Securities Dealers Automated Quotation System.  Target is not indebted to any director, officer, employee or agent of Target (except for amounts due as normal salaries and bonuses and in reimbursement of ordinary expenses), and nosuch person is indebted to Target.  Section 3.18    Employees, Independent Contractors andConsultants.    The Target Disclosure Schedule lists and describes all past and all currently effective written or, to Target’s knowledge, oral consulting, independent contractor and/or employment agreements and othermaterial agreements to which Target is a party with individual employees, independent contractors or consultants. True and correct copies of all such written agreements have been provided to or made available to Acquiror or its representatives. Allindependent contractors have been properly classified as independent contractors for the purposes of federal and applicable state tax laws, laws applicable to employee benefits and other applicable law. All salaries and wages paid by Target are incompliance in all material respects with applicable federal, state and local laws. Also shown on the Target Disclosure Schedule are the names, positions and salaries or rates of pay, including bonuses, of all persons presently employed by Target. Section 3.19    Insurance.    The fire, liability and other insurance policiesheld by Target are of the type and in amounts which are customary and adequate for a company of its nature and size and are set forth on the Target Disclosure Schedule. The Target Disclosure Schedule contains a list of all claims made by Targetunder such policies. Target has not done anything, either by way of action or inaction, that to the knowledge of Target, might invalidate such policies in whole or in part. There is no claim pending under any of such policies or bonds as to whichcoverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums due and payable under all such policies and bonds have been paid and Target is otherwise in compliance with the terms of such policies andbonds in all material respects. Target has no knowledge of any threatened termination of, or material premium increase with respect to, any of such policies.  Section 3.20    Litigation.    There is no private or governmental action, suit, proceeding, claim, arbitration or investigation pending before any agency, court ortribunal, foreign or domestic, or, to the knowledge of Target, threatened against Target or any of its properties or any of its officers or directors (in their capacities as such). There is no judgment, decree or order against Target, or, to theknowledge of Target, any of its directors or officers (in their capacities as such). To Target’s knowledge, no circumstances exist that could form a valid 26 
 basis for a claim against Target as a result of the conduct of Target’s business (including, without limitation,relating to any claim of infringement of any intellectual property right).  Section 3.21    Restrictionson Business Activities.    There is no agreement, judgment, injunction, order or decree binding upon Target which has or could reasonably be expected to have the effect of prohibiting or materially impairing any current orfuture business practice of Target, any acquisition of property by Target or the overall conduct of business by Target as currently conducted or as proposed to be conducted by Target. Target has not entered into any agreement under which Target isrestricted from selling, licensing or otherwise distributing any of its products to any class of customers, in any geographic area, during any period of time or in any segment of the market.  Section 3.22    Governmental Authorizations and Regulations.    Target has obtained each federal, state, county, local or foreigngovernmental consent, license, permit, grant, or other authorization of a Governmental Entity (i) pursuant to which Target currently operates or holds any interest in any of its properties or (ii) that is required for the operation of Target’sbusiness or the holding of any such interest, and all of such authorizations are in full force and effect, except where the failure to obtain or have any such Target authorizations would not reasonably be expected to have a Target Material AdverseEffect. Target is in compliance in all material respects with all terms and conditions of all such permits, licenses and authorizations.  Section 3.23    Compliance with Environmental Requirements.    Target is not in violation of any applicable statute, law or regulation relating to the environment or occupational health andsafety, and no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. Target is not aware of, nor has Target received written notice of, any conditions, circumstances, activities,practices, incidents, or actions which may form a valid basis of any claim, action, suit, proceeding, hearing, or investigation of, by, against or relating to Target, based on or related to the manufacture, processing, distribution, use, treatment,storage, disposal, transport, or handling, or the emission, discharge, release or threatened release into the environment, of any pollutant, contaminant, or hazardous or toxic substance, material or waste, or relating to the safety of employees,workers or other persons.  Section 3.24    Export Control Laws.    Target hasconducted its export transactions in accordance with applicable provisions of the United States export control laws and regulations, including but not limited to the Export Administration Act and implementing Export Administration Regulations exceptfor violations which would not have a Target Material Adverse Effect. Without limiting the foregoing, Target represents and warrants that:  (a)    Target has obtained all export licenses and other approvals required for its exports of products, software and technologies from the United States;  (b)    Target is in compliance with the terms of all applicable export licenses or other approvals;  (c)    There are no pending or, to the knowledge of Target, threatened claims against Target with respect to such export licenses orother approvals; 27 
 (d)    There are no actions, conditions or circumstances pertaining toTarget’s export transactions that may give rise to any future claims; and  (e)    No consents orapprovals for the transfer of export licenses to Acquiror are required, or such consents and approvals can be obtained expeditiously without material cost.  Section 3.25    Assets.    Set forth on **Schedule 3.25** is a complete and accurate list of all principal assets of the Target, including, without limitation, [ * ].The assets reflected on Schedule 3.25 are sufficient or necessary to enable the operation of the business of the Company, as it was conducted at any time prior to the Closing Date.  Section 3.26    Corporate Documents.    Target has furnished to Acquiror or its representatives copies of: (a) its Certificate ofIncorporation and Bylaws, as amended to date; (b) its minute book containing all records required to be set forth of all proceedings, consents, actions, and meetings of the stockholders, the board of directors and any committees thereof; (c) allmaterial permits, orders, and consents issued by any regulatory agency with respect to Target, or any securities of Target, and all applications for such permits, orders, and consents; and (d) the stock transfer books of Target setting forth alltransfers of any capital stock. The corporate minute books, stock certificate books, stock registers and other corporate records of Target are complete and accurate, and the signatures appearing on all documents contained therein are the truesignatures of the persons purporting to have signed the same. All actions reflected in such books and records were duly and validly taken in compliance with the laws of the applicable jurisdiction.  Section 3.27    No Brokers.    Neither Target nor, to Target’s knowledge, any Target stockholder isobligated for the payment of fees or expenses of any broker or finder in connection with the origin, negotiation or execution of this Agreement or the other Transaction Documents or in connection with any transaction contemplated hereby orthereby**.** Section 3.28    Vote Required.    The affirmative vote of theholders of a majority of the shares of Target capital stock outstanding on the record date set for the Target Stockholders Meeting is the only vote of the holders of any of Target’s capital stock necessary to approve this Agreement and thetransactions contemplated hereby.  Section 3.29    Target Action.    The Board ofDirectors of Target, by unanimous written consent or at a meeting duly called and held, has by the unanimous vote of all directors (i) determined that the Merger is fair and in the best interests of Target and its stockholders, (ii) approved theMerger and this Agreement in accordance with the provisions of Delaware Law, and (iii) directed that this Agreement and the Merger be submitted to Target stockholders for their approval and resolved to recommend that Target stockholders vote infavor of the approval of this Agreement and the Merger.  Section3.30    Offers.    Target has suspended or terminated, and has the legal right to terminate or suspend, all negotiations and discussions of Acquisition Transactions (as defined in Section 5.6) withparties other than Acquiror.     ***** **Confidential portions of this document have been omitted pursuant to a confidential treatment request and have been filed separately with the Securities and ExchangeCommission.**28 
 Section 3.31    Information Statement.    Theinformation supplied by Target for inclusion in the information statement to be sent to the stockholders of Target in connection with the notice required under Section 228(d) and Section 262(d)(2) of Delaware Law of Target (such informationstatement as amended or supplemented is referred to herein as the “**Information****Statement**”) shall not, on the date the Information Statement is first mailed to Target stockholders contain any statement which is false ormisleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they are made, not false or misleading. Notwithstanding the foregoing,Target makes no representation, warranty or covenant with respect to any information supplied by or relating to Acquiror or Sub which is contained in any of the foregoing documents.  Section 3.32    Complete Copies of Materials.    Target has delivered or made available true and complete copies of each document which hasbeen requested by Acquiror or its counsel in connection with their legal and accounting review of Target and its subsidiaries.  Section 3.33    Disclosure.    No statements by Target contained in this Agreement, its exhibits and schedules nor in any of the certificates or documents, including any of the TransactionDocuments, delivered or required to be delivered by Target to Acquiror or Sub under this Agreement contains any untrue statement of a material fact or omits (when read together with all such other statements) to state a material fact necessary inorder to make the statements contained herein or therein not misleading in light of the circumstances under which they were made.  **ARTICLE IV** **REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND SUB** Acquiror and Sub represent and warrant to Target and the holders of Target Common Stock as follows:**** 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 good standing under the laws of its respective jurisdiction of incorporation and has all requisite corporate power to own, lease and operate its property and to carry on its business as nowbeing conducted and is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the failure to be so qualified or licensed would have an Acquiror Material Adverse Effect.  “**Acquiror Material Adverse Effect**” means any change or effect that is materially adverse to the condition (financial or otherwise),assets, liabilities, business or results of operations of the Acquiror or its subsidiaries taken as a whole, *provided, however,* that none of the Excluded MAE Factors shall be deemed (either alone or in combination) to constitute, and none ofthe Excluded MAE Factors shall be taken into account in determining whether there has been or will be, an Acquiror Material Adverse Effect, and *provided, further* that no developments related to Acquiror’s litigation and settlement withLexicon Genetics, Inc. shall constitute an Acquiror Material Adverse Effect. 29 
 Section 4.2    Acquiror and Sub CapitalStructure.    The authorized capital stock of Acquiror consists of 75,000,000 shares of Common Stock, par value of $0.001 per share (“**Acquiror Common Stock**”) and 5,000,000 shares of Preferred Stock, par value$0.001 per share (“**Acquiror Preferred Stock**”), of which there were issued and outstanding as of the close of business on November 30, 2001, 32,081,516 shares of Acquiror Common Stock and no shares of Acquiror Preferred Stock. Thereare no other outstanding shares of capital stock or voting securities of Acquiror other than shares of Acquiror Common Stock issued after November 30, 2001 under Acquiror’s 2000 Employee Stock Purchase Plan (the “**ESPP**”) or uponthe exercise of options issued under Acquiror’s 1998 Stock Incentive Plan or 2000 Stock Incentive Plan. The authorized capital stock of Sub consists of 1,000 shares of Common Stock, all of which are issued and outstanding and are held byAcquiror. All outstanding shares of Acquiror and Sub have been duly authorized, validly issued, fully paid and are nonassessable and free of any liens or encumbrances other than any liens or encumbrances created by or imposed upon the holdersthereof. As of the close of business on November 30, 2001, Acquiror has reserved an aggregate of 6,726,901 shares of Common Stock for issuance to employees, directors and independent contractors upon exercise of outstanding options to acquire sharesof Acquiror Common Stock issued under the Acquiror stock option plans and an aggregate of 472,142 shares of Common Stock for issuance upon exercise of outstanding warrants. Other than as contemplated by this Agreement or under the ESPP, and exceptas described in this Section 4.2, there are no other options, warrants, calls, rights, commitments or agreements to which Acquiror or Sub is a party or by which either of them is bound obligating Acquiror or Sub to issue, deliver, sell, repurchaseor redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any shares of the capital stock of Acquiror or Sub or obligating Acquiror or Sub to grant, extend or enter into any such option, warrant, call, right, commitment oragreement. The shares of Acquiror Common Stock to be issued pursuant to the Merger have been reserved for issuance and will be duly authorized, validly issued, fully paid, and non-assessable and issued in compliance with all applicable federal orstate securities laws.  Section 4.3    Authority; No Conflict; Required Filings and Consents. (a)    Each of Acquiror and Sub has all requisite corporate power and authority to enter into thisAgreement and the other Transaction Documents to which it is or will become a party and to consummate the transactions contemplated by this Agreement and such Transaction Documents. The execution and delivery of this Agreement and such TransactionDocuments and the consummation of the transactions contemplated by this Agreement and such Transaction Documents have been duly authorized by all necessary corporate action on the part of Acquiror and Sub under the provisions of Delaware Law andAcquiror’s and Sub’s respective certificates of incorporation. This Agreement has been and such Transaction Documents have been or, to the extent not executed as of the date hereof, will be duly executed and delivered by Acquiror and Sub.This Agreement and each of the Transaction Documents to which Acquiror or Sub is a party constitutes, and each of the Transaction Documents to which Acquiror or Sub will become a party when executed and delivered by Acquiror or Sub will constitute,the valid and binding obligation of Acquiror or Sub, enforceable in accordance with its terms, except to the extent that enforceability may be limited by applicable bankruptcy, reorganization, insolvency, moratorium or other laws affecting theenforcement of creditors’ rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding at law or in equity. 30 
 (b)    The execution and delivery by Acquiror or Sub of this Agreement andthe Transaction Documents to which it is or will become a party does not, and consummation of the transactions contemplated by this Agreement or the Transaction Documents to which it is or will become a party will not, (i) conflict with, or resultin any violation or breach of any provision of the Certificate of Incorporation or Bylaws of Acquiror or Sub, (ii) result in any violation or breach of, or constitute (with or without notice or lapse of time, or both) a default (or give rise toa right of termination, cancellation or acceleration of any obligation or loss of any material 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 or any of their properties or assets may be bound, or (iii) conflict or violate any permit, concession, franchise, license, judgment, order, decree, statute, law, ordinance,rule or regulation applicable to Acquiror or Sub or any of their properties or assets, except in the case of (ii) and (iii) for any such conflicts, violations, defaults, terminations, cancellations or accelerations which would not have an AcquirorMaterial Adverse Effect.  (c)    No consent, approval, order or authorization of, or registration,declaration or filing with, any Governmental Entity is required by or with respect to Acquiror or Sub in connection with the execution and delivery of this Agreement or the Transaction Documents to which it is or will become a party or theconsummation of the transactions contemplated hereby or thereby, except for (i) the filing of the Certificate of Merger with the Delaware Secretary of State, (ii) such consents, approvals, orders, authorizations, registrations, declarations andfilings as may be required under applicable federal and state securities laws and the laws of any foreign 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;Financial Statements.  (a)    Acquiror has filed with the Commission and made available to Target or itsrepresentatives all forms, reports and documents required to be filed by Acquiror with the Commission since August 2, 2000 (collectively, the “**Acquiror Commission Reports**”). The Acquiror Commission Reports constitute all of thedocuments required to be filed by the Acquiror under 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 or superseded by a filing prior to the date ofthis Agreement, then on the date of such filing) complied in all material respects with the applicable requirements of the Securities Act of 1933, as amended, (the “**Securities Act**”), and the Exchange 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 material fact or omit to state a material fact required to bestated in such Acquiror Commission Reports or necessary in order to make the statements in such Acquiror Commission Reports, in the light of the circumstances under which they were made, not misleading, except to the extent corrected by asubsequently filed Acquiror Commission Report.  (b)    Each of the financial statements (including, in eachcase, any related notes) contained in the Acquiror Commission Reports, including any Acquiror Commission Reports filed after the date of this Agreement until the Closing, complied or will comply as to 31 
 form in all material respects with the applicable published rules and regulations of the Commission with respectthereto, was prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as may be indicated in the notes to such financial statements or, in the case of unauditedstatements, as permitted by Form 10-Q of the Commission) and fairly presented the consolidated financial position of Acquiror and its subsidiaries as at the respective dates and the consolidated results of its operations and cash flows for theperiods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount.  Section 4.5    Absence of Certain Changes or Events.    Except as otherwise disclosed in the AcquirorCommission Reports, from September 30, 2001 to the date of this Agreement, Acquiror and its subsidiaries have conducted their business in the ordinary course and, during this time, Acquiror has not suffered any change or effect that has resulted inan Acquiror Material Adverse Effect (other than any change in the business of Acquiror occurring as a result of the execution or announcement of this Agreement and provided that changes in the trading prices of Acquiror common stock shall not in andof itself constitute a change with respect to Acquiror).  Section 4.6    Compliance withLaws.    Acquiror has complied with, is not in violation of, and has not received any notices of violation with respect to, any federal, state or local statute, law or regulation with respect to the conduct of its business,or the ownership or operation of its business, except for failures to comply or violations which would 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 of engaging in the transactions contemplated by thisAgreement, has engaged in no other business activities and has conducted its operations only as contemplated by this Agreement.  Section 4.8    Disclosure.    No statements by Acquiror contained in this Agreement, its exhibits and schedules, or any of the certificates or documents, including any of the TransactionDocuments, required to be delivered by Acquiror or Sub to Target under this Agreement contain any untrue statement of material fact or omits (when read together with all such other statements) to state a material fact necessary in order to make thestatements contained herein or therein not misleading in light of the circumstances under which they were made.  Section4.9    Stockholders Consent.    No consent or approval of the stockholders of Acquiror is required or necessary for Acquiror to enter into this Agreement or the Transaction Documents or to consummatethe transactions contemplated hereby and thereby.  Section4.10    Litigation.    Except as otherwise disclosed in the Acquiror Commission Reports, (i) there is no private or governmental action, suit, proceeding, claim, arbitration or investigation pendingbefore any agency, court or tribunal, foreign or domestic, or, to the knowledge of Acquiror or any of its subsidiaries, threatened against Acquiror or any of its properties or any of its officers or directors (in their capacities as such), which, ifdetermined adversely to Acquiror, would have an Acquiror Material Adverse Effect, and (ii) there is no 32 
 judgment, decree or order against Acquiror, 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 circumstances exist that could form a valid basis for a claim againstAcquiror as a result of the conduct of Acquiror’s business (including, without limitation, any claim of infringement of any intellectual property right) that would have an Acquiror Material Adverse Effect.  **ARTICLE IV** **PRECLOSING COVENANTS OFTARGET** During the period from the date of this Agreement until the Effective Time, Target covenants and agrees asfollows:  Section 5.1    Notice to Target Stockholders.    Prior to the EffectiveTime, Target will send to all stockholders who have not consented to the Merger Agreement the notice required under Section 228(e) and Section 262(d)(2) of Delaware Law, along with the Information Statement. The notice and the Information Statementshall comply in all material respects with all applicable requirements of law and the rules and regulations promulgated thereunder. The Information Statement shall contain the unanimous recommendation of the Board of Directors of Target that theTarget stockholders approve the Merger and this Agreement and the conclusion of the Board of Directors that the terms and conditions of the Merger are fair and reasonable to the stockholders of Target. Anything to the contrary contained hereinnotwithstanding, Target shall not include in the Information Statement any information with respect to Acquiror or its affiliates or associates, the form and content of which information shall not have been approved by Acquiror prior to suchinclusion.  Section 5.2    Advice of Changes.    Target will promptly adviseAcquiror in writing of any event occurring subsequent to the date of this Agreement which would render any representation or warranty of Target contained in this Agreement, if made on or as of the date of such event or the Closing Date, untrue orinaccurate in any material respect.  Section 5.3    Operation ofBusiness.    During the period from the date of this Agreement and continuing until the earlier of the termination of the Agreement or the Effective Time, Target agrees (except to the extent that Acquiror shall otherwiseconsent in writing), to carry on its business in the usual, regular and ordinary course in substantially the same manner as previously conducted, to pay its debts and taxes when due, subject to good faith disputes over such debts or taxes, to pay orperform other obligations when due, and, to the extent consistent with such business, use all reasonable efforts consistent with past practices and policies to preserve intact its present business organization, keep available the services of itspresent officers and key employees and preserve its relationships with customers, suppliers, distributors, licensors, licensees, and others having business dealings with it with the understanding that Target shall take commercially reasonable stepsto enter into the License Amendments. Target shall promptly notify Acquiror of any event or occurrence not in the ordinary course of business of Target. Except as expressly contemplated by this Agreement, Target shall not, without the prior writtenconsent of Acquiror: 33 
 (a)    Accelerate, amend or change the period of exercisability or thevesting schedule of options or restricted stock granted under any employee stock plan or agreements or authorize cash payments in exchange for any Target Option or any options granted under any of such plans except as specifically required by theterms of such plans or any related agreements or any such agreements in effect as of the date of this Agreement and disclosed in the Target Disclosure Schedule;  (b)    Declare or pay any dividends on or make any other distributions (whether in cash, stock or property) in respect of any of its capital stock, or split, combineor reclassify any of its capital stock or issue or authorize the issuance of any other securities (other than with respect to the exercise of Target Options or Target Warrants or the conversion of Target Preferred Stock) in respect of, in lieu of orin substitution for shares of capital stock of such party, or purchase or otherwise acquire, directly or indirectly, any shares of its capital stock except from former employees, directors and consultants in accordance with agreements providing forthe repurchase of shares in connection with any termination of service by such party;  (c)    Issue, deliveror sell or authorize or propose the issuance, delivery or sale of, or purchase or propose the purchase of, any shares of its capital stock or securities convertible into shares of its capital stock, or subscriptions, rights, warrants or options toacquire, or other agreements or commitments of any character obligating it to issue any such shares or other convertible securities, other than (i) the issuance of (A) shares of Target Common Stock issuable (1) upon exercise of Target Options or (2)pursuant to other commitments that are outstanding on the date of this Agreement and set forth in **Schedule 3.3**, (B) shares of Target Common Stock issuable upon conversion of shares of Target Preferred Stock or (C) shares of Target CommonStock or Target Preferred Stock upon the exercise of Target Warrants or (ii) the repurchase of shares of Common Stock from terminated employees pursuant to the terms of outstanding stock restriction or similar agreements;  (d)    Acquire or agree to acquire by merging or consolidating with, or by purchasing a substantial equity interest in orsubstantial portion of the assets of, or by any other manner, any business or any corporation, partnership or other business organization or division, or otherwise acquire or agree to acquire any assets;  (e)    Sell, lease, license or otherwise dispose of any of its properties or assets which are material, individually or in theaggregate, to the business of Target, except in the ordinary course of business consistent with past practices;  (f)    (i)  *Increase or agree to increase the compensation payable or to become payable to its officers or employees, except for increases in salary or wages of non-officer employees in accordance with pastpractices, (ii) grant any additional severance or termination pay to, or enter into any employment or severance agreements with, officers, (iii) grant any severance or termination pay to, or enter into any employment or severance agreement, with anynon- officer employee, except in accordance with past practices or pursuant to agreements existing as of the date of this Agreement, (iv) enter into any collective bargaining agreement, or (v) establish, adopt, enter into or amend in any materialrespect any bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation,*34 
 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, including writing down the value of inventory orwriting off notes or accounts receivable;  (h)    Incur any indebtedness for borrowed money or guarantee anysuch indebtedness or issue or sell any debt securities or warrants or rights to acquire any debt securities or guarantee any debt securities of others;  (i)    Amend or propose to amend its Certificate of Incorporation or Bylaws;  (j)    Incur or commit to incur any capital expenditures in excess of $50,000 in the aggregate or in excess of $10,000 as to any individual matter;  (k)    Lease, license, sell, transfer or encumber or permit to be encumbered any asset, Target Proprietary Right or other property associated with the business ofTarget (including sales or transfers to Affiliates of Target) except for license agreements entered into in the ordinary course of business consistent with past practices and except for entering into the License Amendments.  (l)    Enter into any lease or contract for the purchase or sale of any property, real or personal, except in the ordinary course ofbusiness consistent with past practices;  (m)    Fail to maintain its equipment and other assets in goodworking condition and repair according to the standards it has maintained up to the date of this Agreement, subject only to ordinary wear and tear;  (n)    Change accounting methods;  (o)    Amend orterminate any material contract, agreement or license to which it is a party except in the ordinary course of business consistent with past practices;  (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 or claim, except in the ordinary course of business consistent with past practices;  (r)    Make or change any Tax or accounting election, change any annual accounting period, adopt or change any accounting method, file any amended Return, enter intoany closing agreement, settle any Tax claim or assessment relating to Target, surrender any right to claim refund of Taxes or consent to any extension or waiver of the limitation period applicable to any Tax claim or assessment relating to Target ifany such election, adoption, change, amendment, agreement, settlement, surrender, consent or other similar action or omission would have the effect of increasing the Tax liability of Target or Acquiror; 35 
 (s)    Take any action, or fail to take any action, that would cause aTarget Material Adverse Effect;  (t)    Enter into any agreement in which the obligation of Target exceeds$10,000 or shall not terminate or be subject to termination for convenience within 180 days following execution;  (u)    Enter into any agreement not in the ordinary course of business (including without limitation any material licenses, any exclusive agreements of any kind, or any agreements providing for obligations that wouldextend 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 any action which is reasonably likely to make any of Target’s representations or warranties contained in this Agreement untrue or incorrect in any material respect onthe date made (to the extent so limited) or as of the Effective Time.  Section 5.4    Access toInformation.    Until the earlier of the Closing or the termination of this Agreement, Target shall allow Acquiror and its agents reasonable access during normal business hours upon reasonable notice to its files, books,records, and offices, including, without limitation, any and all information relating to taxes, commitments, contracts, leases, licenses, and personal property and financial condition. Until the earlier of the Closing or the termination of thisAgreement, Target shall cause its accountants to cooperate with Acquiror and its agents in making available all financial information requested, including without limitation the right to examine all working papers pertaining to all financialstatements prepared or audited by such accountants. No information or knowledge obtained in any investigation pursuant to this Section shall effect or be deemed to modify any representation or warranty contained in this Agreement or its exhibits andschedules. All such access shall be subject to the terms of the Confidentiality Agreement (as defined in Section 7.1).  Section5.5    Satisfaction of Conditions Precedent.    Target will use its best efforts to satisfy or cause to be satisfied all the conditions precedent which are set forth in Sections 8.1 and 8.2, and Targetwill use its best efforts to cause the transactions contemplated by this Agreement to be consummated, and, without limiting the generality of the foregoing, to obtain all consents and authorizations of third parties and to make all filings with, andgive all notices to, third parties which may be necessary or reasonably required on its part in order to effect the transactions contemplated by this Agreement. Target shall use its best efforts to obtain any and all consents necessary with respectto those Material Contracts listed on **Schedule 5.5** of the Target Disclosure Schedule in connection with the Merger (the “**Material Consents**”).  Section 5.6    Other Negotiations.    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 any information to, or participate in any negotiations with, any corporation, partnership, person or otherentity or group (other than Acquiror) regarding any acquisition of Target, any merger or consolidation with or involving Target, or any acquisition of any material portion of the stock or assets of Target or any material license of TargetProprietary Rights, except for the License Amendments 36 
 and license agreements entered into in the ordinary course of business (any of the foregoing being referred to in thisAgreement as an “**Acquisition Transaction**”) or enter into an agreement concerning any Acquisition Transaction with any party other than Acquiror. If between the date of this Agreement and the termination of this Agreement pursuant toSection 9.1, Target receives from a third party any offer or indication of interest regarding any Acquisition Transaction, or any request for information regarding any Acquisition Transaction, Target shall (i) notify Acquiror immediately (orally andin writing) of such offer, indication of interest or request, including the identity of such party and the terms of any proposal therein, and (ii) notify such third party of Target’s obligations under this Agreement.  **ARTICLE V** **PRECLOSING AND OTHERCOVENANTS OF ACQUIROR AND SUB** Section 6.1    Advice ofChanges.    Acquiror and Sub will promptly advise Target in writing of any event occurring subsequent to the date of this Agreement which would render any representation or warranty of Acquiror or Sub 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 6.2    Reservation of Acquiror Common Stock.    Acquiror shall reserve for issuance, out of its authorized but unissued capital stock, the maximum number of shares of Acquiror CommonStock as may be issuable upon consummation of the Merger.  Section 6.3    Satisfaction of ConditionsPrecedent.    Acquiror and Sub will use commercially reasonable efforts to satisfy or cause to be satisfied all the conditions precedent which are set forth in Sections 8.1 and 8.3, and Acquiror and Sub will use commerciallyreasonable efforts to cause the transactions contemplated by this Agreement to be consummated, and, without limiting the generality of the foregoing, to obtain all consents and authorizations of third parties and to make all filings with, and giveall notices to, third parties which may be necessary or reasonably required on its part in order to effect the transactions contemplated hereby.  Section 6.4    Nasdaq National Market Listing.    Acquiror shall cause the shares of Acquiror Common Stock issuable to the stockholders of Target in the Merger, includingthe Earn Out Shares, to be authorized for listing on the Nasdaq National Market prior to the Closing.  Section6.5    Stock Options and Warrants.    Prior to the Effective Time, Target shall provide notice to each holder of Target Options and Target Warrants, within the required time periods, informing theholders that any outstanding Target Options and Target Warrants not exercised before the Effective Time shall expire.  Section6.6    Registration of Shares Issued in the Merger.  (a)    RegistrableShares.    For purposes of this Agreement, “**Registrable Shares**” shall mean the shares of Acquiror Common Stock issued in the Merger, including the Merger Shares and any and all Escrow Shares and Earn OutShares, but excluding shares of Acquiror Common Stock issued in the Merger that have been sold or otherwise transferred without the consent of Acquiror (which shall not be unreasonably withheld) by the stockholders 37 
 of Target who initially received such shares in the Merger prior to the effective date of the Registration Statement (asdefined below) (collectively, the “**Holders**”); *provided, however,* that a distribution of shares of Acquiror Common Stock issued in the Merger without additional consideration, to underlying beneficial owners (such as thegeneral and limited partners, stockholders or trust beneficiaries of a Holder) shall not be deemed such a sale or transfer for purposes of this Section 6.6 and such underlying beneficial owners shall be entitled to the same rights under this Section6.6 as the initial Holder from which the Registrable Shares were received and shall be deemed Holders for the purposes of this Section 6.6.  (b)    Required Registration.    Acquiror shall prepare and file with the Commission a registration statement on Form S-3 (or such successor or other appropriate formthat Acquiror is eligible to use) under the Securities Act with respect to the Registrable Shares (the “**Registration Statement**”) by the date that is five (5) days after the date of public disclosure of the Acquiror’s financialresults for the financial quarter in which the Effective Time occurs and to effect all such registrations, qualifications and compliances in connection therewith (including, without limitation, filing any Exchange Act reports or Financial Statementswith the Commission and obtaining appropriate qualifications under applicable state securities or “blue sky” laws and compliance with any other applicable governmental requirements or regulations) as any selling Holder may reasonablyrequest and that would permit or facilitate the public sale of Registrable Shares (*provided, however,* that Acquiror shall not be required in connection therewith to qualify to do business or to file a general consent to service of process inany such state or jurisdiction), in each case so that such Registration Statement and all other such registrations, qualifications and compliances may become effective as soon as possible thereafter, but in any event no later than 30 days after thefiling thereof, or as soon as practicable thereafter in the event such Registration Statement becomes subject to review by the Commission Staff.  (c)    Effectiveness; Trading Window; Suspension Right.  (i)    Acquiror will use its commercially reasonable efforts to maintain the effectiveness of the Registration Statement and other applicable registrations, qualifications and compliances for one (1) year from theClosing Date (the “**Registration Effective Period**”), and from time to time will amend or supplement the Registration Statement and the prospectus contained therein as and to the extent necessary to comply with the Securities Act, theExchange Act and any applicable state securities statute or regulation, subject to the following limitations and qualifications.  (ii)    Following the date on which the Registration Statement is first declared effective and subject to the restrictions set forth in the Restricted Stock Agreement and the Sale Restriction Agreement, the Holders willbe permitted (subject in all cases to Section 6.7 below) to offer and sell Registrable Shares under the Registration Statement during the Registration Effective Period in the manner described in the Registration Statement *provided* that theRegistration Statement remains effective and has not been suspended; *provided, however,* that such offers and sales may only occur during the period that begins at the close of business on the second trading day following the date of publicdisclosure of the Acquiror’s financial results for a particular fiscal 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 second month of the next fiscal quarter.38 
 (iii)    Notwithstanding any other provision of this Section 6.6, Acquirorshall have the right pursuant to its insider trading policy, at any time to require that all Holders suspend further open market offers and sales of Registrable Shares whenever, and for such period of time as there is material undisclosedinformation or events with respect to Acquiror the disclosure of which would be seriously detrimental to the Acquiror; *provided, however,* that Acquiror shall also suspend further open market offers and sales of its shares by all other personsand entities then subject to Acquiror’s insider trading policy. Acquiror will promptly give the Holders notice of any such suspension.  (d)    Expenses.    Acquiror shall bear all costs and expenses for purposes of this Section 6.6, including, without limitation, printing expenses (including a reasonablenumber of prospectuses for circulation by the selling Holders), reasonable legal fees and disbursements of counsel for Acquiror and one counsel for the selling Holders (up to $5,000), “blue sky” expenses, accounting fees and filing fees,but shall not include underwriting commissions or similar charges, legal fees and disbursements of other counsel for the selling Holders.  (e)    Indemnification.  (i)    To the extentpermitted by law, Acquiror will indemnify and hold harmless each Holder, any underwriter (as defined 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 which they may become subject under the Securities Act, the Exchange Act or other federal or statelaw, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a “**Violation**”): (A) any untruestatement or alleged untrue statement of a material fact contained in the Registration Statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (B) the omission or allegedomission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (C) any violation or alleged violation by Acquiror of the Securities Act, the Exchange Act, any state securitieslaw or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law; and Acquiror will pay to each such Holder (and its officers, directors, stockholders or partners), underwriter or controlling person,any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; *provided, however,* that the indemnity agreement contained in this Section 6.6(e)(i)shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of Acquiror; 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 is based upon (a) a Violation which occurs in reliance upon and in conformity with information furnished expressly for use in the Registration Statement by any such Holder, or (b) aViolation that would not have occurred if such Holder had delivered to the purchaser the version of the Prospectus most recently provided by Acquiror to the Holder as of the date of such sale.  (ii)    To the extent permitted by law, each selling Holder will indemnify and hold harmless Acquiror, each of its directors, each of its officers who has signedthe 39 
 Registration Statement, each person, if any, who controls Acquiror within the meaning of the Securities Act, anyunderwriter, any other Holder selling securities pursuant to the Registration Statement and any controlling person of any such underwriter or other Holder, against any losses, claims, damages, or liabilities (joint or several) to which any of theforegoing persons may become subject, under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any Violation(which includes without limitation the failure of the Holder to comply with the prospectus delivery requirements under the Securities Act, and the failure of the Holder to deliver the most current prospectus 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 in conformity with written information furnished by such Holder expressly for use in the Registration Statement or such Violation is caused by theHolder’s failure to deliver to the purchaser of the Holder’s Registrable Shares a prospectus (or amendment or supplement thereto) that had been made available to the Holder by Acquiror; and each such Holder will pay any legal or otherexpenses reasonably incurred by any person intended to be indemnified pursuant to this Section 6.6(e)(ii) in connection with investigating or defending any such loss, claim, damage, liability, or action; *provided, however,* that the indemnityagreement contained in this Section 6.6(e)(ii) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of such Holder, which consent shall not beunreasonably withheld. The aggregate indemnification and contribution liability of each Holder under this Section 6.6(e)(ii) shall not exceed the net proceeds received by such Holder in connection with sale of shares pursuant to the RegistrationStatement.  (iii)    Each person entitled to indemnification under this Section 6.6(e) (the“**Indemnified Party**”) shall give notice to the party required to provide indemnification (the “**Indemnifying Party**”) promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may besought and shall permit the Indemnifying Party to assume the defense of any such claim and any litigation resulting therefrom, *provided* that counsel for the Indemnifying Party who conducts the defense of such claim or any litigation resultingtherefrom shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may 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 the Indemnifying Party of its obligations under this Section 6.6 unless the Indemnifying Party is materially prejudiced thereby. No Indemnifying Party, in the defense of any suchclaim or litigation, shall (except with the consent of each Indemnified Party) consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to suchIndemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing andas shall be reasonably required in connection with the defense of such claim and litigation resulting therefrom.  (iv)    To the extent that the indemnification provided for in this Section 6.6(e) is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damageor expense referred to herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage or40 
 expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand andof the Indemnified Party on the other in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense, as well as any other relevant equitable considerations. The relative fault of the IndemnifyingParty and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to informationsupplied by the Indemnifying Party or by the Indemnified Party and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.  (f)    Current Public Information. Until the earlier of the first anniversary of the Closing Date (or, if any Holder is anaffiliate of Acquiror, the second anniversary of the Closing Date) or the date all shares of Acquiror Common Stock subject to this Section 6.6 have been sold, Acquiror will timely file all reports required to be filed by it under the Exchange Act,and the rules and regulations adopted by the Commission thereunder, all to the extent required to enable such Holders to sell their shares pursuant to Rule 144 and the Registration Statement. Upon written request, Acquiror will deliver to suchHolders a written statement as to whether it has complied with such requirements.  Section6.7    Procedures for Sale of Shares Under Registration Statement.  (a)    Delivery of Prospectus.    For any offer or sale of any of the Registrable Shares by a Holder in a transaction that is not exempt under the Securities Act, the Holder, in addition tocomplying with any other federal securities laws, shall deliver a copy of the final prospectus (or amendment of or supplement to such prospectus) of Acquiror covering the Registrable Shares in the form furnished to the Holder by Acquiror to thepurchaser of any of the Registrable Shares on or before the settlement date for the purchase of such Registrable Shares.  (b)    Copies of Prospectuses.    Acquiror shall, upon the effectiveness of the Registration Statement and within two (2) trading days following any request, furnish to such Holder a reasonablenumber of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Shares, such prospectus shall not as of the date of delivery to the Holder include anuntrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances under which they were made.  Section 6.8    Certain Employee Benefit Matters.    From and after the Effective Time,employees of Target at the Effective Time will be provided with employee benefits by the Surviving Corporation or Acquiror which in the aggregate are no less favorable to such employees than those provided from time to time by Acquiror to similarlysituated employees. If any employee of Target becomes a participant in any employee benefit plan, program, policy or arrangement of Acquiror, such employee shall be given credit for all service prior to the Effective Time with Target to the extentpermissible under such plan, program, policy or arrangement. Employees of Target as of the Effective Time shall be permitted to participate in the ESPP commencing on the first enrollment date following the Effective Time, subject to compliance withthe eligibility and other provisions of such plan. 41 
 Section 6.9    Indemnity of Target Affiliates.  (a)    Acquiror shall not, for a period of six years after the Effective Time, take any action to alter or impair anyexculpatory or indemnification provisions now existing in the Certificate of Incorporation or By-laws of Target for the benefit of any individual who served as a director or officer of Target at any time prior to the Effective Time (the“**Indemnified Executives**”), except for any changes which do not affect the application of such provisions to acts or omissions of such individuals prior to the Effective Time.  **ARTICLE VII** **OTHER AGREEMENTS** Section 7.1    Confidentiality.     Each party acknowledges Acquiror and Target have previously executeda Mutual Non-Disclosure Agreement dated April 9, 2001 (the “**Confidentiality Agreement**”), which agreement shall continue in full force and effect in accordance with its terms.  Section 7.2    No Public Announcement.    The parties have agreed upon the form and substances of a joint press release announcing theconsummation of the Merger, which shall be issued at a time and in a manner mutually agreed upon. Other than such joint press release, the parties shall make no public announcement concerning this Agreement, their discussions or any other memoranda,letters or agreements between the parties relating to the Merger; *provided, however,* that either of the parties, but only after reasonable consultation with the other, may make disclosure if required under applicable law.  Section 7.3    Regulatory Filings; Consents; Reasonable Efforts.    Subject to the terms andconditions of this Agreement, Target and Acquiror shall use commercially reasonable efforts to (i) make all necessary filings with respect to the Merger and this Agreement under the Exchange Act and applicable blue sky or similar securities laws andobtain required approvals and clearances with respect thereto and supply all additional information requested in connection therewith; (ii) make merger notification or other appropriate filings with federal, state or local governmental bodies orapplicable foreign governmental agencies and obtain required approvals and clearances with respect thereto and supply all additional information requested in connection therewith; (iii) obtain all consents, waivers, approvals, authorizations andorders required in connection with the authorization, execution and delivery of this Agreement and the consummation of the Merger; and (iv) take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary, properor advisable to consummate and make effective the transactions contemplated by this Agreement as promptly as practicable.  Section 7.4    Further Assurances.    Prior to the Closing, each party agrees to cooperate fully with the other parties and to execute such further instruments, documents and agreements and togive such further written assurances, as may be reasonably requested by any other party to better evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement.42 
 Section 7.5    Escrow Agreement.    On or beforethe Effective Date, Acquiror shall, and the parties hereto shall exercise commercially reasonable efforts to cause the Escrow Agent (as defined in Section 10.2) and the Stockholders’ Agent (as defined in Section 10.9) to enter into the EscrowAgreement.  Section 7.6    FIRPTA.    Target shall, prior to the Closing Date,provide Acquiror with a properly executed Foreign Investment and Real Property Tax Act of 1980 (“**FIRPTA**”) FIRPTA Notification Letter which states that shares of capital stock of Target do not constitute “United States realproperty interests” under Section 897(c) of the Code, for purposes of satisfying Acquiror’s obligations under Treasury Regulation Section 1.1445-2(c)(3). In addition, simultaneously with delivery of such FIRPTA Notification Letter, Targetshall provide to Acquiror, as agent for Target, a form of notice to the Internal Revenue Service in accordance with the requirements of Treasury Regulation Section 1.897-2(h)(2), along with written authorization for Acquiror to deliver such noticeform to the Internal Revenue Service on behalf of Target upon the Closing of the Merger.  Section7.7    Blue Sky Laws.    Acquiror shall take such steps as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable to the issuance of the AcquirorCommon Stock in connection with the Merger. Target shall use its best efforts to assist Acquiror as may be necessary to comply with the securities and blue sky laws of all jurisdictions which are applicable in connection with the issuance ofAcquiror Common Stock in connection with the Merger.  Section 7.8    OtherFilings.    As promptly as practicable after the date of this Agreement, Target and Acquiror will prepare and file any other filings required under the Exchange Act, the Securities Act or any other Federal, foreign or statesecurities or blue sky laws relating to the Merger and the transactions contemplated by this Agreement (the “**Other Filings**”). The Other Filings will comply in all material respects with all applicable requirements of law and therules and regulations promulgated thereunder. Whenever any event occurs which is required to be set forth in an amendment or supplement to any Other Filing, Target or Acquiror, as the case may be, will promptly inform the other of such occurrenceand cooperate in making any appropriate amendment or supplement, and/or mailing to stockholders of Target, such amendment or supplement.  **ARTICLE VIII** **CONDITIONS TO MERGER** Section 8.1    Conditions to Each Party’s Obligation to Effect the Merger.    The respective obligations of each party to thisAgreement to effect the Merger shall be subject to the satisfaction or waiver prior to the Closing Date of the following conditions:  (a)    No Injunctions or Restraints; Illegality.    No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or otherlegal or regulatory restraint or prohibition preventing the consummation of the Merger shall have been issued and still be effective, nor shall any proceeding brought by a domestic administrative agency or commission or other domestic GovernmentalEntity or other third party, 43 
 seeking any of the foregoing be pending; nor shall there be any action taken, or any statute, rule, regulation or orderenacted, entered, enforced or deemed applicable to the Merger which makes the consummation of the Merger illegal.  (b)    Registration Exemption.    The issuance of Acquiror Common Stock in the Merger shall be exempt from registration pursuant to Regulation D promulgated under the Securities Act. (c)    Preferred Stock.    All of the outstanding Target Preferred Stock shallhave been converted to Target Common Stock.  Section 8.2    Additional Conditions to Obligations ofAcquiror and Sub.    The obligations of Acquiror and Sub to effect the Merger are subject to the satisfaction of each of the following conditions, any of which may be waived in writing exclusively by Acquiror and Sub: (a)    Representations, Warranties and Covenants.    (i) Each of therepresentations and warranties of Target in this Agreement that is expressly qualified by a reference to materiality shall be true in all respects as so qualified, and each of the representations and warranties of Target in this Agreement that isnot so qualified shall be true and correct in all material respects, on and as of the Closing Date as though such representation or warranty had been made on and as of the Closing (except that those representations and warranties which addressmatters only as of a particular date shall remain true and correct as of such date, and (ii) Target shall have performed and complied in all material respects with all covenants, obligations and conditions of this Agreement required to be performedand complied with by Target as of the Closing.  (b)    Material AdverseEffect.    Since the date hereof, there shall not have occurred any event or events, which has had, individually or in the aggregate, or would reasonably be expected to have, a Target Material Adverse Effect.  (c)    Approvals.    All authorizations, consents (including the Material Consents), orapprovals of, or notifications to any third party or Governmental Entity, required by Target’s contracts, agreements or other obligations in connection with the consummation of the Merger shall have occurred or been obtained except for any theabsence of which is not reasonably likely to have a Target Material Adverse Effect.  (d)    Certificatesof Target.  (i)    Compliance Certificate of Target.    Acquiror and Subshall have been provided with a certificate executed on behalf of Target by its President or Chief Financial Officer to the effect that, as of the Effective Time, each of the conditions set forth in Section 8.2(a), (b) and (c) above has beensatisfied.  (ii)    Certificate of Secretary of Target.    A certificate, datedthe Closing Date, of the Secretary of Target (i) attaching copies of the Certificate of Incorporation and Bylaws, and any amendments thereto, of Target, (ii) attaching a good standing certificate of Target, duly certified by the Secretary of Stateof the State of Delaware, (iii) certifying (A) that attached thereto are true and correct copies of action by written consent or resolutions duly 44 
 adopted by the Board of Directors, of Target and continuing in effect, which authorize the execution, delivery andperformance by Target of this Agreement and the Certificate of Merger and the consummation of the transactions contemplated hereby and thereby; and (B) that there are no proceedings for the dissolution or liquidation of Target, and (iv) certifyingthe incumbency, signatures and authority of the officers of Target authorized to execute, deliver and perform this Agreement and the Certificate of Merger and all other documents, instruments or agreements related thereto executed or to be executedby Target.  (e)    Dissenting Stockholders.    Holders of not more than 5% ofTarget’s issued and outstanding capital stock as of the Closing shall have elected to exercise dissenters’ or appraisal rights under Delaware Law or California Law as to such shares.  (f)    Escrow Agreement.    The Escrow Agent and Stockholders’ Agent shall have executed and delivered to Acquiror the EscrowAgreement and such agreement shall remain in full force and effect.  (g)    InvestorQuestionnaire.    Each stockholder of Target who is not an “affiliate” of Target and who has executed a written consent in favor of the Merger shall have executed and delivered to Acquiror an investor questionnaire. (h)    Ancillary Agreements.    Each of the Employment Agreement, ConsultingAgreement, Noncompetition Agreements, Restricted Stock Agreements, Sale Restriction Agreements and Support Agreements executed and delivered concurrently with the execution of this Agreement shall remain in full force and effect.  (i)    License Agreements.    Each of the Salk License, Baylor License and Sydney Licenseshall have been amended in the forms attached hereto as Exhibits A-1, A-2 and A-3 or as such forms may be amended with the prior written approval of Acquiror, and shall be in full force and effect.  (j)    Consultants.    William Schrader, Ping Wei, Teresa Aja and David Moore shall be consultants of theTarget and shall have indicated that he or she intends to retain his status as a consultant of the Target on the terms and conditions set forth in his or her respective Consulting Agreement.  (k)    Evans Consulting Agreement.    Ronald Evans shall have executed and delivered to Acquiror a Consulting Agreement in formsatisfactory to Acquiror and such agreement shall remain in full force and effect.  (l)    RegistrationRights Waivers.    Acquiror shall have received the waivers and consents from its existing holders of registration rights to grant the registration rights contained in this Agreement.  (m)    Opinion of Target’s Counsel.    Acquiror shall have received an opinion dated the ClosingDate of Cooley Godward LLP, counsel to Target, as to the matters in the form attached hereto as Exhibit I. 45 
 (n)    Termination of Agreements.    Thefollowing agreements between Target and certain of its employees, consultants or stockholders shall have been terminated: (i) Lichter Offer Letter dated February 1, 2001, including all amendments thereto, (ii) Schrader Offer Letter dated November22, 2000, including all amendments thereto and (iii) Stockton Offer Letter dated February 6, 2001.  (o)    Board Resignations.    Target shall have received written letters of resignation from each of the current members of the Target Board of Directors and from each officer of Target, ineach case effective at the Effective Time.  (p)    Warrant Exercise.    Alloutstanding warrants to purchase Target Common Stock or Target Preferred Stock shall have been exercised or cancelled.  (q)    FIRPTA Certificate.    Target shall, prior to the Closing Date, provide Acquiror with a properly executed FIRPTA Notification Letter and a form of notice to the Internal Revenue Servicein accordance with the requirements of Treasury Regulation Section 1.897-2(h)(2) along with written authorization for Acquiror to deliver such notice form to the Internal Revenue Service on behalf of Target upon the Closing of the Merger, as setforth in Section 7.6 above.  (r)    Termination of Target’s BenefitPlans.    Target shall have taken all steps necessary to terminate the Target Employee Plans contingent on the Closing and effective on or before the Closing Date.  (s)    Stockholder Approval of 280G Payments.    Any payments subject to Section 280G of the Internal Revenue Code shall have been dulyapproved by the requisite number of holders of the shares of the capital stock of Target.  (t)    EvansShares.    Acquiror shall be satisfied that Ronald Evans shall have complied with the share ownership restrictions set forth in the Founder Stock Purchase Agreement and Consulting Agreement, each dated November 30, 2000between XenoPharm, Inc. and Ronald M. Evans.  (u)    EstoppelCertificate.    Target’s landlord shall have delivered an estoppel certificate indicating the no past or future rents are owed.  (v)    Transfer of Assets.    Target shall have made arrangements (acceptable to Acquiror and at Acquiror’s expense) for the transfer of all of Target’sphysical assets to Acquiror upon the Closing.  (w)    Consultants’ ProprietaryInformation.    Each of William Schrader, Ping Wei, Teresa Aja, David Moore and Ronald Evans shall have executed a Consultants’ Proprietary Information and Inventions Agreement in substantially the form of Exhibit B tohis or her respective Consulting Agreement.  Section 8.3    Additional Conditions to Obligations ofTarget.    The obligation of Target to effect the Merger is subject to the satisfaction of each of the following conditions, any of which may be waived, in writing, exclusively by Target: 46 
 (a)    Representations, Warranties andCovenants.    (i) Each of the representations and warranties of Acquiror and Sub in this Agreement that is expressly qualified by a reference to materiality shall be true in all respects as so qualified, and each of therepresentations and warranties of Acquiror and Sub in this Agreement that is not so qualified shall be true and correct in all material respects, on and as of the Closing Date as though such representation or warranty had been made on and as of theClosing (except that those representations and warranties which address matters only as of a particular date shall remain true and correct as of such date), and (ii) each of Acquiror and Sub shall have performed and complied in all material respectswith all covenants, obligations and conditions of this Agreement required to be performed and complied with by Acquiror and Sub as of the Closing.  (b)    Certificates of Acquiror.  (i)    Compliance Certificate of Acquiror.    Target shall have been provided with a certificate executed on behalf of Acquiror by its President or Chief Financial Officer to the effect that,as of the Effective Time, each of the conditions set forth in Section 8.3(a) above has been satisfied.  (ii)    Certificate of Secretary of Acquiror.    A certificate, dated the Closing Date, of the Secretary of Acquiror (i) attaching copies of the Certificate of Incorporation and Bylaws, and anyamendments thereto, of Acquiror, (ii) attaching a good standing certificate of Acquiror, duly certified by the Secretary of State of the 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 Acquiror and continuing in effect, which authorize the execution, delivery and performance by Acquiror of this Agreement and the consummation of the transactions contemplated hereby;and (B) that there are no proceedings for the dissolution or liquidation of Acquiror, and (iv) certifying the incumbency, signatures and authority of the officers of Acquiror authorized to execute, deliver and perform this Agreement and all otherdocuments, instruments or agreements related thereto executed or to be executed by Acquiror.  (c)    Certificates of Sub.  (i)    Compliance Certificate ofAcquiror.    Target shall have been provided with a certificate executed on behalf of Sub by its President or Chief Financial Officer to the effect that, as of the Effective Time, each of the conditions set forth in Section8.3(a) above has been satisfied.  (ii)    Certificate of Secretary of Sub.    Acertificate, dated the Closing Date, of an officer of Sub (i) attaching copies of the Certificate of Incorporation and Bylaws, and any amendments thereto, of Sub, (ii) attaching a good standing certificate of Sub, duly certified by the Secretary ofState of the State of Delaware, (iii) certifying (A) that attached thereto are true and correct copies of action by written consent or resolutions duly adopted by the Board of Directors, of Sub and continuing in effect, which authorize theexecution, delivery and performance by Sub of this Agreement and the Certificate of Merger and the consummation of the transactions contemplated hereby and thereby; and (B) that there are no proceedings for the dissolution or liquidation of Sub, and(iv) certifying the incumbency, signatures and authority of the officers of Sub authorized to execute, deliver and perform this Agreement and the Certificate 47 
 of Merger and all other documents, instruments or agreements related thereto executed or to be executed by Sub. (d)    Opinion of Acquiror’s Counsel.    Target shall have received anopinion dated the Closing Date of Orrick, Herrington & Sutcliffe LLP, counsel to Acquiror, as to the matters attached hereto as Exhibit J.  (e)    Stockholder Consent.    This Agreement and the Merger shall have been duly approved and adopted by the holders of a majority of the shares of the capital stock ofTarget outstanding as of the date hereof.  (f)    Expenses.    Acquiror shallhave paid or caused to be paid (i) outstanding Third Party Expenses representing legal fees incurred by the Target for services provided by Cooley Godward LLP as set forth on Schedule 2.1(c), and (ii) the Accrued Legal Expenses not to exceed$15,000.  (g)    Nasdaq.    Acquiror shall have filed with the Nasdaq NationalMarket a Notification Form for Change in Number of Shares Outstanding with respect to the shares of Acquiror Common Stock issuable upon conversion of the Target Capital Stock in the Merger.  **ARTICLE IX** **TERMINATION AND AMENDMENT** Section 9.1    Termination. This Agreement may be terminated at any time prior to the Effective Time:  (a)    by mutual written consent of Acquiror and Target;  (b)    by either Acquiror or Target, by giving written notice to the other party, if a court of competent jurisdiction or other Governmental Entity shall have issueda nonappealable final order, decree or ruling or taken any other action, in each case having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger;  (c)    by Acquiror, by giving written notice to Target, if the Closing shall not have occurred on or before 11:59 p.m. (Pacific Standard Time) on March 15, 2002 (the“**Deadline**”) by reason of the failure of any condition precedent under Section 8.1 or 8.2 (unless the failure results primarily from a breach by Acquiror of any representation, warranty, or covenant of Acquiror contained in thisAgreement or Acquiror’s failure to fulfill a condition precedent to closing or other default);  (d)    by Target, by giving written notice to Acquiror, if the Closing shall not have occurred by July 15, 2002 by reason of the failure of any condition precedent under Section 8.1 or 8.3 (unless the failure resultsprimarily from a breach by Target of any representation, warranty, or covenant of Target contained in this Agreement or Target’s failure to fulfill a condition precedent to closing or other default); or 48 
 (e)    by Target, if the 10-Day Average Acquiror Closing Price is less than$5.50.  Section 9.2    Effect of Termination.    In the event of termination ofthis Agreement as provided in Section 9.1, this Agreement shall immediately become void and there shall be no liability or obligation on the part of Acquiror, Target, Sub or their respective officers, directors, stockholders or Affiliates, except asset forth in Sections 7.1 and 9.3 and this Section 9.2 and further except to the extent that such termination results from the willful breach by any such party of any of its representations, warranties or covenants set forth in this Agreement. Section 9.3    Fees and Expenses.    If the Merger is consummated, all legal,accounting, investment banking, broker’s and finder’s fees and expenses incurred by Target or its stockholders in connection with the Merger (collectively, the “**Third Party Expenses**” shall be deemed expenses of thestockholders of Target and shall be deemed to be transaction expenses and shall reduce the merger consideration pursuant to Section 2.1(c) and will not become obligations of Target. The legal fees of Cooley Godward LLP set forth on **Schedule2.1(c)** shall be paid at Closing, and both parties agree that neither party may waive this covenant. Any amount of such fees or expenses in excess of the amounts set forth on **Schedule 2.1(c)** shall be borne by the former Target stockholdersand deducted from the Escrow Fund (as defined below) without regard to the damage threshold in Section 10.3 and shall not become obligations of the Surviving Corporation.  **ARTICLE IX** **ESCROW AND INDEMNIFICATION** Section 10.1    Indemnification.    From and after the Effective Time and subject to the limitationscontained in Section 10.2, Acquiror shall be indemnified and held harmless against any loss, expense, liability or other damage, including attorneys’ fees, to the extent of the amount of such loss, expense, liability or other damage(collectively “**Damages**”) that Acquiror has incurred by reason of (i) the breach by Target of any representation, warranty, covenant or agreement of Target contained in this Agreement that occurs or becomes known to Acquiror duringthe Escrow Period (as defined in Section 10.4 below), (ii) any claims relating to the information set forth in Section 3.15 of the Target Disclosure Schedule or (iii) any claims relating to the information set forth in Sections 3.9(b) and 3.9(j) ofthe Target Disclosure Schedule.  Section 10.2    Escrow Fund.    As security forthe indemnities in Section 10.1, the Escrow Shares shall be deposited with, Wells Fargo Bank, National Association (or such other institution selected by Acquiror with the reasonable consent of Target) as escrow agent (the “**EscrowAgent**”) in accordance with Section 2.2, such deposit to constitute the Escrow Fund (the “**Escrow Fund**”) and to be governed by the terms set forth in this Article X and in the Escrow Agreement. Notwithstanding the foregoing,the indemnification rights afforded to Acquiror pursuant to this Article X shall be limited to the Escrow Fund and Acquiror shall not be entitled to pursue any claims for indemnification under this Article X or otherwise against any former Targetstockholder directly or personally and the sole recourse of Acquiror shall be to make claims against the Escrow Fund in accordance with the terms of the Escrow Agreement. 49 
 Section 10.3    DamageThreshold.    Notwithstanding the foregoing, Acquiror may not receive any shares from the Escrow Fund unless and until the total amount of Damages incurred by Acquiror exceeds $25,000, *provided, however,* that afterAcquiror has incurred an aggregate of $25,000 in Damages, Acquiror shall be entitled to receive Escrow Shares equal in value to the full amount of Damages.  Section 10.4    Escrow Periods.    The escrow shall commence on the Closing Date and terminate twelve (12) months thereafter (the period from the Closing to such datereferred to as the “**Escrow Period**”), *provided, however,* that if there are any unsatisfied claims for Damages specified in any Officer’s Certificate theretofore delivered to the Escrow Agent and the Stockholders’Agent (as defined in Section 10.9) prior to termination of the Escrow Period with respect to facts and circumstances existing prior to expiration of the Escrow Period, then all Escrow Shares shall remain in the Escrow Fund until such claims havebeen finally resolved.  Section 10.5    Claims Upon Escrow Fund.    In the eventAcquiror suffers any Damages, then on or before the last day of the Escrow Period, it shall deliver a certificate signed by any appropriately authorized officer of Acquiror (an “**Officer’s Certificate**”)  (i)    stating the aggregate amount of Acquiror’s Damages or an estimate thereof, in each case to the extent known ordeterminable at such time, and,  (ii)    specifying in reasonable detail the individual items of suchDamages included in the amount so stated, the date each such item was paid or properly accrued or arose, and the nature of the misrepresentation, breach or claim to which such item is related.  Section 10.6    Valuation.    For the purpose of compensating Acquiror for its Damages pursuant to this Agreement, the value per shareof the Escrow Shares shall be the average closing price of Acquiror’s Common Stock as quoted on the Nasdaq National Stock Market for the ten trading days ending on (A) the last day of the thirty (30) day period set forth in Section 10.7, (B)the date of delivery to the Escrow Agent of a memorandum pursuant to Section 10.8(a) or (C) the date of delivery to the Escrow Agent of a court decision pursuant to Section 10.8(b).  Section 10.7    Objections to Claims.    At the time of delivery of any Officer’s Certificate to the Escrow Agent, a duplicate copy ofsuch Officer’s Certificate shall be delivered to the Stockholders’ Agent (as defined in Section 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 theEscrow Agreement unless the Escrow Agent shall have received written authorization from the Stockholders’ Agent to make such delivery. After the expiration of such thirty (30) day period, the Escrow Agent shall make delivery of the EscrowShares in the Escrow Fund in accordance with the Escrow Agreement, *provided* that no such delivery may be made if the Stockholders’ Agent shall object in a written statement to the claim made in the Officer’s Certificate, and suchstatement shall have been delivered to the Escrow Agent and to Acquiror prior to the expiration of such thirty (30) day period. 50 
 Section 10.8    Resolution of Conflicts.  (a)    In case the Stockholders’ Agent shall so 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 written statement to the objection of the Stockholders’ Agent. If after such thirty (30) day period there remains a dispute as to any claims, the Stockholders’ Agent andAcquiror shall attempt in good faith for thirty (30) days to agree upon the rights of the respective 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 the Escrow Agent. The Escrow Agent shall be entitled to rely on any such memorandum and shall distribute the Escrow Shares from the Escrow Fund in accordance with the terms ofthe memorandum.  (b)    If no such agreement can be reached after good faith negotiation, the Escrow Agentshall only be entitled to act in accordance with the decision of a court of competent jurisdiction and make or withhold payments out of the Escrow Fund in accordance with such decision.  Section 10.9    Stockholders’ Agent.  (a)    Jay Lichter shall be constituted and appointed as agent (the “**Stockholders**’ **Agent**”) for and on behalf of the former Target stockholders to give and receive notices and communications,to authorize delivery to Acquiror of the Escrow Shares or other property from the Escrow Fund in satisfaction of claims by Acquiror, to object to such deliveries, to agree to, negotiate, enter into settlements and compromises of, and demandarbitration and comply with orders of courts and awards of arbitrators with respect to such claims, and to take all actions necessary or appropriate in the judgment of the Stockholders’ Agent for the accomplishment of the foregoing. Such agencymay be changed by the holders of a majority in interest of the Escrow Shares from time to time upon not less than ten (10) days’ prior written notice to Acquiror. No bond shall be required of the Stockholders’ Agent, and theStockholders’ Agent shall receive no compensation for services; *provided* that the Stockholders’ Agent shall be entitled to reimbursement of all expenses incurred in the satisfaction of its duties hereunder and shall be reimbursedout of the Escrow Fund. Notices or communications to or from the Stockholders’ Agent shall constitute notice to or from each of the former Target stockholders.  (b)    The Stockholders’ Agent shall not be liable for any act done or omitted hereunder as Stockholders’ Agent while acting in good faith and in theexercise of reasonable judgment, and any act done or omitted pursuant to the advice of counsel shall be conclusive evidence of such good faith. The former Target stockholders shall severally and pro rata, in accordance with their Pro Rata Portion,indemnify the Stockholders’ Agent and hold him harmless against any loss, liability or expense incurred without gross negligence or bad faith on the part of the Stockholders’ Agent and arising out of or in connection with the acceptance oradministration of his duties under this Agreement or the Escrow Agreement.  (c)    The Stockholders’Agent shall have reasonable access to information about Target and Acquiror and the reasonable assistance of Target’s and Acquiror’s officers and employees for purposes of performing his duties and exercising the rights under this ArticleX, provided that the Stockholders’ Agent shall treat confidentially and not disclose any nonpublic 51 
 information from or about Target or Acquiror to anyone (except on a need to know basis to individuals who agree to treatsuch information confidentially).  Section 10.10    Actions of the Stockholders’Agent.    A decision, act, consent or instruction of the Stockholders’ Agent shall constitute a decision of all of the former Target stockholders for whom shares of Acquiror Common Stock otherwise issuable to them aredeposited in the Escrow Fund and shall be final, binding and conclusive upon each such former Target stockholder, and the Escrow Agent and Acquiror may rely upon any decision, act, consent or instruction of the Stockholders’ Agent as being thedecision, act, consent or instruction of each and every such former Target stockholder. The Escrow Agent and Acquiror are hereby relieved from any liability to any person for 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 Acquiror or its affiliates with respect to any matter (hereinafter referred to asa “**Third Party Claim**”), which may result in Damages, then Acquiror shall give prompt notice to Stockholders’ Agent (and in any event within 10 business days) of Acquiror becoming aware of any such Third Party Claim or of factsupon which any such Third Party Claim will be based setting forth such material information with respect to the Third Party Claim as is reasonably available to Acquiror; *provided, however,* that no delay or failure on the part of Acquiror innotifying Stockholders’ Agent shall relieve Stockholders from any obligation hereunder unless Stockholders are thereby prejudiced (and then solely to the extent of such prejudice).  (b)    In case any Third Party Claim is asserted against Acquiror or its affiliates, Stockholders’ Agent will be entitled, if he so elects by written noticedelivered to Acquiror within 30 days after receiving Acquiror’s notice under Section 10.11(a), to assume the defense thereof, at the expense of Stockholders’ Agent, so long as  (i)    Acquiror has reasonably determined that Damages which may be incurred as a result of the Third Party Claim do not exceed either individually, or whenaggregated with all other Third Party Claims, the total dollar value of the Escrow Shares determined in accordance with the Escrow Agreement; and  (ii)    the Third Party Claim involves only money damages and does not seek an injunction or other equitable relief; and  (iii)    counsel selected by Stockholders’ Agent is reasonably acceptable to Acquiror.  If Stockholders’ Agent so assumes any such defense, he shall conduct the defense of the Third Party Claim actively and diligently. Stockholders’ Agent shall not compromise orsettle such Third Party Claim or consent to entry of any judgment in respect thereof without the prior written consent of Acquiror.  (c)    In the event that Stockholders’ Agent assumes the defense of the Third Party Claim in accordance with Section 10.11(b) above, Acquiror or its affiliates may retain 52 
 separate counsel and participate in the defense of the Third Party Claim, but the fees and expenses of such counselshall be at the expense of Acquiror unless Acquiror or its affiliates shall reasonably determine that there is a material conflict of interest between or among Acquiror or its affiliates and Stockholders with respect to such Third Party Claim, inwhich case the reasonable fees and expenses of such counsel will be reimbursed out of the Escrow Fund. Acquiror or its affiliates will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claimwithout the prior written consent of Stockholders’ Agent which shall not be unreasonably withheld. Acquiror will cooperate in the defense of the Third Party Claim and will provide full access to documents, assets, properties, books and recordsreasonably requested by Stockholders’ Agent and material to the claim and will make available all officers, directors and employees reasonably requested by Stockholders’ Agent for investigation, depositions and trial.  (d)    In the event that Stockholders’ Agent fails or elects not to assume the defense of Acquiror or its affiliatesagainst such Third Party Claim, which Stockholders’ Agent had the right to assume under Section 10.11(b) above, (i) Acquiror or its affiliates shall have the right to undertake the defense and (ii) Acquiror shall not compromise or settle suchThird Party Claim or consent to entry of any judgment in respect thereof without the prior written consent of Stockholders’ Agent which shall not be unreasonably withheld. In the event that the Stockholders’ Agent is not entitled to assumethe defense of Acquiror or its affiliates against such Third Party Claim pursuant to Section 10.11(b) above, (i) Acquiror or its affiliates shall have the right to undertake the defense and (ii) Acquiror shall not compromise or settle such ThirdParty Claim or consent to entry of any judgment in respect thereof without the prior written consent of Stockholders’ Agent which shall not be unreasonably withheld. In each case, Acquiror or its affiliates shall conduct the defense of theThird Party Claim actively and diligently, and Stockholders’ Agent will cooperate with Acquiror or its affiliates in the defense of that claim and will use its reasonable efforts to make available all individuals reasonably requested byAcquiror for investigation, depositions and trial.  **ARTICLE X** **MISCELLANEOUS** Section11.1    Survival of Representations and Covenants.    All representations and warranties of Target, Acquiror and Sub contained in this Agreement shall survive the Closing and any investigation at anytime made by or on behalf of Acquiror or Target until the end of the Escrow Period; *provided* that the maximum amount recoverable under this Agreement by the former Target stockholders for a breach of the representations and warranties ofAcquiror or Sub shall be an amount equal to 10% of the total number of shares of Acquiror Common Stock issued in the Merger multiplied by the average closing price of Acquiror’s Common Stock for the ten trading days prior to execution hereof.If Escrow Shares or other assets are retained in the Escrow Fund beyond expiration of the period specified in the Escrow Agreement, then (notwithstanding the expiration of such time period) the representation, warranty, covenant or agreementapplicable to such claim shall survive until, but only for purposes of, the resolution of the claim to which such retained Escrow Shares or other assets relate. All covenants and agreements of Target, Acquiror and Sub shall continue in effect inaccordance with their terms. 53 
 Section 11.2    Notices.    All notices andother communications hereunder shall be in writing and shall be deemed given if delivered personally, telecopied (which is confirmed) or two business days after being mailed by registered or certified mail (return receipt requested) to the partiesat the following addresses (or at such other address for a party as shall be specified by like notice):  with a copy to: (a)    if to Acquiror or Sub:  Deltagen, Inc. 740 Bay Road Redwood City, CA 94063-2469 Attention:  PresidentFax No.:  (650) 569-5273 TelephoneNo.:  (650) 569-5100  with a copy at the same address to the attention of the General Counsel and Secretary and with acopy to:  Orrick, Herrington & Sutcliffe LLP 400 Sansome Street San Francisco, CA 94111 Attention:  Alan Talkington, Esq. Fax No.  (415)773-5759 Telephone No.:  (415) 773-5762  (b)    if to Target, to:  XenoPharm, Inc. 7770 Regents Road, Suite 113-566 San Diego, CA 92122-1967Attention:  President FaxNo:  (858) 458-4524 Telephone No.:  (858) 458-4501  with a copy to:  Cooley Godward LLP4401 Eastgate Mall San Diego, CA 92121Attention:  Carl R. Sanchez, Esq. FaxNo:  (858) 550-6420 Telephone No.:  (858) 550-6042  (c)    if to Stockholders’ Agent, to:  Jay Lichter, Stockholders’ Agent 4950 Sandshore Court San Diego, CA 92130 Fax No:  (858) 202-91830 Telephone No.:  (858) 546-8093 54 
 Section 11.3    Interpretation.    When areference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affectin any way the meaning or interpretation of this Agreement. Whenever the words “**include**,” “**includes**” or “**including**” are used in this Agreement they shall be deemed to be followed by the words“**without limitation**.” The phrase “**made available**” in this Agreement shall mean that the information referred to has been made available if 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 similar expression shall mean the actual knowledge, after reasonable inquiry, of Jay Lichter, William Schrader and any other individual whois an executive officer or director of Target.  Section11.4    Counterparts.    This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterpartshave been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart.  Section 11.5    Entire Agreement; No Third Party Beneficiaries.    This Agreement (including the documents and the instruments referred to herein), the ConfidentialityAgreement, and the Transaction Documents (a) constitute the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, and (b) are not intended toconfer upon any person other than the parties hereto (including without limitation any Target employees) any rights or remedies hereunder; *provided* that the provisions in Article II concerning issuance of shares of Acquiror Common Stock inthe Merger, the representations and warranties in Article IV and the provisions in Section 6.6 concerning registration rights are intended for the benefit of all Target stockholders and may be enforced by them; and the provisions in Section 6.9concerning indemnification of directors and officers are intended for the benefit of such individuals and may be enforced by them.  Section 11.6    Severability.    If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith, inorder to maintain the economic position enjoyed by each party as close as possible to that under the provision rendered unenforceable. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision,then (i) such provision shall be excluded from this Agreement, (ii) the balance of the Agreement shall be interpreted as if such provision were so excluded and (iii) the balance of the Agreement shall be enforceable in accordance with its terms. Section 11.7    Remedies Cumulative.    Except as otherwise provided herein, anyand all remedies herein expressly conferred upon a party will be deemed cumulative with and not 55 
 exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of anyone remedy will not preclude the exercise of any other remedy.  Section 11.8    GoverningLaw.    This Agreement shall be governed and construed in accordance with the laws of the State of California without regard to any applicable conflicts of law.  Section 11.9     Rules of Construction.    The parties hereto agree that they have been represented by counsel during the negotiation,preparation and execution of this Agreement and, therefore, waive the application of any law, regulation, holding or rule of construction providing that ambiguities in an agreement or other document will be construed against the party drafting suchagreement or document.  Section 11.10    Assignment.    Neither this Agreementnor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, thisAgreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns.  Section 11.11    Amendment.    This Agreement may be amended by the parties hereto, at any time before or after approval of matters presented in connection with the Merger by the stockholdersof Target, but after any such stockholder approval, no amendment shall be made which by law requires the further approval of stockholders without obtaining such further approval. This Agreement may not be amended except by an instrument in writingsigned on behalf of each of the parties hereto.  Section 11.12    Extension;Waiver.    At any time prior to the Effective Time, the parties hereto may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or the other acts of the other parties hereto, (ii)waive any inaccuracies in the representations or warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a partyhereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party.  Section 11.13    Specific Performance.    The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordancewith their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to injunctive relief to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court ofthe United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at law or in equity.  [Signature Page Follows] 56 
 IN WITNESS WHEREOF, Acquiror, Sub and Target have caused this Agreement and Plan of Merger andReorganization to be signed by their respective officers thereunto duly authorized as of the date first written above.  DELTAGEN, INC.By: /s/    AUGUSTINE YEEName: Augustine YeeTitle: Secretary   XP ACQUISITION CORPORATIONBy: /s/    AUGUSTINE YEEName: Augustine YeeTitle: Secretary    XENOPHARM, INC.By: /s/    JAY B. LICHTERName: Jay B. LichterTitle: President & Chief Executive Officer      **SIGNATURE PAGE OF AGREEMENT AND PLAN****OF MERGER AND REORGANIZATION**57