Document:

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                                                                   EXHIBIT 10.57

             COLLABORATIVE RESEARCH, PURCHASE AND LICENSE AGREEMENT

                                     BETWEEN

                                  N.V. ORGANON

                                       AND

                         Aurora Biosciences Corporation

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             COLLABORATIVE RESEARCH, PURCHASE AND LICENSE AGREEMENT

THIS AGREEMENT is entered into as of the Effective Date by and between N.V.
ORGANON, a company organized and existing under the laws of The Netherlands and
having offices at Molenstraat 110, P.O. Box 20, 5340 BH Oss, The Netherlands,
("Organon"), and AURORA BIOSCIENCES CORPORATION, a Delaware corporation having
offices at 11010 Torreyana Road, San Diego, California 92121 ("Aurora").

                                    RECITALS

WHEREAS, Aurora has expertise in the development of screening systems and
screening biologies/chemistries used therein; and

WHEREAS, Aurora has the scientific expertise and capacity to undertake the
alliance activities and provide the services, materials and instrumentation
described below; and

WHEREAS, Organon desires screen development services and has the capability to
undertake screening and development of drug products for the prevention and
treatment of human and veterinary diseases and disorders.

NOW, THEREFORE, in consideration of the foregoing premises and of the covenants,
representations and agreements set forth below, the parties agree as follows:

1. DEFINITIONS

As used herein, the following terms shall have the following meanings:

        1.1.    "Affiliate" means any corporation, association or other entity,
        which directly or indirectly controls, is controlled by or is under
        common control with the party in question. As used herein, the term
        control shall mean direct or indirect beneficial ownership of more than
        *** of the voting or income interest in such corporation or other
        business entity.

        1.2.    "Agreement" means this agreement, together with all appendices,
        exhibits and schedules hereto, and as the same may be amended or
        supplemented from time to time hereafter by a written agreement duly
        executed by authorized representatives of each party hereto.

        1.3.    "Aurora Copyrights" means all copyrights throughout the world
        Controlled by Aurora.

        1.4.    "Aurora Patent Rights" means the Patent Rights Controlled by
        Aurora described in Exhibit 2 attached hereto *** Effective Date.

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        1.5.    "Aurora Reporter" means any of the reporters described in
        Exhibit 1.2 attached hereto.

        1.6.    "Aurora Screen Development Resource" shall have the meaning set
        forth in Section 2.2.1.

        1.7.    "Aurora Screening Program" shall have the meaning set forth in
        Section 2.1.5.

        1.8.    "Aurora Technology" means Technology Controlled by Aurora
        necessary for Aurora Reporters and the development of Collaborative
        Screens, ***

        1.9.    "Collaborative Period" means the period during which the parties
        are developing Collaborative Screens and ending on the third anniversary
        of the Effective Date unless extended by written mutual agreement or
        concluded earlier in accordance with Section 9.

        1.10.   "Collaborative Screen" means a screen or assay developed by
        Aurora for an Organon Target under a CSP Work Plan as defined in Section
        2.1.3.

        1.11.   "Collaborative Screen Program or CSP" shall have the meaning set
        forth in Section 2.1.

        1.12.   "Compound" means *** Aurora *** in a Collaborative Screen or
        tested by Organon in a Collaborative Screen and excluding *** in
        accordance with Section 2.1.6.

        1.13.   "Compound Supply" shall have the meaning set forth in Section
        2.1.6.

        1.14.   "Confidential Information" means all confidential information,
        data, and materials received by either party from the other party
        pursuant to this Agreement, which if in writing is marked confidential,
        and all information, data, and materials developed pursuant to this
        Agreement which if in writing is marked confidential, including, without
        limitation, Technology of each party, subject to the exceptions set
        forth in Section 6.1.2.

        1.15.   "Control" or "Controlled" means, with respect to intellectual
        property, possession by a party of the ability to grant a license or
        sublicense in accordance with the terms of this Agreement, and without
        violating the terms of any agreement by such party with any Third Party
        that is in effect on the Effective Date.

        1.16.   "Copyrights" means rights that protect expression in a tangible
        form, such as the U.S. Copyright Laws.

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        1.17.   "CSP Steering Committee" shall have the meaning set forth in
        Section 2.1.1.

        1.18.   "CSP Work Plan" shall have the meaning set forth in Section
        2.1.3.

        1.19.   "Derivative" means *** Organon based ***, including i) *** , ii)
        *** , or iii) *** Organon that *** has a ***. It is understood that a
        ***, provided that the Derivative of a ***.

        1.20.   "Development Compound" means *** for Organon. For the purpose of
        this definition, a *** includes, but is not limited ***, and as defined
        in the U.S. Code of Federal Regulations ***, or its foreign counterparts
        and which is conducted under ***. In the event a *** reaches *** without
        *** Organon, such ***.

        1.21.   "Effective Date" means the date that this Agreement is executed
        by the last party to so execute.

        1.22.   "FDA" shall mean the United States Food and Drug Administration,
        or any successor agency having regulatory jurisdiction over the
        manufacture, distribution and sale of drugs in the United States or
        equivalent in any other jurisdiction.

        1.23.   "Hit" means *** in the course of *** Organon using a *** on ***;
        provided, however, a chemical developed *** incorporating or utilizing
        an Aurora Technology, Aurora Patent Rights or an Aurora Reporter ***
        indication. Organon ***.

        1.24.   "IND" means the first to occur of the following: (i) the filing
        with and acceptance by the FDA of an Investigational New Drug
        application; or (ii) any corresponding application filed in any country
        other than the United States; or (iii) the first administration of a
        Development Compound into a human subject.

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        1.25.   "Internal Research" means any *** solely *** for the *** to be
        developed and ***, its Licensor(s) or its Licensee(s). Internal Research
        does not include use requiring the *** under this Agreement.

        1.26.   "Invention" means any new and useful ***, or improvement
        thereto, whether or not patentable.

        1.27.   "Know-How" means information and data which is not generally
        known to the public, comprising: ***.

        1.28.   "Licensee" means a Third Party to whom *** grants a license,
        sublicense or other right to manufacture, use, sell, offer for sale,
        distribute and/or import one or more ***.

        1.29.   "Licensor" means a Third Party that grants *** a license,
        sublicense or other right to manufacture, use, sell, offer for sale,
        distribute and/or import one or more ***.

        1.30.   "Materials" means any reagents, promoters, enhancers, vectors,
        plasmids, genes, polynucleotides, cell lines, proteins and fragments
        thereof, peptides, antigens, antibodies, antagonists, agonists,
        inhibitors, Compounds and chemicals.

        1.31.   "NDA" means a new drug application or product license
        application, as appropriate in the United States or a foreign equivalent
        in a foreign country.

        1.32.   "***" shall mean, with respect to Product(s), *** to customers
        for all Product(s) sold *** the following items:

        i)      ***;

        ii)     ***;

        iii)    ***; and

        iv)     ***.

        v)      ***.

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        Such amounts shall be determined from the books and records of ***
        maintained in accordance with generally accepted accounting principles
        ("GAAP") consistently applied.

        1.33.   "Organon Copyrights" means all copyrights throughout the world
        Controlled by Organon.

        1.34.   "Organon Patent Rights" means Patent Rights Controlled by
        Organon.

        1.35.   "Organon Target" shall have the meaning set forth in Exhibit
        1.35 and Section

        1.36.   "Organon Technology" means Technology Controlled by *** Aurora.

        1.37.   "Patent Rights" means all U.S. or foreign (including regional
        authorities such as the European Patent Office) regular or provisional
        patent applications, including any continuation, continuation-in-part,
        or division thereof or any substitute application therefor or equivalent
        thereof, and any patent issuing thereon, including any reissue,
        reexamination or extension thereof and any confirmation patent or
        registration patent or patent of additions based on any such patent,
        containing one or more claims to an Invention (and in the case of an
        issued patent, containing one or more Valid Claims), and for which a
        party hereto owns or Controls, individually or jointly, any title
        thereto or rights thereunder.

        1.38.   "Phase III Clinical Trial" means that portion of a clinical
        development program which provides for the testing of a Development
        Compound designed to assess the safety and efficacy of such a product at
        a dosage regimen identified in Phase II dose ranging studies on a
        sufficient number of human patients to support an NDA.

        1.39.   "Product" means any composition of matter developed *** use that
        incorporates a Development Compound ***.

        1.40.   "Royalty Term" means, in the case of any Product and as to any
        country, the period of time commencing on the first commercial sale for
        use or consumption of such Product in such country and ending upon the
        earlier of: (i) the date that there no longer exists a Valid Claim in a
        patent owned or Controlled by Organon or its Affiliates, or the
        Licensors or Licensees covering the manufacture, use or sale of such
        Product in such country, or (ii) the date that is *** after the date of
        such first commercial sale for use or consumption of such Product in
        such country; provided, however, Organon *** royalties on a Product in a
        country *** in such country *** in such country ***. *** for *** in such
        country ***.

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        1.41.   "Selection Procedure" of molecular targets shall have the
        meaning set forth in Section 2.1.2.

        1.42.   "Technology" means Materials and Know-How.

        1.43.   "Term" means the period beginning on the Effective Date and
        terminating in accordance with this Agreement, as set forth in Section
        9.

        1.44.   "Third Party" means any entity other than Aurora and Organon or
        their respective Affiliates.

        1.45.   "Tracking Record" shall have the meaning set forth in Section
        4.4.2.

        1.46.   "Validation" shall have the meaning set forth in Section 2.1.4.

        1.47.   "***" shall mean the parameters, standards, and results
        established by the CSP Steering Committee for each Collaborative Screen
        and will generally be in agreement with Aurora's standard assay ***
        indicated in Exhibit 1.48.

        1.48.   "Valid Claim" means: (a) an issued claim under an issued patent
        within the Patent Rights, which has not (i) expired or been canceled,
        (ii) been declared invalid by an unreversed and unappealable decision of
        a court or other appropriate body of competent jurisdiction, (iii) been
        admitted to be invalid or unenforceable through reissue, disclaimer or
        otherwise, and/or (iv) been abandoned; or (b) a claim included in a
        pending patent application within the Patent Rights that is being
        actively prosecuted in accordance with this Agreement and which has not
        been (v) canceled, (vi) withdrawn from consideration, (vii) finally
        determined to be unallowable by the applicable governmental authority
        for whatever reason (and from which no appeal is or can be taken), or
        (viii) abandoned.

        1.49.   "***" means ***reader purchased by Organon under this Agreement
        and described on Exhibit 2.7.

        1.50.   "***" means *** which are to be used by ***.

2.      COLLABORATIVE SCREEN PROGRAM AND INSTRUMENT PURCHASE

        2.1.    Collaborative Screen Program.

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        For a period of three (3) years following the Effective Date, unless
        terminated earlier or extended by mutual agreement, the parties will
        collaborate in the development and validation of Collaborative Screens
        as part of a *** (the "Collaborative Screen Program or CSP"). Organon
        and Aurora will collaborate to develop Collaborative Screens at Aurora
        for *** during the Collaborative Period.

                2.1.1.  CSP Steering Committees. No later than *** after the
                        Effective Date, the parties shall establish a CSP
                        Steering Committee (the "CSP Steering Committee"). The
                        mission of the CSP Steering Committee is to manage the
                        experimental science and all other matters of the CSP
                        including the selection of targets for screen
                        development at Aurora (each such target provided by
                        Organon is an "Organon Target") as provided for under
                        Section 2.1.2. The CSP Steering Committee shall consist
                        of *** representatives designated by Organon from
                        Organon and *** representatives designated by Aurora
                        from Aurora. Each representative to the CSP Steering
                        Committee will have *** vote resulting in each party
                        having exactly *** votes.

                        The CSP Steering Committee will meet no later than ***
                        days after the Effective Date and at least *** times per
                        year using mutually agreed upon meeting locations and
                        formats including tele- and video-conferencing. On an
                        alternating basis, one party shall promptly prepare and
                        deliver to the members of the CSP Steering Committee
                        minutes in respect thereof, for review and approval of
                        both parties. Decisions in the CSP Steering Committee
                        will be ***, at a meeting where all *** voting
                        representatives are present.

                        Where meetings are to be held between the Parties, which
                        includes CSP Steering Committee meetings, each Party ***
                        attending such meetings.

                2.1.2.  Screen Selection. Attached as Exhibit 1.35 is a list of
                        at least *** Organon Targets for ***. Additional
                        potential Organon Targets (at least *** and of ***
                        listed on Exhibit A, with a *** by ***; i.e *** and ***
                        or ***, e.g., ***, etc.) will be presented by Organon to
                        Aurora at *** days prior to the *** of the Effective
                        Date during the Collaboration Period. Aurora will
                        develop Collaborative Screens for at least *** Organon
                        Targets (of which *** unless otherwise agreed by the CSP
                        Steering Committee) in the ***, of the Collaborative
                        Period, *** Collaborative Screens for Organon Targets
                        (of which *** may be *** unless otherwise agreed by the
                        CSP Steering Committee) in the *** of the Collaborative
                        Period, subject to Sections 2.1.3.3 and 2.1.3.4.

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                        2.1.2.1.The *** listed in Exhibit A and *** Organon
                                shall be *** Organon reasonably *** using Aurora
                                Technology. Aurora may reasonably request
                                further information regarding ***. Within *** of
                                first receiving such information, Aurora shall
                                notify Organon in writing in the event that
                                Aurora reasonably *** is *** obligations or if
                                Aurora *** for a *** would not reasonably be
                                scientifically *** based on available
                                information and that ***. If Aurora *** proposed
                                by ***, Aurora will *** Organon ***, to the
                                extent that Aurora does not have to reveal
                                confidential *** Third Party. Consequently, the
                                parties agree that in some instances Aurora ***
                                a ***.

                        2.1.2.2.Additional Rights Necessary for Screen
                                Development. During the course of screen
                                selection or development the parties may
                                identify Third Party Materials (such as cell
                                lines or proteins) that may be useful for screen
                                development. If such Materials are deemed
                                necessary for screen development by the CSP
                                Steering Committee, *** required for their use.

                2.1.3.  Screen Development.

                        2.1.3.1 CSP Work Plan. The CSP Steering Committee will
                        coordinate the preparation of a work plan (a "CSP Work
                        Plan"), which shall set forth the respective
                        responsibilities of the parties for the development of
                        each Collaborative Screen, and which must be approved by
                        the CSP Steering Committee in accordance with Section
                        2.1.1. Each such CSP Work Plan will also *** to be
                        produced, the ***, the dates by which such activities
                        are expected to be accomplished by the parties, and ***
                        for each Collaborative Screen.

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                        2.1.3.2 Screen Development. The CSP Steering Committee
                        will coordinate screen development (including the
                        preparation and management of a CSP Work Plan, and the
                        ***) for each Collaborative Screen within a time frame
                        set by the CSP Steering Committee that can satisfy the
                        objectives of the CSP Steering Committee and the
                        parties. Promptly following the approval of each CSP
                        Work Plan, the parties will use reasonable efforts to
                        commence their respective duties under the CSP Work Plan
                        ***. Organon shall provide to Aurora all necessary
                        materials for screen development, including ***, etc.,
                        in an appropriate form and a timely manner (materials
                        *** Organon Targets in the *** of the Collaborative
                        Period, and materials for *** Organon Targets within ***
                        of the Effective Date), consistent with the CSP Work
                        Plans. Should such materials not be properly provided in
                        a timely manner, the parties shall discuss remedies ***.
                        All work under a CSP Work Plan shall be performed in
                        accordance with the provisions of this Agreement, and
                        each party will *** to complete its obligations under
                        the CSP Work Plan as ***. In situations where an *** is
                        required for a Collaborative Screen and Organon has
                        provided Aurora ***, if *** at Aurora a *** for a given
                        Organon Target, then work on that Target *** selected.
                        *** Aurora will be performed in conjunction with screen
                        development efforts ***. *** reagents for screening, and
                        methods thereof, are ***. Aurora may *** under
                        additional funding by Organon.

                        2.1.3.3 Additional Screens. Should Aurora complete the
                        development of *** for Organon Targets *** during the
                        Collaborative Period, Aurora may, with the approval of
                        the CSP Steering Committee, direct the Aurora Screen
                        Development Resource (see 2.2.1 below) to the
                        development of additional Collaborative Screens for
                        Organon Targets. Such work shall be conducted under a
                        CSP Work Plan approved by the CSP Steering Committee,
                        and Aurora shall be compensated *** in accordance with
                        Section 2.2.4.

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                        2.1.3.4 Fewer Screens. Should Aurora *** development of
                        *** Organon Targets *** during the Collaborative Period,
                        *** research and *** Aurora screen development resources
                        to *** of such *** Collaborative Screens within *** of
                        the ***, such resources to *** to the Aurora effort
                        during the Collaborative Period (i.e., ***). Such ***
                        Collaborative Screens shall be *** of *** Targets *** as
                        the parties shall mutually agree in writing. By the ***
                        the Effective Date *** Collaborative Screens will ***,
                        and by the *** the Effective Date *** Collaborative
                        Screens will ***, unless terminated earlier in
                        accordance with Section 9.4.

                2.1.4.  *** Collaborative Screens. When Aurora *** a
                        Collaborative Screen, including it's ***, which Organon
                        *** expense if desired, a written report describing the
                        Collaborative Screen and *** with the CSP Work Plan
                        including *** shall be provided by *** to the CSP
                        Steering Committee. The CSP Steering Committee will ***
                        report and *** each Collaborative Screen according to
                        the *** in the CSP Work Plan ("***")*** on the ***, if
                        any, necessary for ***. When so directed in writing by
                        *** and consistent with *** obligations, which
                        obligations shall not *** Organon, Aurora shall ***
                        Organon *** in accordance with the licenses described in
                        Section 3.1.

                2.1.5   *** Screening by Aurora. During the Collaborative
                        Period, Organon shall *** screening of *** Collaborative
                        Screens to Aurora and subject to Section 2.2.5. For each
                        such Collaborative Screen developed pursuant to a CSP
                        Work Plan of Section 2.1.3, *** screening by Organon and
                        agreed by the parties in writing, Aurora will use *** to
                        screen Compounds or other chemicals agreed to by the
                        parties pursuant to Section 2.1.6. Aurora shall, with
                        regard to each Collaborative Screen, screen Compounds in
                        a manner determined by the CSP Steering Committee and
                        *** Compounds for ***, and *** as determined by the CSP
                        Steering Committee (such screening by Aurora of each
                        Collaborative Screen to be referred to as an "Aurora
                        Screening Program"), provided, however, the screening
                        *** utilized will be *** of *** performing such
                        Collaborative Screen *** equipment. Aurora will use ***
                        to provide such screening service *** which is *** used
                        *** as provided for in Section 2.2.5. The *** for any
                        given Collaborative Screen will *** wells or datapoints,
                        including standards and controls.

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                2.1.6   Libraries. Organon shall, ***, *** Compounds *** Organon
                        for an Aurora Screening Program. Conversely, in the
                        event that Organon desires to have Aurora test in an
                        Aurora Screening Program a chemical (including a library
                        of compounds) owned, accessed or Controlled by ***, the
                        parties agree *** under which such chemical may be
                        screened. Any chemical supplied by *** for use in an
                        Aurora Screening Program shall be *** in *** (the
                        "Compound Supply", which refers only to compounds ***
                        Organon). The current *** is provided as Exhibit
                        2.1.6.). The quantities needed for each screen will be
                        specified in writing in the CSP Work Plan. Aurora agrees
                        *** received from *** or to use *** Collaborative
                        Screens without ***. Aurora *** Compound Supply received
                        *** to Organon of the action taken and successfully
                        completed, upon written notice by Organon of how it
                        would like the Compound Supply provided by Organon
                        handled upon completion of any screening by Aurora.

        2.2     Aurora Screen Development Resource, Technology Access and
        Payments. Aurora will provide access to Aurora Technology, Aurora
        Reporters, Aurora Patent Rights, and the Aurora Screen Development
        Resource at Aurora to Organon as follows:

                2.2.1   Aurora Screen Development Resource. During the
                        Collaborative Period, upon payment by Organon of the
                        funding provided for in Section 2.2.2, Aurora will
                        commit a *** number of Aurora personnel (the "Aurora
                        Screen Development Resource") to develop at least ***
                        Collaborative Screens for the Organon Targets each year
                        of the Collaborative Period.

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                2.2.2.  Payments for Technology Access and Support of the Screen
                        Development Resource. As partial consideration for use
                        of the Aurora Screen Development Resource under Section
                        2.2.1 and *** to use *** during the Collaborative Period
                        in accord with Section 3.1, Organon shall pay Aurora ***
                        for ***. Such amount shall be payable in *** payments
                        *** each, the first payment to be made within *** of the
                        Effective Date, and subsequent payments to be made on or
                        before each of the following *** and *** during the
                        Collaborative Period, for a total of *** payments. Such
                        payments shall be ***. The total of the *** above
                        mentioned payments if so made would be *** dollars ***.

                2.2.3.  Payments for a License Subsequent to the Initial Term.
                        Organon will pay to Aurora starting on the date of ***
                        and on each *** thereafter a *** annual license fee to
                        maintain its license under Section 3.1. This license fee
                        shall *** dollars ($***) for *** of the Collaborative
                        Period ("First Payment"), and *** dollars ($***) per
                        year for *** ("Subsequent Payments") up to a maximum of
                        *** years. Such payments shall be made within *** days
                        of the anniversary of the Effective Date. Such license
                        fees are applicable *** Organon *** makes the First
                        Payment as described. Organon *** license granted under
                        Section 3.1 *** with *** to Aurora. ***, should Organon
                        have interest *** license or *** license, the ***
                        license shall *** the parties.

                2.2.4   Payments for Additional Screens. For each *** developed
                        by Aurora for an Organon Target *** per a given year of
                        the Collaborative Period, or *** during the
                        Collaborative Period as described in Section 2.1.3.3,
                        Organon shall pay to *** dollars ($***) ***, due within
                        *** of *** Collaborative Screen *** for a given year of
                        the Collaborative Period by the CSP Steering Committee.

                2.2.5   Payments for Screening by Aurora.

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                        As partial consideration for screening by Aurora and the
                        generation of datapoints during the Collaborative Period
                        pursuant to Section 2.1.5, Organon will pay Aurora ***
                        payments as follows: for datapoints generated in an ***
                        a ***, Organon will pay Aurora, in advance, ***, and for
                        datapoints generated in *** in a screening ***, Organon
                        will pay Aurora in advance, ***. Such payments *** costs
                        incurred by Aurora related to *** a Collaborative
                        Screen). The parties shall agree on the *** for any
                        assay to be performed, and *** above ***. Additionally
                        the prices indicated above are *** Aurora in accordance
                        with Section 2.1.6.

        2.3     Milestones and Royalties.
        In addition to such payments as are made by Organon to Aurora pursuant
        to Section 2 hereof, the following payments shall be made to Aurora for
        each Collaborative Screen:

                2.3.1   Milestones. When *** Compound, Hit or Derivative from
                        any Collaborative Screen reaches the following
                        milestones, Organon will promptly notify Aurora of same
                        and within *** of such notification, Organon will pay
                        Aurora the amount corresponding to such milestone. It is
                        understood that Organon *** the milestone payments for a
                        Compound, Hit or Derivative it *** Compound, Hit or ***
                        such *** is *** Compound, Hit or Derivative.
                        Notwithstanding the above, each milestone shall be paid
                        *** Collaborative Screen.

<TABLE>
<CAPTION>
               Milestone                Amount ($US)
               ---------                ------------
<S>                                     <C>
               ***                              ***

               ***                              ***

               ***                              ***

               ***                              ***
</TABLE>

                2.3.2.  Royalties. With respect to each Product, Organon shall
                        pay a royalty on *** of such Product during the Royalty
                        Term for such Product. The royalty applicable is the
                        product of the worldwide *** summed from each applicable
                        country multiplied by the royalty rate of *** for annual
                        worldwide ***.

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        2.4     Supply of Aurora Reporters.
        So long as Organon has made payments in accordance with Section 2.2. and
        2.3 as applicable, at Organon 's written request or other agreed upon
        means available, Aurora will *** within *** days after receipt of a
        written purchase order therefor, Materials pertaining to the Aurora
        Reporters as Organon may require *** Collaborative Screens *** Aurora as
        provided for in Section 2.1.3 and *** Organon as provided for under
        Section 2.1.4. Organon will *** all supplies so delivered at Aurora's
        then *** ( *** are indicated in Exhibit 2.4). Organon will pay for all
        Materials so ordered within *** days after delivery to Organon. If
        within *** weeks after Organon receives an Aurora Reporter *** by
        Aurora, then *** of Organon's *** perform.

        2.5     Ownership of Compounds and Data.
        *** shall own all *** it, and Hits, Derivatives, Development Compounds
        and Products arising from the Compound Supply *** it under this
        Agreement. All results and data concerning any such Hits or Development
        Compounds *** generated *** resulting from any Collaborative Screen ***
        and shall be treated as *** Confidential Information hereunder. *** will
        not *** any biological materials ***, provided, however, the parties
        agree that *** biological materials to *** *** acquired by ***, its ***
        or ***.

        2.6.    Development of Products.
        *** will be responsible for all ***, including all regulatory filings,
        of Hits and Development Compounds arising out of this Agreement at no
        expense ***. Such development shall be at *** sole discretion, and ***
        shall use ***, consistent with commercial business practices, to conduct
        the activities associated with the development of any Development
        Compound, all regulatory activities relating to the manufacture, use or
        sale of any Development Compound or Product, and the commercialization
        and marketing of any Product in any country. All regulatory filings made
        or filed by *** for any Development Compound or Product shall be owned
        ***. At *** and expense, *** to the extent *** necessary to permit
        Organon to perform the foregoing activities.

        2.7     Purchase of an Aurora VIPR.
        Organon shall purchase an Aurora VIPR for the purpose of performing
        Collaborative Screens *** in accordance with Exhibit 2.7.

3.      INTELLECTUAL PROPERTY RIGHTS

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        3.1     Grant of Rights from Aurora to Organon.
        License to Collaborative Screens developed by Aurora. Aurora, subject to
        payments under Section 2.2, grants to Organon a *** under Aurora Patent
        Rights and Aurora Technology to *** for Internal Research, and to ***
        Internal Research *** developed by Aurora in accordance with Sections
        2.1 and 2.2, *** CSP Steering Committee and *** Organon in accordance
        with Section 2.1.4. The grant of rights from Aurora to Organon does not
        include the right to ***. The Parties agree to *** for a license in
        favor of *** for the practice of *** for other *** needed for *** out or
        to be *** by *** or product development by ***.

        3.2.    Grant of Rights from Organon to Aurora.
        Organon grants to Aurora *** license, ***, and *** Aurora to ***. ***
        this Section 3.2, Aurora *** provided by Organon ***; provided however,
        Aurora *** as provided for in Section 2.1.5.

        3.3.    Ownership of Intellectual Property and Property.

                3.3.1.  Transfer of Rights. All rights not expressly licensed or
                        assigned by Organon are retained by Organon. All rights
                        not expressly licensed or assigned by Aurora are
                        retained by Aurora. Except as otherwise expressly
                        provided in this Agreement, nothing in this Agreement is
                        intended to convey or transfer ownership by one party to
                        the other of any rights, title or interest in any
                        Confidential Information, Technology, Copyrights or
                        Patent Rights owned or Controlled by a party. Except as
                        expressly provided in this Agreement, nothing in this
                        Agreement shall be construed as a license or sublicense
                        by one party to the other of any rights in any
                        Technology, Copyrights, or Patent Rights owned or
                        Controlled by a party.

                3.3.2.  Organon Inventions. *** shall *** Inventions and other
                        Technology made solely by its employees and agents, and
                        all patent applications and

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                        patents claiming such Inventions and other Technology.
                        If Organon has a license pursuant to Sections 3.1,
                        Aurora *** that *** relating to *** and Organon ***.

                3.3.3   Aurora Inventions. *** shall *** Inventions and other
                        Technology made solely by its employees and agents, and
                        all patent applications and patents claiming such
                        Inventions and other Technology, provided, however, that
                        *** and other Technology *** Organon (including *** from
                        the *** where such *** by Organon) and *** Aurora in
                        performance of this Agreement and Aurora *** Organon.

                3.3.4.  Joint Inventions. During the period from the Effective
                        Date to *** thereafter, all Inventions and other
                        Technology conceived jointly by employees or agents of
                        Organon and employees or agents of Aurora shall be owned
                        by ***; provided, however, that if a) ***, Aurora ***
                        such Inventions and other Technology that *** and
                        Organon *** Aurora and b) Organon will *** all
                        Inventions and other *** Organon and *** and Aurora ***
                        Organon.

                3.3.5   Other Inventions. Any Inventions not included in
                        Sections 3.3.2, 3.3.3, 3.3.4 (a) or 3.3.4 (b) above
                        shall be owned by their inventors.

                3.3.6.  Inventorship and Assignment. Inventorship of patentable
                        inventions shall be determined by U.S. patent law.
                        Organon and Aurora agree to execute all documentation
                        necessary to perfect all assignments of Inventions,
                        Technology and Patent Rights.

4.      PAYMENTS OF ROYALTIES, ACCOUNTING FOR ROYALTIES AND RECORDS.

        4.1.    Payment and Reporting.
        The royalties due under Article 2 and as follows in this Article 4,
        shall be paid within *** after the end of *** in which such royalties
        are earned during the Royalty Term for each Product. With each such ***,
        Organon shall furnish Aurora a summary statement setting forth on a
        country-by-country basis the relevant sales information, including the
        total number of units of each such Product sold and other information
        employed to calculate *** for such Product.

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        4.2.    Currency of Payment.
        All payments to be made under this Agreement, including the milestones
        and royalties payable to Aurora by Organon, shall be paid in U.S.
        dollars by wire transfer or other mutually acceptable means to a bank
        account designated by Aurora upon an invoice received from Aurora.
        Translation of sales recorded in local currencies to U.S. dollars will
        be performed in a manner consistent with *** used to prepare its audited
        financial statements for internal and external reporting purposes, which
        uses a widely accepted source of published exchange rate.

        4.3.    Taxes Withheld.
        Any income or other tax that Organon or any of its Affiliates, Licensees
        or Licensors is required by a government agency to withhold and pay on
        behalf of Aurora with respect to the royalties payable under this
        Agreement shall be deducted from and offset against said royalties prior
        to remittance to Aurora; provided, however, that in regard to any tax so
        deducted, Organon shall give or cause to be given to Aurora such
        assistance as may reasonably be necessary to enable Aurora to claim
        exemption therefrom or credit therefor, and in each case shall furnish
        Aurora proper evidence of the taxes paid on Aurora's behalf.

        4.4.    Records.

                4.4.1.  ***Royalty Calculations. During the Royalty Term and for
                        *** from the date of each payment of royalties, Organon
                        shall keep complete and accurate records of sales and
                        all other information necessary to calculate Net Sales
                        of each Product in sufficient detail to allow the
                        accrued royalties to be determined accurately in
                        accordance with GAAP. Aurora, with reasonable written
                        notice to Organon but not more than once each calendar
                        year, shall have the right to cause Aurora's nationally
                        recognized independent, certified public accountant to
                        audit such records at the place or places of business
                        where such records are customarily kept in order to
                        verify the accuracy of the reports of *** and royalty
                        payments. Such accountant shall execute a
                        confidentiality agreement prior to entering Organon's
                        premises, obligating such accountant to keep all
                        information disclosed to it confidential and shall only
                        be permitted to disclose to Aurora the extent of any
                        discrepancy between royalty payments made by Organon
                        hereunder and the actual royalty required to be so paid.
                        Aurora shall bear the full cost of such audit unless
                        such audit discloses a variance of more than *** from
                        the amount of the royalties due under this Agreement, in
                        which event, Organon shall bear the full cost of such
                        audit. Aurora agrees not to disclose Confidential
                        Information concerning royalty payments and reports, and
                        all information learned in the course of any audit or
                        inspection, except to the extent necessary for Aurora to
                        reveal such information in order to enforce its rights
                        under this Agreement or if disclosure is required by
                        law.

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                4.4.2.  Tracking Records for Collaborative Screens.

                        4.4.2.1.***. Organon will ***, to inspect the Tracking
                                Records once per year or upon reasonable request
                                by Aurora for the sole purpose of determining
                                the attainment of a milestone or royalty under
                                Article 2. The Tracking Records shall be
                                securely retained for no less *** years from the
                                last use of a Collaborative Screen. When a
                                compound, such as a Hit, Derivative or
                                Development Compound is selected for a good
                                laboratory practice safety or toxicology study,
                                Organon will *** to Aurora under strict
                                confidentiality.

                        4.4.2.2.Upon reasonable request by Aurora and at a
                                minimum ***, Organon will provide Aurora with a
                                summary of the status of Development Compounds
                                and Products that may be used to calculate
                                royalties or milestones.

        4.5.    Trade Secret Milestones and Royalty.

        The parties acknowledge that the principal value contributed by Aurora
        under this Agreement is the enhanced probability of identifying leads
        for Products, such as human pharmaceutical products (or other products
        having commercial value), and the potential to generate multiple leads,
        either or both of which the parties reasonably believe will lessen the
        time required to bring pharmaceutical products to market and increase
        the efficiency of drug discovery and development processes and
        technologies. Additionally, the parties acknowledge that Aurora may ***
        covering the manufacture, sale, use or importation of a particular
        Development Compound or Product. Organon acknowledges and agrees that
        the value it receives hereunder is in the access and use of a
        Collaborative

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        Screen or Aurora Technology. Accordingly, Organon *** Aurora may *** a
        Development Compound or a Product.

5.      INTELLECTUAL PROPERTY ENFORCEMENT AND DEFENSE OF CLAIMS

        5.1.    Intellectual Property Enforcement.
        Organon and Aurora shall have the right, but not the obligation, to
        bring proceedings against any Third Party for the inappropriate use,
        including patent infringement, of Technology or Patent Rights solely
        owned or Controlled by it, and at its own risk and expense. If one party
        brings such action such party shall be entitled to control such action,
        hire and retain counsel, make decisions, settle on any terms, and retain
        any and all awards or damages obtained in any such proceeding. At the
        request and expense of either party, the other party shall give the
        requesting party all reasonable assistance required to file and conduct
        any such proceeding.

        5.2.    Defense of Infringement Claims for Organon Hits, Development
                Compounds and Products.
        Aurora will cooperate with Organon, at Organon's expense, in the defense
        of any suit, action or proceeding against Organon and Organon's
        Affiliates or Aurora alleging the infringement of the intellectual
        property rights of a Third Party by reason of the manufacture, use or
        sale of a Hit, Derivative, Compound, Development Compound or Product
        from a Compound screened in a Collaborative Screen by Organon or Aurora.
        Each party shall give the other party prompt written notice of the
        commencement of any such suit, action, proceeding or claim of
        infringement. Aurora *** to defend, hire counsel, make decisions or
        settle on any terms any such suit, action or proceeding *** documents,
        provide pertinent records, and take all other actions, including
        requiring persons within its control to give testimony, which may be
        reasonably required in connection with the defense or settlement of such
        litigation.

        5.3.    Defense of Infringement Claims for Aurora Technology, the VIPR
                and Aurora Patent Rights.
        Organon will cooperate with Aurora, in the defense of any suit, action
        or proceeding against Aurora or Organon alleging the infringement of the
        intellectual property rights of a Third Party by reason of Aurora's or
        Organon's use of any Aurora Patent Rights, the VIPR and Aurora
        Technology licensed to Organon under this Agreement. The parties shall
        notify each other promptly in writing of the commencement of any such
        suit, action, proceeding or claim of infringement. Organon shall *** to
        defend, hire counsel, make decisions or settle on any terms any such
        suit, action or proceeding *** all documents, provide pertinent records,
        and take all other actions, including requiring persons within its
        control to give testimony, which may be reasonably required in
        connection with the defense or settlement of such litigation.

6.      TREATMENT OF CONFIDENTIAL INFORMATION; PUBLICITY

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        6.1.    Confidentiality.

                6.1.1.  Subject to the terms and conditions of this Agreement,
                        Organon and Aurora each agree that, during the term of
                        this Agreement and for *** years thereafter, it will
                        keep confidential, and will cause its Affiliates to keep
                        confidential, all Confidential Information that is
                        disclosed to it or to any of its Affiliates by the other
                        party in connection with the performance of this
                        Agreement. Neither Organon nor Aurora nor any of their
                        respective Affiliates shall use the other party's
                        Confidential Information except as expressly permitted
                        in this Agreement.

                6.1.2.  Organon and Aurora each agree that any disclosure of the
                        other's Confidential Information to any officer,
                        employee, contractor, consultant, sublicensee or agent
                        of the other party or of any of its Affiliates shall be
                        made only if and to the extent necessary to carry out
                        its responsibilities under this Agreement and to
                        exercise the rights granted to it hereunder, shall be
                        limited to the extent consistent with such
                        responsibilities and rights, and shall be provided only
                        to such persons or entities who are bound to maintain
                        same in confidence in a like manner as the party
                        receiving same hereunder is so required. Each party
                        shall use reasonable efforts to take such action, and to
                        cause its Affiliates to take such action, to preserve
                        the confidentiality of each other's Confidential
                        Information, which shall be the same efforts as it would
                        customarily take to preserve the confidentiality of its
                        own Confidential Information.

                        Either party may be required to disclose some
                        Confidential Information of the other party in a patent
                        application filed related to Compounds, Technology or
                        uses thereof. The disclosing party shall limit this type
                        of information to the minimum necessary and the
                        disclosing party shall inform the non-disclosing party
                        of exactly what Confidential Information will be
                        disclosed in the patent application *** before such
                        application is filed.

                        Upon termination of this Agreement, each party, upon the
                        other's request, will return all the Confidential
                        Information received from the other party pursuant to
                        this Agreement, including all copies and extracts of
                        documents, within *** of the request of the other party.
                        6.1.3.

                        Confidential Information shall not include any
                        information, which the receiving party can prove by
                        competent evidence:

                        i)      is now, or hereafter becomes, through no act or
                        failure to act on the part of the receiving party,
                        generally known or available;

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                        ii)     is known by the receiving party at the time of
                        receiving such information, as evidenced by its records;

                        iii)    is hereafter furnished to the receiving party
                        without restriction as to disclosure or use by a Third
                        Party lawfully entitled to so furnish same;

                        iv)     is independently developed by the employees,
                        agents or contractors of the receiving party without the
                        aid, application or use of the disclosing party's
                        Confidential Information;

                        v)      is the subject of a written permission to
                        disclose provided by the disclosing party; or

                        vi)     is provided by the disclosing party to a Third
                        Party without restriction as to confidentiality.

                        A party may also disclose Confidential Information of
                        the other where required to do so by law or legal
                        process, provided that, in such event, the party
                        required to so disclose shall give maximum practical
                        advance written notice of same to the other party and
                        will cooperate with the other party's efforts to seek,
                        at the request and expense of the other party, all
                        confidential treatment and protection for such
                        disclosure as is permitted by applicable law.

                        The parties agree that the material financial terms of
                        this Agreement will be considered Confidential
                        Information of both parties. Notwithstanding the
                        foregoing, either party may disclose such terms in legal
                        proceedings or as are required to be disclosed in its
                        financial statements, by law, or under strictures of
                        confidentiality to bona fide potential sublicensees.
                        Either party shall have the further right to disclose
                        the material financial terms of this Agreement under
                        strictures of confidentiality to any potential acquirer,
                        merger partner, bank, venture capital firm, or other
                        financial institution to obtain financing.

                        The parties agree that information developed pursuant to
                        *** will be considered Confidential Information of both
                        parties and shall be subject to the confidentiality
                        requirements of this Section 6.1. Notwithstanding the
                        foregoing, ***.

        6.2.    Publication of Results.

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        Subject to Section 6.1 hereof, results and data obtained by either party
        in the course of a Collaborative Screen Program through use of an Aurora
        Reporter may be submitted for publication by Organon in accordance with
        Organon's customary practices, provided, however, that Organon shall
        credit Aurora in such publication as the developer and/or provider of
        the technology that produced, in part, the published results or data.
        Organon shall send a copy of the proposed publication and shall allow
        Aurora *** from the date of receipt in which to determine whether such
        publication contains subject matter for which patent protection should
        be sought prior to disclosure, or otherwise contains Aurora Confidential
        Information. If no answer is received from Aurora within *** of receipt
        of the proposed publication, Organon shall be free to submit such
        proposed publication.

        6.3.    Publicity. Except as required by law and as provided in this
        Article 6, neither party may make any public announcement or otherwise
        disclose the terms of this Agreement without the prior written consent
        of the other party, which consent shall not be unreasonably withheld.

        6.4.    Press Release. Notwithstanding the foregoing, the parties will
        agree on a press release to announce the execution of this Agreement and
        to be released by Aurora and to be mutually agreed upon. Thereafter,
        Organon and Aurora may each disclose to Third Parties the information
        contained in the mutually agreed upon press release without the need for
        further approval by the other.

7.      PATENT PROSECUTION AND COPYRIGHTS

        7.1.    Patents.
        The control and expense of the filing, prosecution (including an
        opposition or interference) and maintenance of patents and patent
        applications claiming Inventions will be the sole responsibility of the
        party filing the patent application and the party not filing the patent
        application will cooperate in such filing, prosecution and maintenance
        of the validity of such patent position. Organon and Aurora will
        cooperate in the filing, prosecution and maintenance of jointly owned
        patents and patent applications claiming inventions conceived or made
        pursuant to activities under Article 2, and share equally in the
        expenses incurred thereto.

        7.2.    Copyrights.
        The parties agree to treat and handle, to the maximum practical extent,
        any copyrights owned or Controlled by a party in the same manner as
        Patent Rights owned or Controlled by such party.

8.      REPRESENTATIONS, WARRANTIES AND INDEMNIFICATION

        8.1.    Mutual Representations and Warranties.

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        The parties make the following representations and warranties to each
other:

                8.1.1.  Corporate Power. Each party hereby represents and
                        warrants that such party (a) is duly organized and
                        validly existing under the laws of the state of its
                        incorporation and has full corporate power and authority
                        to enter into this Agreement and to carry out the
                        provisions hereof; (b) has the requisite power and
                        authority and the legal right to own and operate its
                        property and assets, to lease the property and assets it
                        operates under lease, and to carry on its business as it
                        is now being conducted; and (c) is in compliance with
                        all requirements of applicable law, except to the extent
                        that any noncompliance would not have a material adverse
                        effect on the properties, business, financial or other
                        condition of it and would not materially adversely
                        affect its ability to perform its obligations under the
                        Agreement.

                8.1.2.  Due Authorization. Each party hereby represents and
                        warrants that such party (a) has the requisite power and
                        authority and the legal right to enter into the
                        Agreement and to perform its obligations hereunder; and
                        (b) has taken all necessary action on its part to
                        authorize the execution and delivery of the Agreement
                        and to authorize the performance of its obligations
                        hereunder and the grant of rights extended by it
                        hereunder.

                8.1.3.  Binding Agreement. Each party hereby represents and
                        warrants to the other that (a) this Agreement has been
                        duly executed and delivered on its behalf and is a legal
                        and valid obligation binding upon it and is enforceable
                        in accordance with its terms; (b) the execution,
                        delivery and performance of this Agreement by such party
                        does not conflict with any agreement, instrument or
                        understanding, oral or written, to which it is a party
                        or by which it may be bound, nor violate any law or
                        regulation of any court, governmental body or
                        administrative or other agency having authority over it;
                        and (c) all necessary consents, approvals and
                        authorizations of all governmental authorities and other
                        persons required to be obtained by it in connection with
                        the Agreement have been obtained.

        8.2.    Warranties and Aurora Technology.
        Aurora represents and warrants to Organon as of the Effective Date the
        following:

                8.2.1.  To the best knowledge of Aurora: (a) ***; (b) ***; (c)
                        ***; and (d) ***.

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               8.2.2. Except as set forth in Section 8.2.1 above, Aurora
                      (including its officers, employees and agents) expressly
                      disclaims any representations and warranties, whether
                      express or implied, relating to ***. Aurora further
                      disclaims i) any express or implied warranty of
                      merchantability or fitness for a particular purpose of the
                      ***, ii) any express or implied warranty that the practice
                      or use of the ***will not infringe a patent, copyright,
                      trademark or other right of a Third Party, and iii) any
                      express or implied warranty regarding ***.

        8.3.    *** Indemnification.
        *** hereby agrees to indemnify, defend and hold ***, and its officers,
        directors, employees, and agents (collectively, the " *** Indemnitees")
        harmless from and against all damages or other amounts payable to a
        Third Party, including reasonable attorneys' fees and costs of
        litigation, resulting from a suit brought or threatened by a Third Party
        against a *** Indemnitee based on (a) *** gross negligence or willful
        misconduct (but not patent infringement) relating to *** contractual
        performance under this Agreement, and (b) *** contractual performance
        under this Agreement in the course of the Collaborative Screen Program
        at ***, except to the extent such damages or other amounts payable are
        attributable to: (i) the misappropriation by any such *** Indemnitee of
        the trade secrets of any Third Party, (ii) any breach of this Agreement
        by a *** Indemnitee or misrepresentation contained herein, or iii) trade
        secret use or patent infringement by *** of Compounds provided under
        this Agreement by ***, a target selected or screen components provided
        by *** that are owned or otherwise controlled by a Third Party or a
        Third Party's patent rights. In no event shall *** be liable for any
        incidental or consequential damages suffered by *** resulting from the
        exercise of any rights granted in accordance with this Agreement.

        8.4.    Warranties and Organon Technology.
        Organon warrants to Aurora as of the Effective Date the following:

                8.4.1.  To the best knowledge of Organon as of the Effective
                        Date: (a) ***; (b) ***; and (c) ***.

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                8.4.2.  Except as set forth in Section 8.4.1 above, Organon
                        (including its officers, employees and agents) expressly
                        disclaim any representations and warranties, whether
                        express or implied, relating ***. Organon further
                        disclaims: i) ***; ii) ***; and iii) ***.

        8.5.    *** Indemnification.
        *** hereby agrees to indemnify, defend and hold ***, and its respective
        officers, directors, employees, and agents (collectively, the "***
        Indemnitees") harmless from and against all damages or other amounts
        payable to a Third Party, including reasonable attorneys' fees and costs
        of litigation, resulting from a suit or other threat brought or
        threatened by a Third Party against an *** Indemnitee based on a) any
        development, manufacture, use or sale of a Development Compound or
        Product by or through *** or its Affiliates or its Licensees or
        Licensors, and b) infringement by *** of Patent Rights as a result of
        using a target in a Collaborative Screen, or Compounds provided under
        this Agreement by ***; except to the extent such damages or other
        amounts payable are attributable to: (i) a violation of any contractual
        or fiduciary duty owed by any *** Indemnitee to a Third Party, (ii) any
        breach of this Agreement by an *** Indemnitee or misrepresentation
        contained herein and (iii) trade secret use or patent infringement by
        *** (other than of a target or screen component provided by ***) that
        are owned or otherwise controlled by a Third Party or a Third Party
        patent right. In no event shall *** be liable for any incidental or
        consequential damages suffered by *** resulting from the exercise of any
        rights granted in accordance with this Agreement.

        *** hereby agrees to indemnify, defend and *** and its respective
        officers, sponsors, directors, employees, and agents (collectively, the
        "IP Indemnitees") harmless from and against all damages or other amounts
        payable to a Third Party, including reasonable attorneys' fees and costs
        of litigation, resulting or arising from the exercise of rights under
        the licenses granted herein and pursuant to ***, including product
        liability. This provision is pursuant to *** license agreement.

9.      TERM AND TERMINATION

        9.1     Term.

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        The term of this Agreement will begin on the Effective Date and shall
        continue until there is no longer a royalty obligation owed by Organon
        to Aurora unless terminated earlier in accordance with the provisions of
        Sections 9.2 or 9.3 hereof.

        9.2.    Termination By Mutual Agreement.
        The parties may at any time terminate this Agreement, in whole or in
        part, by written agreement executed by both Aurora and Organon. In such
        event, the document effecting such termination shall specify the
        continuation or termination of any license rights granted hereunder, as
        well as any other terms agreed to by both parties.

        9.3.    Termination for Cause.
        Either party shall have the right to terminate this Agreement at any
        time for a material breach of this Agreement by the other party,
        provided that the non-breaching party shall have given the breaching
        party *** days written notice of the breach and intention to terminate
        this Agreement in the absence of a cure within ninety *** (*** days in
        the case on non-payment) of receipt of such notice by the breaching
        party. Upon termination of this Agreement for cause, all licenses and
        sublicenses granted in accordance with this Agreement shall be
        terminated and all Materials transferred in accordance with this
        Agreement shall be returned to the supplying party or destroyed at the
        discretion of such party. The non-breaching party, upon termination of
        this Agreement may seek actual or general damages and remedies available
        to it at law or in equity. NO PUNITIVE OR CONSEQUENTIAL DAMAGES MAY BE
        SOUGHT BY EITHER PARTY.

        9.4     Termination without Cause.

Either party shall have the right to terminate the Research *** by providing
written notification thereof *** days ***.

        9.5.    Effect of Expiration or Termination.

        The obligations and rights of the parties under ***, thereof, as well as
        any provisions, which, by their intent or meaning are intended to so
        survive, shall survive termination or expiration of this Agreement.
        Except as otherwise expressly provided in this Agreement, the rights and
        obligations of the parties under Article 2 hereof shall terminate and be
        of no further force or effect whatsoever upon any termination of this
        Agreement. Upon expiration or other termination of the Agreement all
        licenses granted will terminate and Materials and Collaborative Screens
        will be destroyed or returned, at the sole discretion of the providing
        party, to the party providing such Materials and Collaborative Screens
        within *** days.

10.     MISCELLANEOUS

        10.1.   Assignment.

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        *** may assign its rights or obligations under this Agreement in
        connection with the sale of all or substantially all of its assets, or
        may otherwise assign its rights or obligations under this Agreement ***;
        provided, however, if such assignment is to an Affiliate that is wholly
        owned by *** such consent shall not be necessary. This Agreement shall
        survive any merger or consolidation of either party with or into another
        party and no consent for any such merger, consolidation or similar
        reorganization shall be required hereunder. In the event of such merger,
        consolidation or similar reorganization or in the event of a sale of all
        assets, no intellectual property rights of the acquiring or acquired
        company shall be included in the technology licensed hereunder.

        10.2.   Binding Effect.
        This Agreement shall be binding upon and inure to the benefit of the
        successors and permitted assigns of the parties. Any assignment not in
        accordance with this Agreement shall be void.

        10.3.   Force Majeure.
        Neither party shall lose any rights hereunder or be liable to the other
        party for damages or losses on account of failure of performance by the
        defaulting party if the failure is occasioned by war, fire, explosion,
        flood, earthquake, strike, lockout, embargo, act of God, or any other
        similar cause beyond the control of the defaulting party, provided that
        the party claiming force majeure has exerted all reasonable efforts to
        avoid or remedy such force majeure and thereafter takes all reasonable
        steps to mitigate any such delay in performance hereunder and any
        damages that may be incurred by the other party thereby.

        10.4.   Notices.
        Any notices or communications provided for in this Agreement to be made
        by either of the parties to the other shall be in writing, in English,
        and shall be made by prepaid air mail or overnight carrier with return
        receipt addressed to the other at its address set forth below. Any such
        notice or communication may also be given by hand, or facsimile to the
        appropriate designation. Notices shall be sent:

        If to Organon, to:   N.V. Organon
                             Molenstraat 110
                             P.O. Box 20
                             5340 BH Oss
                             The Netherlands

        Facsimile number:    (31) 412 662617

        Attention:           C. David Nicholson, Ph.D.
                             Director, Research

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        If to Aurora, to:    Aurora Biosciences Corporation
                             11010 Torreyana Road
                             San Diego, CA 92121

        Facsimile number:    (619) 404-6714

        Attention:           Michael J. Dunn
                             Vice President, Business Development

        provided that if such notice or communication relates to an amendment to
        this Agreement or to any notice pursuant to Article 9 hereof, a copy
        shall also be sent to:

        If to Organon, to:   Head of the Legal Department

        If to Aurora, to:    John D. Mendlein
                             General Counsel

        Either party may by like notice specify or change an address to which
        notices and communications shall thereafter be sent. Notices sent by
        mail, facsimile or cable shall be effective upon receipt and notices
        given by hand shall be effective when delivered.

        10.5.   Governing Law and Jurisdiction.
        This Agreement shall be governed by the laws of the State of California,
        as such laws are applied to contracts entered into and to be performed
        within such state.

        10.6.   Waiver.
        Except as specifically provided for herein, the waiver from time to time
        by either of the parties of any of their rights or their failure to
        exercise any remedy shall not operate or be construed as a continuing
        waiver of same or any of the other of such party's rights or remedies
        provided in this Agreement.

        10.7.   Severability.
        If any term, covenant or condition of this Agreement or the application
        thereof to any party or circumstance shall, to any extent, be held to be
        invalid or unenforceable, then the remainder of this Agreement, or the
        application of such term, covenant or condition to parties or
        circumstances other than those as to which it is held invalid or
        unenforceable, shall not be affected thereby and each term, covenant or
        condition of this Agreement shall be valid and be enforced to the
        fullest extent permitted by law; and the parties hereto covenant and
        agree to renegotiate any such term, covenant or application thereof in
        good faith in order to provide a reasonably acceptable alternative to
        the term, covenant or condition of this Agreement or the application
        thereof that is invalid or unenforceable, it being the intent of the
        parties that the basic purposes of this Agreement are to be effectuated.

        10.8.   Independent Contractors.

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        It is expressly agreed that Aurora and Organon shall be independent
        contractors and that the relationship between the parties shall not
        constitute a partnership or agency of any kind. Neither Aurora nor
        Organon shall have the authority to make any statements, representations
        or commitments of any kind, or to take any action, which shall be
        binding on the other, without the prior written authorization of the
        other party to do so.

        10.9.   Entire Agreement.
        This Agreement between the parties of even date herewith sets forth all
        of the covenants, promises, agreements, warranties, representations,
        conditions and understandings between the parties hereto, and supersedes
        and terminates all prior agreements and understanding between the
        parties, with respect to the subject matter hereof. There are no
        covenants, promises, agreements, warranties, representations conditions
        or understandings, either oral or written, between the parties other
        than as set forth herein and therein. No subsequent alteration,
        amendment, change or addition to this Agreement shall be binding upon
        the parties hereto unless reduced to writing and signed by the
        respective authorized officers of the parties. This Agreement shall not
        be strictly construed against either party hereto. Any conflict between
        the terms set forth in the text of this Agreement and the terms of any
        Exhibit hereto shall be resolved in favor of the text of this Agreement.

        10.10.  No Third Party Beneficiaries.
        No third party, including any employee of any party to this Agreement,
        shall have or acquire any rights by reason of this Agreement. Nothing
        contained in this Agreement shall be deemed to constitute the parties
        partners with each other or any third party.

        10.11.  Construction.
        The term "Article" or "Section" can refer to any single paragraph level
        found herein or any collection of multiple paragraphs thereunder.

        10.12.  Dispute Resolution.
        The parties recognize that disputes as to certain matters may from time
        to time arise during the term of this Agreement which relate to either
        party's rights and/or obligations hereunder. It is the objective of the
        parties to establish procedures to facilitate the resolution of disputes
        arising under this Agreement in an expedient manner by mutual
        cooperation and without resort to arbitration. The parties agree that
        prior to any arbitration concerning this Agreement, a member of
        Organon's senior management and Aurora's president will meet in person
        or by video-conferencing in a good faith effort to resolve any disputes
        concerning this Agreement. Within *** days of a formal request by either
        party to the other, any party may, by written notice to the other, have
        such dispute referred to their respective officers designated or their
        successors, for attempted resolution by good faith negotiations, such
        good faith negotiations to begin within *** days after such notice is
        received. Any dispute arising out of or relating to this Agreement which
        is not resolved between the parties or the designated officers of the
        parties pursuant to Section 10.12 shall be resolved by final and binding
        arbitration conducted in *** (unless the parties mutually agree to
        another location) under the then

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<PAGE>   31
        current Licensing Agreement Arbitration Rules of the American
        Arbitration Association ("AAA"). The arbitration shall be conducted by
        three (3) arbitrators who are knowledgeable in the subject matter which
        is at issue in the dispute. One arbitrator is selected by Organon and
        one arbitrator is selected Aurora and the third arbitrator is appointed
        by the AAA. In conducting the arbitration, the arbitrators shall
        determine what discovery will be permitted, consistent with the goal of
        limiting the cost and time which the parties must expend for discovery
        (and provided that the arbitrators shall permit such discovery they deem
        necessary to permit an equitable resolution of the dispute), ensure that
        the total time of the arbitration from filing to a final decision or
        executed settlement agreement is less than *** months, and be able to
        decree any and all relief of an equitable nature, including but not
        limited to such relief as a temporary restraining order, a preliminary
        injunction, a permanent injunction, specific performance or repletion of
        property. The arbitrators shall also be able to award actual or general
        damages, but shall not award any other form of damage (e.g.,
        consequential, punitive or exemplary damages). The parties shall share
        equally the arbitrator's fees and expenses pending the resolution of the
        arbitration unless the arbitrator, pursuant to its right but not its
        obligations, requires the non-prevailing party to bear all or any
        portion of the costs of the prevailing party. The decision of the
        arbitrator shall be final and may be sued on or enforced by the party in
        whose favor it runs in any court of competent jurisdiction at the option
        of such party. Notwithstanding anything to the contrary in this Section
        10.12, either party may seek immediate injunctive or other interim
        relief from any court of competent jurisdiction with respect to any
        breach of Articles 3 or 6 hereof, or otherwise to enforce and protect
        the patent rights, copyrights, trademarks, or other intellectual
        property rights owned or Controlled by such party. In addition,
        arbitration shall not be used to resolve disputes about patent rights.
        Patent right disputes including but not limited to disputes concerning
        patent ownership, claim language, claim scope and issues of validity
        shall be settled in a court of law. Any arbitration ruling that relies
        on an interpretation of patent rights shall have no binding effect in a
        court of law on any patent rights related to this Agreement, unless such
        patent rights have been adjudicated in a court of law. In no event shall
        a demand for arbitration be made after the date when the institution of
        a legal or equitable proceeding based on such claim, dispute or other
        matter in question would be barred by the applicable statute.

        10.13.  Counterparts.
        This Agreement may be executed in two (2) or more counterparts, each of
        which shall be deemed an original, but all of which together shall
        constitute one and the same instrument. Counterparts may be signed and
        delivered via facsimile, each of which shall be binding when sent, and
        in each case an original shall be sent via overnight courier.

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<PAGE>   32
        IN WITNESS WHEREOF, the parties have caused this Agreement to be
        executed by their duly authorized representatives.

N.V. Organon                            Aurora Biosciences Corporation

By:                                     By:
   -------------------------------         -------------------------------
Name:   C. David Nicholson, Ph.D.       Name:  Harry Stylli, Ph.D.
Title:  Director, Research              Title: Senior Vice President,
                                               Commercial Development

Date:                                   Date:

By:
   -------------------------------

Name: H. J. Vergouwen, Ph.D.

Title:  Managing Director R&D

Date:

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<PAGE>   33
                                LIST OF EXHIBITS

                                       ***

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<PAGE>   34
                                   EXHIBIT 1.2

                                       ***

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<PAGE>   35
                                  EXHIBIT 1.35

                             LIST OF ORGANON TARGETS

                                       ***

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<PAGE>   36
                                  EXHIBIT 1.48

                                       ***

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<PAGE>   37
                                    EXHIBIT 2

                                       ***

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<PAGE>   38
                                       ***

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                                       ***

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<PAGE>   40
                                   EXHIBIT 2.4

                         PRICE LIST FOR AURORA REPORTERS

                                  CONFIDENTIAL
                                       ***

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<PAGE>   41
                                   EXHIBIT 2.7

                           PURCHASE OF AN AURORA VIPR

                                       ***

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<PAGE>   42
                                       ***

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                                                                   EXHIBIT 10.12

                          AGREEMENT AND PLAN OF MERGER

                                  BY AND AMONG

                               I-FLOW CORPORATION

                                    "PARENT"

                            SPINAL ACQUISITION CORP.

                                     "NEWCO"

                            SPINAL SPECIALTIES, INC.

                                    "COMPANY"

                                       AND

                               THE SHAREHOLDERS OF
                            SPINAL SPECIALTIES, INC.

                                    "SELLERS"

                                January 13, 2000

<PAGE>   2

                                TABLE OF CONTENTS

<TABLE>
<S>                                                                                         <C>
ARTICLE I DEFINITIONS..................................................................      5

ARTICLE II MERGER AND REORGANIZATION...................................................      9
   Section 2.1       Merger............................................................      9
   Section 2.2       Purchase Price....................................................      9
   Section 2.3       Closing...........................................................     11
   Section 2.4       Payment and Holdback..............................................     12
   Section 2.5       Closing Obligations...............................................     12
   Section 2.6       Post Closing Obligations..........................................     13
   Section 2.7       Effect of the Merger..............................................     13

ARTICLE III REPRESENTATIONS AND WARRANTIES OF  THE COMPANY AND SELLERS.................     14
   Section 3.1       Organization and Good Standing....................................     14
   Section 3.2       Authority of Sellers; No Breach...................................     14
   Section 3.3       Capitalization....................................................     15
   Section 3.4       Financial Statements..............................................     15
   Section 3.5       Licenses and Permits..............................................     16
   Section 3.6       Books and Records.................................................     16
   Section 3.7       Title to Properties; Encumbrances.................................     17
   Section 3.8       Conditions and Sufficiency of Assets..............................     17
   Section 3.9       Accounts Receivable...............................................     17
   Section 3.10         Inventory......................................................     17
   Section 3.11         Backlog; Customers.............................................     18
   Section 3.12         No Undisclosed Liabilities.....................................     18
   Section 3.13         Absence of Certain Changes.....................................     18
   Section 3.14         Progress Payments..............................................     19
   Section 3.15         Environmental Matters..........................................     19
   Section 3.16         Intangible Personal Property...................................     20
   Section 3.17         Labor and Employment Agreement.................................     20
   Section 3.18         Employee Benefit Plans; ERISA..................................     21
   Section 3.19         Material Contracts and Relationships...........................     23
   Section 3.20         Absence of Certain Business Practices..........................     24
   Section 3.21         Transactions with Related Parties..............................     24
   Section 3.22         Compliance with Laws...........................................     25
   Section 3.23         Regulatory Approvals...........................................     25
   Section 3.24         Litigation.....................................................     25
   Section 3.25         Taxes..........................................................     25
   Section 3.26         Insurance......................................................     26
   Section 3.27         No Brokerage Fees..............................................     26
   Section 3.28         Product Warranty and Liability.................................     26
   Section 3.29         Consents and Approvals.........................................     27
   Section 3.30         Bank Accounts..................................................     27
   Section 3.31         Securities Matters.............................................     27
</TABLE>

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<PAGE>   3

<TABLE>
<S>                                                                                         <C>
   Section 3.32         Indebtedness...................................................     28
   Section 3.33         Disclosure.....................................................     28

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND NEWCO..........................     29

   Section 4.1       Organization......................................................     29
   Section 4.2       Authority of Parent and Newco.....................................     29
   Section 4.3       No Brokerage Fees.................................................     29
   Section 4.4       Stock Consideration...............................................     30
   Section 4.5       Disclosure........................................................     30
   Section 4.6       Consents and Approvals............................................     30
   Section 4.7       Knowledge and Expertise...........................................     30

ARTICLE V CERTAIN AGREEMENTS AND UNDERSTANDINGS........................................     30

   Section 5.1       Collection of Other Assets........................................     30
   Section 5.2       Conduct of Business...............................................     31
   Section 5.3       No Solicitation...................................................     32
   Section 5.4       Access and Information............................................     32
   Section 5.5       Public Announcements..............................................     33
   Section 5.6       Confidentiality...................................................     33
   Section 5.7       Further Actions...................................................     33
   Section 5.8       Document Retention................................................     34

ARTICLE VI CLOSING CONDITIONS..........................................................     34

   Section 6.1       Conditions to Obligation of Sellers...............................     34
   Section 6.2       Conditions to Obligation of Parent and Newco......................     35

ARTICLE VII INDEMNIFICATION............................................................     36

   Section 7.1       Indemnification by Sellers........................................     36
   Section 7.2       Indemnification by Parent and Newco...............................     37
   Section 7.3       Claims for Indemnification........................................     38
   Section 7.4       Defense Claims....................................................     38
   Section 7.5       Interest..........................................................     39
   Section 7.6       Manner of Indemnification.........................................     39
   Section 7.7       Additional Limitations on Indemnification.........................     39
   Section 7.8       Release of Claims Against the Company.............................     39

ARTICLE VIII TERMINATION...............................................................     40

   Section 8.1       Termination.......................................................     40
   Section 8.2       Effect of Termination.............................................     41

ARTICLE IX MISCELLANEOUS...............................................................     41

   Section 9.1       Fees and Expenses.................................................     41
   Section 9.2       Notices...........................................................     41
   Section 9.3       Attorneys' Fees and Costs.........................................     42
   Section 9.4       Assignability and Parties in Interest.............................     42
   Section 9.5       Governing Law.....................................................     42
   Section 9.6       Counterparts......................................................     42
</TABLE>

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<PAGE>   4

<TABLE>
<S>                                                                                         <C>
   Section 9.7       Complete Agreement................................................     42
   Section 9.8       Modifications Amendments and Waivers..............................     43
   Section 9.9       Due Diligence Investigation; Knowledge............................     43
   Section 9.10         Limit on Interest..............................................     43
   Section 9.11         Post Closing Matters; Further Assurances.......................     43
   Section 9.12         Contract Interpretation; Construction of Agreement.............     43
   Section 9.13         Survival of Representations and Warranties.....................     43
   Section 9.14         Arbitration....................................................     44
   Section 9.15         Severable Provisions...........................................     44

EXHIBIT A SHAREHOLDERS AND SHARE HOLDINGS..............................................     --

EXHIBIT 2.5(A)(II) EMPLOYMENT AGREEMENT................................................     --

EXHIBIT 2.5(A)(III) NONCOMPETITION AGREEMENT...........................................     --

EXHIBIT 2.5(A)(VIII) AT-WILL EMPLOYMENT AGREEMENT......................................     --
</TABLE>

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<PAGE>   5

                          AGREEMENT AND PLAN OF MERGER

         This AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and
entered into as of January 13, 2000 by and among I-Flow Corporation, a
California corporation ("Parent"), Spinal Acquisition Corp., a Delaware
corporation ("Newco"), Spinal Specialties, Inc., a Texas corporation (the
"Company"), and each of the persons named on Exhibit A hereto (all such persons,
"Sellers"), such Sellers being all of the shareholders of the Company.

         WHEREAS, Sellers own all of the issued and outstanding shares of the
Company's Common Stock, no par value (the "Shares");

         WHEREAS, the parties hereto desire to merge the Company with and into
Newco, with Newco to continue as the surviving corporation and the separate
corporate existence of the Company to cease at such time;

         WHEREAS, for federal income tax purposes, it is intended by all parties
that the Merger qualify as a reorganization under Section 368 of the Internal
Revenue Code of 1986 (the "Code"), as amended, and that this Agreement
constitutes a plan of reorganization under Section 368 of the Code;

         WHEREAS, in furtherance of the Merger, the Boards of Directors of
Parent, Newco, and the Company have each approved the Merger in accordance with
applicable laws and upon the terms and subject to the conditions set forth
herein; and

         WHEREAS, in furtherance of the Merger, the shareholders of Newco and
the Company each approve the Merger hereby upon execution of this Agreement;

         NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements contained herein and
intending to be legally bound, the parties hereto agree as follows:

                                    ARTICLE I
                                   DEFINITIONS

         As used in this Agreement, the following terms shall have the meanings
indicated below:

         "Accounts Receivable" shall have the meaning set forth in Section 3.9.

         "Affiliate" shall mean, in respect of any specified Person, any other
Person, whether or not a separate legal entity, that, directly or indirectly,
controls, is controlled by, or is under common control with, such specified
Person or if such specified Person bears a familial relationship of parent,
child, spouse or sibling with such other Person, and such meaning shall include
without limitation subsidiaries, divisions, departments, partners, joint
venturers, product lines or products (the terms "controls," "controlled" or
"control" meaning the possession, directly or indirectly, of the power to direct
or cause the direction of management policies of a Person, whether through the
ownership of securities, by contract or credit arrangement, as trustee or
executor, or otherwise).

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<PAGE>   6

         "Affiliated Parties" shall have the meaning set forth in Section 7.1.

         "Agreement" shall have the meaning set forth in the Preamble.

         "At-Will Employment Agreements" shall have the meaning set forth in
Section 2.5(a)(viii).

         "CERCLA" shall mean the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA") (42 U.S.C. Section 9601 et seq.).

         "Closing" shall have the meaning set forth in Section 2.3.

         "Closing Date" shall have the meaning set forth in Section 2.3.

         "Closing Value" shall mean the average of the last sale price of
Parent's common stock for the five business days ending three business days
prior to Closing, as reported on the Nasdaq SmallCap Market.

         "Code" shall mean the Internal Revenue Code of 1986, as amended.

         "Company" shall have the meaning set forth in the Preamble.

         "Company Employee Plans" shall have the meaning set forth in Section
3.18.

         "Contracts" shall mean all of the contracts, purchase orders and
agreements (whether written or oral) to which the Company is a party or by which
it is bound.

         "Delaware Law" means the Delaware General Corporation Law, as amended.

         "Effective Time" shall have the meaning set forth in Section 2.3(b).

         "Employment Agreements" shall have the meaning set forth in Section
2.5(a)(ii).

         "Employment-related Agreements" shall mean (i) any employment,
consulting, collective bargaining or similar agreement, whether written or oral,
to which the Company is a party or by which it is bound, (ii) any plan,
agreement or arrangement sponsored by or contributed to by the Company,
including, without limitation, any life or health insurance, hospitalization,
savings, bonus, deferred compensation, incentive compensation, stock purchase,
stock option, holiday, vacation, severance pay, sick pay, sick leave,
disability, educational assistance, tuition refund, service award, company car,
scholarship, relocation, fringe benefit, severance contracts, pension
arrangements, and other policies, practices or commitments, whether written or
unwritten, providing employee or executive compensation or benefits to employees
of the Company, (iii) any employee benefit plan as defined in Section 3(3) of
ERISA, and (iv) any arrangement or understanding for the payment of
post-retirement benefits.

         "Environmental Protection Laws" shall mean all federal, state, local
and foreign laws, statutes, regulations having the force and effect of law,
permits, court decrees, judgments, injunctions and written orders concerning (i)
public health and safety relating to toxic or hazardous substances or (ii)
pollution or protection of the environment or natural resources,

                                       6
<PAGE>   7

including, without limitation, CERCLA; the Hazardous Materials Transportation
Act (49 U.S.C. Section 1801 et seq.); the Resource Conservation and Recovery Act
("RCRA") (42 U.S.C. Section 6901 et seq.); the Clean Water Act (33 U.S.C.
Section 1251 et seq.); the Safe Drinking Water Act (14 U.S.C. Section 1401 et
seq.); the Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.); the
Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. Section 136 et
seq.); the Clean Air Act (42 U.S.C. Section 7401 et seq.); and the Emergency
Planning and Community Right-to-Know Act (42 U.S.C. Sections 11001-11005,
11021-11023, and 11041-11050).

         "EPA" shall mean the United States Environmental Protection Agency, or
any successor United States governmental agency.

         "Equipment" shall mean all equipment, machinery, tools, vehicles,
computers, software and furniture owned by the Company.

         "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time.

         "ERISA Affiliate" of the Company shall mean any other Person that,
together with the Company as of the relevant measuring date under ERISA, was or
is required to be treated as a single employer under Section 414 of the Code.

         "FAR" shall mean the Federal Acquisition Regulations, as supplemented
or amended from time to time.

         "Financials" shall have the meaning set forth in Section 3.4.

         "GAAP" shall mean generally accepted accounting principles as in effect
at the time in question.

         "Holdback" shall have the meaning set forth in Section 2.4.

         "Indemnified party" shall have the meaning set forth in Section 7.3.

         "Indemnifying party" shall have the meaning set forth in Section 7.3.

         "Intangible Personal Property" shall have the meaning set forth in
Section 3.16.

         "Interim Balance Sheet" shall have the meaning set forth in Section
3.4(a).

         "Inventories" shall have the meaning set forth in Section 3.10.

         "IRS" shall mean the Internal Revenue Service.

         "Lease" shall have the meaning set forth in Section 3.7.

         "Licenses" shall have the meaning set forth in Section 3.16.

                                       7
<PAGE>   8
         "Material", in respect of the Company, means a fact, matter,
circumstance or condition on which a reasonable businessman would expend money
to correct or change, or which has a cost or value, in excess of $15,000.

         "Material Contracts" shall have the meaning set forth in Section
3.19(a)

         "Merger" shall have the meaning set forth in Section 2.1(a).

         "Newco" shall have the meaning set forth in the Preamble.

         "Noncompetition Agreements" shall have the meaning set forth in Section
2.5(a)(iii).

         "Organizational Documents" means the Articles of Incorporation and the
Bylaws of the Company and any amendment thereto.

         "Person" shall mean any entity or natural person or any corporation,
partnership, joint venture or other entity, whether or not a legal entity.

         "Prime Rate" shall mean the reference rate as reported by Bank of
America, NT&SA.

         "Progress Payments" shall have the meaning set forth in Section 3.14.

         "Purchase Price" shall have the meaning set forth in Section 2.2.

         "RCRA" shall have the meaning set forth within the definition of
"Environmental Protection Laws."

         "Regulated Substance" shall mean any chemical or substance subject to
or regulated under any Environmental Protection Law including, without
limitation, any "pollutant or contaminant" or "hazardous substance" as those
terms are defined in CERCLA, any "hazardous waste" as that term is defined in
RCRA, and any other hazardous or toxic wastes, substances, or materials,
petroleum (including crude oil and refined and unrefined fractions thereof),
polychlorinated biphenyls ("PCBs"), infectious waste, special waste, pesticides,
fungicides, solvents, herbicides, flammables, explosives, asbestos and
asbestos-containing material, and radioactive materials, whether injurious by
themselves or in combination with other materials.

         "Related Parties" shall have the meaning set forth in Section
3.19(a)(viii).

         "Seller" shall mean Michael Wakely, Robert B. Keahey, Robert A. Keahey,
Robert D. Duffet, Camilla B. Doe, R. Bryan Stone, and J. Elliot Cunningham, each
individually.

         "Sellers" shall have the meaning set forth in the Preamble, and are
Michael Wakely, Robert B. Keahey, Robert A. Keahey, Robert D. Duffet, Camilla B.
Doe, R. Bryan Stone, and J. Elliot Cunningham, collectively.

         "Sellers' Closing Documents" shall have the meaning set forth in
Section 3.2(a).

         "Shares" shall have the meaning set forth in the Preamble.

                                       8
<PAGE>   9

         "Subsidiaries" shall mean any corporation or other Person of which the
Company directly or indirectly holds securities or other interests having the
power to elect a majority of such corporation's or other Person's board of
directors or similar governing body, or otherwise having the power to direct the
business and policies of such corporation or other Person.

         "Surviving Corporation" shall have the meaning set forth in Section
2.1(a).

         "Tax" or "Taxes" shall mean any and all taxes imposed or required to be
collected by any federal, state or local taxing authority in the United States,
or by any foreign taxing authority under any statute or regulation, including,
without limitation, all income, gross receipts, sales, use, personal property,
use and occupancy, business occupation, mercantile, ad valorem, transfer,
license, withholding, payroll, employment, excise, real estate, environmental,
capital stock, franchise, alternative or add-on minimum, estimated or other tax
of any kind whatsoever, including any interest, penalties and other additions
thereto.

         "Texas Law" shall mean the Texas Business Corporation Act, as amended.

         "Transactions" shall mean, in respect of any party, all transactions
contemplated by this Agreement that involve, relate to or affect such party.

         "Unregistered Shares" shall mean shares of common stock of I-Flow
Corporation that have not been registered pursuant to the Securities Act of
1933, as amended.

                                   ARTICLE II
                            MERGER AND REORGANIZATION

SECTION 2.1       MERGER.

                  (a) At the Effective Time, and subject to and upon the terms
and conditions of this Agreement, Delaware Law and Texas Law, the Company shall
be merged with and into Newco (the "Merger"). The separate corporate existence
of the Company shall cease and Newco shall continue as the surviving
corporation. Newco as the surviving corporation after the Merger is hereafter
sometimes referred to as the "Surviving Corporation." Upon consummation of the
Merger, the corporate name of Newco shall be changed to Spinal Specialties,
Inc., a Delaware corporation.

                  (b) Parent, as the sole shareholder of Newco, hereby approves
and adopts this Agreement and the Merger contemplated hereby in accordance with
applicable law and the Certificate of Incorporation and Bylaws of Newco.

                  (c) Sellers, as the sole shareholders of the Company, hereby
approve and adopt this Agreement and the Merger contemplated hereby in
accordance with applicable law and the Articles of Incorporation and Bylaws of
the Company.

SECTION 2.2       PURCHASE PRICE.

                  (a) Consideration. The purchase price (the "Purchase Price")
for the Shares will be comprised of: (i) cash in the amount of $750,000, offset
by an amount equal to any

                                       9
<PAGE>   10

indebtedness of the Company at the time of the Closing in excess of $590,000,
including general trade payables and any debts of the Company paid by Parent or
Newco at or in connection with Closing, including payments pursuant to Section
6.1(f) (the "Cash Consideration"), and (ii) a number of Unregistered Shares
equal to $750,000 divided by the Closing Value, payable no later than 5 business
days after the Closing Date (the "Stock Consideration").

                  (b) Conversion. At the Effective Time, each holder of the
Shares that are outstanding immediately prior to the Effective Time, other than
any Dissenting Shares (defined in Section 2.2(g)), shall be entitled to receive
in exchange for his or her portion of the Shares, a pro rata portion of the
Purchase Price equal to that Seller's proportionate ownership of the Shares.

                  Each holder of a certificate representing any of the Shares
(except for Dissenting Shares) shall, after the Effective Time, cease to have
any rights with respect to such stock, except the right to receive his or her
pro rata share of the Purchase Price upon the surrender of such certificate,
payable in accordance with this Section 2.

                  (c) Fractional Shares. No fractional shares of Parent shall be
issued in the Merger. In lieu of the issuance of any such fractional shares,
Parent shall pay to each Seller who otherwise would have been entitled to
receive fractional shares, an amount in cash (rounded to the nearest whole cent)
determined by multiplying (i) the Closing Value, by (ii) the fraction of a share
of Parent's stock which such holder would otherwise have been entitled to
receive.

                  (d) No Subsequent Transfers; Lost, Stolen or Destroyed
Certificates. After the Effective Time, there shall be no transfers on the stock
transfer books of the Surviving Corporation of shares of the Company that were
registered as outstanding immediately prior to the Effective Time. In the event
that any registered certificate of any Seller shall have been lost, stolen or
destroyed, the Surviving Corporation, upon the making of an affidavit of that
fact by the Seller claiming such certificate to be lost, stolen or destroyed and
an indemnification (subject to the following sentence) shall make payment of the
Seller's pro rata share of the Purchase Price for the Shares represented by such
certificate in accordance with this Section to persons legally entitled thereto.
The Surviving Corporation, in its sole discretion and as a condition precedent
to the delivery of the Seller's pro rata share of the Purchase Price, in
exchange for the shares represented by such certificate, may require the owner
of such lost, stolen or destroyed certificate to provide a bond or other
security in such sum as it reasonably may direct as indemnity against any claim
that may be made against the Surviving Corporation with respect to the
certificate alleged to have been so lost, stolen or destroyed.

                  (e) Tax Withholding. The right of Seller to receive the
Purchase Price as provided herein shall be subject to and reduced by the amount
of any required tax withholding obligation, if any. To the extent that Parent
withholds taxes from payments to Sellers, Parent will provide each such Seller
with documentary evidence of any amounts so withheld and information as to the
basis therefore.

                  (f) Newco Capital Stock. Each share of common stock of Newco
issued and outstanding immediately prior to the Effective Time shall continue to
represent one share of issued and outstanding common stock of the Surviving
Corporation and shall not be affected by the Merger.

                                       10
<PAGE>   11

                  (g) Dissenting Shares.

                           (i) Notwithstanding any provision of this Agreement
to the contrary, any holder of any of the Shares who has exercised his or her
dissenter's rights and demanded payment of the fair value of such shares in
accordance with Texas Law and who, as of the Effective Time, has not effectively
withdrawn or lost such dissenter's rights ("Dissenting Shares"), shall not be
converted into or represent a right to receive his/her pro rata portion of the
Purchase Price pursuant to this Section, but shall only be entitled to such
rights as are granted under Texas Law.

                           (ii) Notwithstanding the provisions of this Section,
if any holder of the Shares who exercise his or her dissenter's rights under
Texas Law shall effectively withdraw or lose (through a failure to perfect or
otherwise) such rights, then, as of the later of the Effective Time or the
occurrence of such event, such holder's shares shall automatically be converted
into and represent only the right to receive his or her pro rata share of the
Purchase Price applicable to such shares as provided in this Section, without
interest thereon, upon surrender of the certificate(s) representing such shares.

                           (iii) The Company shall give (A) Newco and Parent
prompt notice of any exercise of any dissenter's rights by the holders of any of
the Shares, withdrawals of such exercise, and any other instruments served
pursuant to Texas Law and received by the Company, and (B) the opportunity to
direct all negotiations and proceedings with respect to dissenter's rights under
Texas Law. Except with the prior written consent of Parent and Newco, the
Company shall not voluntarily make any agreement or payment with respect to any
demand for appraisal of the Shares or offer to settle any such demands.

SECTION 2.3       CLOSING.

                  (a) The purchase and sale (the "Closing") provided for in this
Agreement will take place at the offices of Parent's counsel at 4 Park Plaza,
Suite 1700, Irvine, California at 10:00 a.m. (local time) on January 14, 2000,
or at such other time and place as the parties may agree (the "Closing Date").

                  (b) If, at the Closing, each of the conditions set forth in
Article VI has been satisfied or any such condition is not satisfied and the
party whose obligation to close is subject to the satisfaction of such condition
elects to waive satisfaction of the condition, then the transactions
contemplated herein shall be consummated on such date and, then and thereupon
the parties hereto shall carry out the procedures specified under the applicable
provisions of Delaware Law and Texas Law, to the end that the Merger shall
become effective. The Merger shall be consummated and become effective by filing
the Certificate of Merger (the "Delaware Certificate of Merger") with the
Delaware Secretary of State and the Articles of Merger (the "Texas Articles of
Merger") with the Texas Secretary of State, in such form as required by and
executed in accordance with the relevant provisions of Delaware Law and Texas
Law, respectively. When used in this Agreement, "Effective Time" shall mean the
time at which the Delaware Certificate of Merger and the Texas Articles of
Merger are so filed in accordance with Delaware Law and Texas Law, respectively.

                                       11
<PAGE>   12

SECTION 2.4       PAYMENT AND HOLDBACK.

         As security for Sellers' indemnities set out in Section 7.1, but
without limitation of Sellers' liability under that Section, Parent shall retain
out of the Cash Consideration payable under Section 2.2(a), the sum of $150,000
(the "Holdback"). From time-to-time, on not less than 10 days' prior notice to
Sellers, Parent may apply all or any part of the Holdback to pay, or to provide
for the payment of, any liability of Sellers arising under the indemnities
contained in Section 7.1. One year from the Effective Date, Parent will pay
Sellers, pro rata, a sum equal to the Holdback, minus any amounts for which
Parent has given the notice provided for above by the date of the payment, plus
interest on the difference thereof accrued at the Prime Rate and compounded
monthly.

         Nothing in this Section will be construed as limiting the liability of
Sellers under this Agreement to the amount of the Holdback, nor will that amount
be considered as liquidated damages for any breach under this Agreement.

SECTION 2.5       CLOSING OBLIGATIONS.

                  (a) At the Closing, the Company and Sellers will deliver, or
cause to be delivered, to Parent and Newco:

                           (i) certificates representing all of the Shares, duly
endorsed (or accompanied by duly executed stock powers), for transfer to Newco;

                           (ii) employment agreements, executed by Michael
Wakely and Robert B. Keahey, in the form of Exhibit 2.5(a)(ii) (the "Employment
Agreements");

                           (iii) noncompetition agreements, executed by Michael
Wakely and Robert B. Keahey, in the form of Exhibit 2.5(a)(iii) (the
"Noncompetition Agreements");

                           (iv) a certificate executed by Sellers representing
and warranting to Parent and Newco (A) that each of his or her and the Company's
representations and warranties in this Agreement were accurate in all respects
as of the date of this Agreement and are accurate in all respects as of the
Closing Date as if made on the Closing Date and (B) as to the amount of cash on
hand in the Company and the amount of indebtedness of the Company at Closing
(including amounts to be paid by Parent pursuant to Section 6.1(f));

                           (v) assignments, in form and substance satisfactory
to Parent and Newco, executed by Sellers, transferring to the Company each such
persons' respective rights, title and interest in and to any assets, including
trade secrets or intellectual property, made use of by the Company in the
conduct of its business;

                           (vi) written evidence of termination of any Company
Employee Plans other than United Healthcare health insurance policy identified
on Schedule 3.18;

                           (vii) written resignations and releases, effective as
of the Closing Date, executed by all directors, officers and employees of the
Company;

                                       12
<PAGE>   13

                           (viii) at-will employment agreements, executed by all
employees of the Company other than Michael Wakely and Robert B. Keahey, in the
form of Exhibit 2.5(a)(viii) (the "At-Will Employment Agreements");

                           (ix) signature cards and executed powers of attorney
for all bank accounts identified on Schedule 3.30 hereto; and

                           (x) payoff letters relating to all debts listed on
Schedule 6.1 executed by all creditors and lien holders listed thereon.

                  (b) At the Closing Parent or Newco will deliver to Sellers:

                          (i) a sum equal to the Cash Consideration minus the
Holdback and a certificate stating the number of Unregistered Shares that will
be paid in satisfaction of the Stock Consideration, with the actual stock
certificates to be delivered within 5 business days from the Closing Date;

                           (ii) a certificate executed by Parent and Newco to
the effect that each of Parent and Newco's representations and warranties in
this Agreement were accurate in all respects as of the date of this Agreement
and is accurate in all respects as of the Closing Date as if made on the Closing
Date;

                           (iii) the Employment Agreements, executed by Newco
and Parent;

                           (iv) the Noncompetition Agreements, executed by Newco
and Parent; and

                           (v) the At-Will Employment Agreements executed by
Newco.

SECTION 2.6       POST CLOSING OBLIGATIONS.

         Within 5 business days after the Closing, Parent will deliver to
Sellers certificates representing the Stock Consideration.

SECTION 2.7       EFFECT OF THE MERGER.

         At the Effective Time:

                  (a) the Company will be merged with and into Newco, with Newco
as the Surviving Corporation;

                  (b) the separate existence of the Company will cease and the
Surviving Corporation shall succeed, without other transfer, to all rights and
properties of the Company and shall be subject to all the debts and liabilities
of the Company;

                  (c) the Certificate of Incorporation of Newco will be the
Certificate of Incorporation of the Surviving Corporation (except that the name
of the Surviving Corporation shall be changed to Spinal Specialties, Inc.);

                                       13
<PAGE>   14

                  (d) the Bylaws of Newco shall be the Bylaws of the Surviving
Corporation;

                  (e) the directors and officers of Newco shall be the directors
and officers of the Surviving Corporation, each to serve until his or her
successor has been duly elected and qualified or otherwise as provided by law;

                  (f) the Surviving Corporation's principal executive office
shall be located in the State of California;

                  (g) the Merger, from and after the Effective Time, shall have
all the effects provided by Delaware Law, Texas Law and any other applicable
law.

                                   ARTICLE III
                        REPRESENTATIONS AND WARRANTIES OF
                             THE COMPANY AND SELLERS

         Sellers and the Company jointly and severally, hereby represent and
warrant to Parent and Newco that:

SECTION 3.1       ORGANIZATION AND GOOD STANDING.

         Schedule 3.1 is a complete and accurate list, for the Company, of its
name, jurisdiction of incorporation, other jurisdictions in which it is
authorized to do business, and its capitalization (including the identity of
each stockholder and the number of shares held by each). The Company is duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation, with full corporate power and authority to own or
lease its properties and to conduct its business in the manner and in the places
where such properties are owned or leased or such business is currently
conducted. The Company is qualified to do business and is in good standing in
each other jurisdiction in which either the ownership or use of the properties
owned or used by it, or the nature of the activities conducted by it, requires
such qualification, except where the failure to be qualified, if required, could
not result in a material liability to the Company. The Company does not have and
has never had any Subsidiaries or Affiliate companies.

SECTION 3.2       AUTHORITY OF SELLERS; NO BREACH.

                  (a) This Agreement constitutes the legal, valid, and binding
obligation of the Company and Sellers, enforceable against the Company and
Sellers in accordance with its terms. Upon the execution and delivery by Sellers
of this Agreement and the other agreements required to be delivered by Sellers,
or any of them, pursuant to Section 2.5 hereof (collectively, the " Sellers'
Closing Documents"), the Sellers' Closing Documents will, to the extent any such
Seller is a party thereto, constitute the legal, valid, and binding obligations
of Sellers, enforceable against Sellers in accordance with their respective
terms. The Company and Sellers each have the absolute and unrestricted right,
power, authority, and capacity to execute and deliver this Agreement and, to the
extent any such Seller is a party thereto, the Sellers' Closing Documents, and
to perform their respective obligations under this Agreement and, to the extent
any such Seller is a party thereto, the Sellers' Closing Documents.

                                       14
<PAGE>   15

                  (b) Except as set forth in Schedule 3.2, neither the execution
and delivery of this Agreement nor the consummation or performance of any of the
Transactions will, directly or indirectly (with or without notice or lapse of
time):

                           (i) violate any provision of the Articles of
Incorporation or Bylaws of the Company;

                           (ii) violate any laws of the United States, or any
state or other jurisdiction applicable to Sellers or the Company or require
Sellers or the Company to obtain any approval, consent or waiver of, or make any
filing with, any person or entity (governmental or otherwise) that has not been
obtained or made;

                           (iii) result in a violation or any breach of,
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, result in the acceleration of any indebtedness
under or performance required by, result in any right of termination of,
increase any amounts payable under, decrease any amounts receivable under,
change any other rights pursuant to, or conflict with, any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which any of Sellers or the Company is a party
or by which he or his, or it or its, properties is bound; or

                           (iv) result in the creation or imposition of any
lien, charge, encumbrance or restriction upon any of the Shares or any assets of
the Company.

SECTION 3.3       CAPITALIZATION.

         The authorized equity securities of the Company consists entirely of
10,000,000 shares of Common Stock, of which 104,000 shares are issued and
outstanding (the "Shares"). Sellers are, and will be on the Closing Date, the
record and beneficial owners and holders of the Shares, free and clear of any
and all liens, encumbrances, security agreements, options, claims, charges and
restrictions. Each Seller owns the number of Shares set forth opposite his/her
or its name on Exhibit A. No legend or other reference to any purported
encumbrance appears upon any certificate representing the Shares. All of the
outstanding equity securities of the Company have been duly authorized and
validly issued and are fully paid and nonassessable. There are no outstanding
warrants, stock options or other Contracts relating to the issuance, sale, or
transfer of any equity securities or other securities of the Company. None of
the outstanding equity securities or other securities of the Company was issued
in violation of the Securities Act of 1933, as amended, any state securities
laws, or any other legal requirement. The Company does not own, and has no
Contract to acquire, any equity securities or other securities of any Person or
any direct or indirect equity or ownership interest in any other business.

SECTION 3.4       FINANCIAL STATEMENTS.

                  (a) The Company has delivered to Parent and Newco: (i)
unaudited balance sheets of the Company as of December 31 in each of the years
1996, 1997 and 1998, and the related unaudited statements of operations, for
each of the fiscal years then ended, and (ii) an unaudited balance sheet of the
Company as of November 30, 1999 (the "Interim Balance Sheet") and the related
unaudited statements of operations for the eleven months then ended, excluding

                                       15
<PAGE>   16

in each case any notes thereto. Such financial statements (the "Financials") are
complete and correct, and fairly present the financial condition and the results
of operations, of the Company as at the respective dates of and for the periods
referred to in such financial statements, all in accordance with GAAP
consistently applied throughout the periods covered.

                  (b) The Financials have been prepared from, and are consistent
with, the accounting books and records of the Company. There are no material
transactions, agreements or accounts that have not been properly reflected in
the Financials and recorded in the accounting books and records of the Company
underlying the Financials. All transactions with Related Parties, including, but
not limited to, sales, purchases, loans, transfers, leasing arrangements,
guarantees and amounts receivable from or payable to Related Parties, have been
properly reflected in the Financials and recorded in the accounting books and
records of the Company. For purposes of the Financials, revenue, including sales
under fixed price contracts, has been recognized upon shipment of products, and
not on the percentage completion method or any other method. The Financials
reflect all costs and expenses incurred in connection with the business of the
Company throughout the respective periods covered. The Financials contain and
reflect the establishment and inclusion in the balance sheets, and in cost of
goods sold or operating expense, for the respective periods covered of all
appropriate accruals and reserves affecting the carrying value of the assets and
liabilities of the Company. Liabilities for amounts unpaid to suppliers are
recorded for all items included in inventories at each of the respective balance
sheet dates of the Financials, and all quantities billed to customers at those
dates are excluded from the inventory balances. Adequate provision has been made
in the Financials for all anticipated losses on contracts, including contracts
on which work has not started. Except for the liabilities reflected in the
Financials or as otherwise specifically disclosed in Schedules to this
Agreement, there are no other liabilities, obligations or gain or loss
contingencies that would be required by GAAP to be accrued or disclosed in notes
to the Financials, or considered for disclosure in notes to the Financials. The
Financials do not contain any items of extraordinary or nonrecurring income or
any other income not earned in the ordinary course of business.

SECTION 3.5       LICENSES AND PERMITS.

         The Company has received and holds all permits, registrations,
licenses, franchises, certifications and other approvals required from federal,
state or local authorities in order for the Company to conduct and operate its
business as currently conducted or operated by it and to permit the Company to
own or use its assets in the manner in which such assets are currently owned or
used including, but not limited to, a Medical Device Facility license in good
standing issued by the Federal Food and Drug Administration ("FDA"), a Medical
Device Facility license, and a Wholesale Drug Distributor license, both in good
standing, issued by the State of Texas Department of Health.

SECTION 3.6       BOOKS AND RECORDS.

         The accounting books and records, minute books, stock record books, and
other records of the Company, all of which have been made available to Parent
and Newco, are complete and correct and have been maintained in accordance with
sound business practices, including the maintenance of an adequate system of
internal controls. The minute books of the Company contain accurate and complete
records of all meetings held of, and corporate action taken by, the

                                       16
<PAGE>   17

stockholders, the Board of Directors, and committees of the Board of Directors
of the Company, and no meeting of any such stockholders, Board of Directors, or
committee has been held for which minutes have not been prepared and are not
contained in such minute books. At the Closing, all of those books and records
will be in the possession of the Company.

SECTION 3.7       TITLE TO PROPERTIES; ENCUMBRANCES.

         Schedule 3.7 contains a complete and accurate list of all real property
leaseholds, or other interests in real property, owned by the Company. The
Company does not own any real property. The Company owns all the properties and
assets that it purports to own, including all of the properties and assets
reflected in the Financials (except for items of Inventory sold since the date
of the Interim Balance Sheet, in the ordinary course of business and consistent
with past practice). Except as disclosed on Schedule 3.7, all properties and
assets reflected in the Financials are free and clear of all encumbrances or
limitations of any nature. Each lease (a "Lease") of real property to which the
Company is a party is valid, binding, enforceable and in full force and effect.
No default or breach has occurred under any Lease, and no event has occurred
which, with the passage of time or giving of notice or both, would constitute a
breach or default thereunder or would cause the acceleration of any obligation
of any party thereto or the creation of a lien or encumbrance upon any asset of
the Company.

SECTION 3.8       CONDITIONS AND SUFFICIENCY OF ASSETS.

         The buildings, plants, structures, and equipment owned or used by the
Company are structurally sound, are in good operating condition and repair, and
are adequate for the uses to which they are being put, and none of such
buildings, plants, structures, or equipment is in need of maintenance or
repairs. The building, plants, structures, and equipment of the Company are
sufficient for the continued conduct of the Company's businesses after the
Closing in substantially the same manner as conducted prior to the date hereof.

SECTION 3.9       ACCOUNTS RECEIVABLE.

         All accounts receivable of the Company that are reflected on the
Interim Balance Sheet or on the accounting records of the Company as of the
Closing Date (collectively, the "Accounts Receivable") represent or will
represent valid obligations arising from sales actually made or services
actually performed in the ordinary course of business. Each of the Accounts
Receivable either has been or will be collected in full, without any set-off.
There is no contest, claim or right of set-off under any Contract with any
obligor of an Accounts Receivable relating to the amount or validity of such
Accounts Receivable.

SECTION 3.10      INVENTORY.

         All inventories of the Company that are reflected on the Interim
Balance Sheet or on the accounting records of the Company as of the Closing Date
(collectively, the "Inventories") are stated at the lower of cost or market,
cost being determined on the actual cost basis, and due provision has been made
to reduce all slow-moving, obsolete, or unusable inventories to their estimated
useable or scrap values. Except for finished goods inventory with a carrying
value of less than $25,000, all of the Inventories consist of raw materials and
work in process inventories purchased or built by the Company only in support of
firm customer backlog.

                                       17
<PAGE>   18

SECTION 3.11      BACKLOG; CUSTOMERS.

                  (a) Schedule 3.11(a) sets forth a complete and correct listing
of the amount of firm customer backlog by customer as of the Closing Date, and
calendar year of scheduled delivery. As used in this Agreement, "firm customer
backlog" means purchase orders or contracts from customers of the Company with
fixed prices, fixed quantities and fixed delivery dates. The Company has not
received any notification from any customer that any of such firm customer
backlog may be canceled or rescheduled.

                  (b) Except as set forth on Schedule 3.11(b), the Company has
not received notice from any customers that any such customer intends materially
to reduce the purchase of products from the Company in the future, relative to
its historic past practice.

SECTION 3.12      NO UNDISCLOSED LIABILITIES.

         Except as set forth in Schedule 3.12, the Company has no liabilities or
obligations of any nature (whether known or unknown and whether absolute,
accrued, contingent, or otherwise) except for liabilities or obligations
reflected or reserved against in the Interim Balance Sheet and current
liabilities incurred in the ordinary course of business since the date thereof.

SECTION 3.13      ABSENCE OF CERTAIN CHANGES.

                  (a) Except as disclosed on Schedule 3.13, since December 31,
1998, there has not occurred:

                           (i) Any adverse change in the assets, liabilities
(whether absolute, accrued, contingent or otherwise), condition (financial or
otherwise), results of operations, business or prospects of the Company not
reflected in the Financials and that has resulted in or may result in a material
loss to the Company;

                           (ii) Any guarantee by the Company of any obligation,
or any mortgage, pledge or encumbrance on any of the properties or assets of the
Company;

                           (iii) Any amendment or modification of any Material
Contract, or any termination of any agreement that would have been a Material
Contract were such agreement in existence on the date hereof;

                           (iv) Any transaction by the Company, whether or not
covered by the foregoing, not in the ordinary course of business, including,
without limitation, any purchase or sale of any assets;

                           (v) Any alteration in the manner of keeping the
books, accounts or records of the Company, or in the accounting principles,
policies or procedures therein reflected;

                           (vi) Any loss or threatened loss of a customer or
customers;

                           (vii) Any material increase in the salary, wages,
vacation pay, sick pay, bonuses or other compensation of any employee,
consultant, representative or agent;

                                       18
<PAGE>   19

                           (viii) Any transactions involving any of the Sellers
or their Affiliates, and the Company;

                           (ix) Any change in the capital structure of the
Company, including any grant or exercise of warrants, options or other rights to
acquire stock, the issuance or repurchase or redemption of any shares of capital
stock or otherwise, or the declaration or payment of any dividends or
distributions;

                           (x) Any payment of any fees or other compensation to
directors;

                           (xi) Any loans or guarantees of indebtedness, or the
incurrence of any indebtedness generally, by the Company;

                           (xii) Any material damage or destruction to, or loss
of, any assets or property owned, leased or used by the Company (whether or not
covered by insurance); or

                           (xiii) Any agreement or commitment to do any of the
things described in the preceding subsections (i) - (xii) of this Section
3.13(a).

                  (b) In the event of a change in accounting principles,
policies or procedures, Schedule 3.13 sets forth a complete and correct
description of each such change in accounting principles, policies and
procedures, including, but not limited to, the date of such change, the reason
for such change, a description of such change and the effect of such change on
the financial results of the Company as reflected in the Financials.

SECTION 3.14      PROGRESS PAYMENTS.

         The Company has not received any progress payments, milestone payments,
advance payments, deposits or other similar payments from customers
(collectively, "Progress Payments") with respect to the Contracts. All Progress
Payment requests submitted by the Company have been in material compliance with
the contractual terms and with applicable U.S. Government laws and regulations,
including but not limited to, the FAR and related cost accounting standards.

SECTION 3.15      ENVIRONMENTAL MATTERS.

                  (a) The Company has complied and is in compliance in all
material respects with all applicable Environmental Protection Laws pertaining
to any of its properties and assets at which the business of the Company has
ever been conducted, and the use and ownership thereof. No violation by the
Company is being alleged of any applicable Environmental Protection Law relating
to any of the properties and assets at which the business of the Company has
ever been conducted or the use or ownership thereof.

                  (b) Neither the Company nor any other Person (including any
tenant or subtenant) has caused or taken any action that will result in, and the
Company is not subject to, any liability or obligation on the part of the
Company or any of its Affiliates, relating to (i) the environmental conditions
on, under, or about the Real Property or other properties or assets owned,
leased, operated or used by the Company or any predecessor thereto at the
present time

                                       19
<PAGE>   20

or in the past including without limitation, the air, soil and groundwater
conditions at such properties or (ii) the past or present use, management,
handling, transport, treatment, generation, storage, disposal or release of any
Regulated Substance.

                  (c) The Company has disclosed and made available to Parent and
Newco all information, including, without limitation, all studies, analyses and
test results, in the possession, custody or control of or otherwise known to the
Company relating to (i) the environmental conditions on, under or about the Real
Property or other properties or assets owned, leased, operated or used by the
Company or any predecessor in interest thereto at the present time or in the
past, and (ii) any Regulated Substance used, managed, handled, transported,
treated, generated, stored, disposed of or released by the Company or any other
Person in connection with the use or operation of any of the business,
properties or assets of the Company.

SECTION 3.16      INTANGIBLE PERSONAL PROPERTY.

         Schedule 3.16 sets forth (i) a complete and correct list of each
patent, patent application, copyright, copyright application, trademark,
trademark application (in any such case, whether registered or to be registered
in the United States of America or elsewhere), process, invention, trade secret,
trade name, computer program, formula and customer list (collectively, the
"Intangible Personal Property") owned by or used in the business of the Company,
and (ii) a complete and correct list of all licenses or similar agreements or
arrangements ("Licenses") to which the Company is a party either as licensee or
licensor for each such item of Intangible Personal Property. The conduct by the
Company of its businesses, and the manufacture and sale by the Company of its
products, does not conflict with, infringe upon or violate any patent,
copyright, trademark, registration or other intellectual property right of any
other person or entity.

SECTION 3.17      LABOR AND EMPLOYMENT AGREEMENT.

         The Company is not a party to or bound by any collective bargaining
agreement and there are no labor unions or other organizations representing,
purporting to represent or attempting to represent any employees of the Company.
Since January 1, 1996, there has not occurred or, to the knowledge of the
Company, have there been threatened any material strike, slowdown, picketing,
work stoppage, concerted refusal to work overtime or other similar labor
activity. There are no labor disputes currently subject to any grievance
procedure, arbitration or litigation and there is no representation petition
pending, or to the knowledge of the Company, threatened. The Company has
complied with all provisions of applicable law pertaining to the employment of
employees, including, without limitation, all such laws relating to labor
relations, the Consolidated Omnibus Budget Reconciliation Act (commonly known as
"COBRA"), equal employment, fair employment practices, entitlements, prohibited
discrimination or other similar employment practices or acts, except for any
failure so to comply that, individually or together with all such other
failures, has not and will not result in a material liability or obligation on
the part of the Parent, Newco or the Company, and has not had or resulted in,
and will not have or result in, an adverse effect on the business, operations or
prospects of the Company.

                                       20
<PAGE>   21

SECTION 3.18      EMPLOYEE BENEFIT PLANS; ERISA.

                  (a) Schedule 3.18 lists, with respect to the Company, any
subsidiary of the Company and any trade or business (whether or not
incorporated) that is treated as a single employer with the Company within the
meaning of Section 414(b), (c), (m) or (o) of the Code (an "ERISA Affiliate"),
whether written or unwritten, (i) all employee benefit plans (as defined in
Section 3(3) of ERISA), (ii) each loan to a non-officer employee in excess of
$5,000, any 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 or arrangements,
(iii) all bonus, pension, profit sharing, savings, deferred compensation or
incentive plans, programs or arrangements, (iv) all other fringe or employee
benefit plans, programs or arrangements that apply to senior management of the
Company and that do not generally apply to all employees, and (v) all current or
former employment agreements, executive compensation or severance agreements for
the benefit of, or relating to, any present or former employee, consultant or
director of the Company (together, the "Company Employee Plans").

                  (b) The Company has furnished to Parent and Newco a copy of
(i) each of the Company Employee Plans and related plan documents (including
trust documents, insurance policies or contracts, funding arrangements, employee
booklets, summary plan descriptions, amendments, other authorizing documents,
summaries of material modifications, any material employee communications
relating thereto and, if unwritten, a summary of plan provisions), (ii) with
respect to each Company Employee Plan that is subject to ERISA reporting
requirements, copies of the Form 5500 for the three most recent plan years,
including all schedules attached thereto and actuarial reports, if any, (iii)
the most recent determination letter received from the IRS, (iv) the most recent
application for a determination letter filed with the IRS, (v) the latest
actuarial valuations, (vi) the latest financial statements, and (vii) in the
case of any stock options or stock appreciation rights issued under any Company
Employee Plan, a list of holders, dates of grant, number of shares, the exercise
price per share and dates exercisable.

                  (c) Any Company Employee Plan intended to be qualified under
Sections 401(a) or 501(c)(9) of the Code has either obtained from the IRS a
favorable determination letter as to its qualified status under the Tax Reform
Act of 1986 and subsequent legislation, or has applied to the IRS for such a
determination letter prior to the expiration of the requisite period under
applicable Treasury Regulations or IRS pronouncements in which to apply for such
determination letter and to make any amendments necessary to obtain a favorable
determination, and nothing has occurred since the issuance of each such letter
which could reasonably be expected to cause the loss of the tax-qualified status
of any Company Employee Plan subject to Code Sections 401(a) or 501(c)(9).

                  (d) With respect to each and every Company Employee Plan, (i)
there are no promises express or implied to provide 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, (iii) each 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), and the Company and each
subsidiary or ERISA

                                       21
<PAGE>   22

Affiliate have performed all obligations required to be performed by them under,
are not in any respect in default under or violation of, and have no knowledge
of any default or violation by any other party to, any of the Company Employee
Plans, (iv) neither the Company nor any subsidiary or ERISA Affiliate is subject
to any liability or penalty under Sections 4976 through 4980 of the Code or
Title I of ERISA with respect to any of the Company Employee Plans, (v) all
contributions required to be made by the Company or any subsidiary or ERISA
Affiliate to any Company Employee Plan have been made on or before their due
dates and a reasonable amount has been accrued for contributions to each Company
Employee Plan for the current plan years, (vi) 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 the regulations to Section
4043 of ERISA) nor any event described in Section 4062, 4063 or 4041 of ERISA
has occurred, and (vii) no Company Employee Plan is covered by, and neither the
Company nor any subsidiary or ERISA Affiliate has incurred or expects to incur
any liability under, Title IV of ERISA or Section 412 of the Code. With respect
to each Company 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
plan within the meaning of Section 3(1) of ERISA, the Company 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 all notices and reports to employees required to be filed,
distributed or posted with respect to each such Company Employee Plan. No suit,
administrative proceeding, action or other litigation has been brought, or to
the best knowledge of the Company is threatened, against or with respect to any
Company Employee Plan, including any audit or inquiry by the IRS or United
States Department of Labor. Neither the Company nor any Company subsidiary or
other ERISA Affiliate is a party to, or has made any contribution to or
otherwise incurred any obligation or liability under, any "multiemployer plan"
as defined in Sections 3(37) and 4001(a)(3) of ERISA.

                  (e) With respect to any Group Health Plan (as defined in
Section 5000(b)(1) of the Code) maintained by the Company or any subsidiary or
ERISA Affiliate, each such plan has been operated in compliance with the
provisions of Part 6 of Title I of ERISA and Sections 4980B, 9801 and 9802 of
the Code. The Company is not obligated to provide health care or other welfare
benefits of any kind to its retired or former employees or their dependents, or
to any person not actively employed by it, pursuant to any agreement or
understanding.

                  (f) There are no contracts, agreements, plans or arrangements
covering any of the Company's employees with "change of control" or similar
provisions. The consummation of the transactions contemplated by this Agreement
will not (i) entitle any current or former employee or other service provider of
the Company, any Company subsidiary or any other ERISA Affiliate to severance
benefits or any other payment, or (ii) accelerate the time of payment or
vesting, or increase the amount of compensation due any such employee or service
provider. There is no contract, agreement, plan or arrangement covering the
Company or any employee, that individually or collectively could give rise to
the payment of any amount that would not be deductible pursuant to Section 280G
of the Code.

                  (g) There has been no amendment to, written interpretation or
announcement (whether or not written) by the Company, any Company subsidiary or
other ERISA Affiliate relating to, or change in participation or coverage under,
any Company Employee Plan that would materially increase the expense of
maintaining such Plan above the level of expense

                                       22
<PAGE>   23

incurred with respect to that Plan for the most recent fiscal year included in
the Company's financial statements.

SECTION 3.19      MATERIAL CONTRACTS AND RELATIONSHIPS.

                  (a) Except for agreements specifically identified on other
Schedules, Schedule 3.19(a) sets forth a complete and correct list of the
following:

                           (i) All agreements (or groups of agreements with one
or more related entities) between the Company and any customer or supplier in
excess of $10,000 and all agreements and blanket purchase orders extending
beyond one year;

                           (ii) All credit and loan agreements, promissory
notes, and other obligations in respect of borrowed money;

                           (iii) All guarantees, letters of credit, performance
or other bonds, and any other financial instruments;

                           (iv) All general or special powers of attorney;

                           (v) All agreements that create or continue any claim,
lien, charge or encumbrance against, or right of any third party with respect
to, any of the assets of the Company;

                           (vi) All agreements by which the Company leases any
capital equipment and all other leases involving the Company as lessee or
lessor;

                           (vii) All agreements to which the Company is a party
not in the ordinary course of business;

                           (viii) All agreements to which the Company, on the
one hand, and any of the Company's Affiliates (all such Affiliates being
collectively referred to herein as "Related Parties"), on the other hand, are
parties or by which they are bound that relate to or are connected in any way
with the Company or its operations, business or prospects;

                           (ix) All contracts or commitments relating to
commission arrangements with others;

                           (x) All license agreements, whether as licensor or
licensee;

                           (xi) All agreements between the Company and its sales
representatives, distributors and dealers;

                           (xii) All agreements between the Company and its
customers relating to volume rebates or price reductions;

                           (xiii) All other agreements to which the Company is a
party or by which it is bound and that involve $10,000 or more or that extend
for a period of one year or more; and

                                       23
<PAGE>   24

                           (xiv) All other agreements to which the Company is a
party or by which it is bound and that are or may be material to the assets,
liabilities (whether absolute, accrued, contingent or otherwise), condition
(financial or otherwise), results of operations, business or prospects of the
Company.

         As used in this Section 3.19, the word "agreement" includes both oral
and written contracts, leases, understandings, arrangements and all other
agreements. The term "Material Contracts" means the agreements of the Company
required to be disclosed on Schedule 3.19(a), including agreements specifically
identified in other Schedules.

                  (b) All of the Material Contracts are in full force and effect
and will remain so through the Closing, and are valid and binding and
enforceable in accordance with their terms in favor of the Company and against
any third party that is a party thereto, except for bankruptcy and similar laws
affecting the enforcement of creditors rights generally. There are no
liabilities of any party to any Material Contract arising from any breach or
default of any provision thereof and no event has occurred that, with the
passage of time or the giving of notice or both, would constitute a breach or
default by any party thereto.

                  (c) The Company has fulfilled all material obligations
required pursuant to each Material Contract to have been performed by the
Company prior to the date hereof, and to the knowledge of the Company the
Company will be able to fulfill, when due, all of its obligations under the
Material Contracts that remain to be performed after the date hereof.

                  (d) The Company has maintained and continues to maintain good
relations with its customers, agents and suppliers, and to the knowledge of the
Company such relations will not in the foreseeable future deteriorate or suffer
any changes adverse to the Company, whether as a result of the Transactions or
otherwise.

SECTION 3.20      ABSENCE OF CERTAIN BUSINESS PRACTICES.

         Neither the Company nor any employee, agent or other person acting on
its behalf, has, directly or indirectly, given or agreed to give any gift or
similar benefit to any customer, supplier, competitor or governmental employee
or official (domestic or foreign): (i) that would subject the Company to any
damage or penalty in any civil, criminal or governmental litigation or
proceeding, or (ii) the past non-payment of which would have had a material
adverse effect on the Company.

SECTION 3.21      TRANSACTIONS WITH RELATED PARTIES.

         Except as set forth on Schedule 3.21, (i) there have been no
transactions by the Company with any Related Party since December 31, 1996, (ii)
there are no agreements or understandings now in effect between the Company and
any Related Party and (iii) no expenses of the Company have been paid by a
Related Party, and no non-business expenses of a Related Party have been paid by
the Company. In addition, none of the transactions with the Company or Related
Parties that have occurred since December 31, 1996 has provided to the Company
assets, income, financing or business on a basis significantly more or less
favorable than that available from unaffiliated persons. Schedule 3.21 also (i)
states the amounts due from the Company to any Related Party and the amounts due
from any Related Party to the Company, (ii) describes the

                                       24
<PAGE>   25

transactions out of which such amounts due arose and (iii) describes any
interest of any Related Party in any supplier or customer of, or any other
entity that has had business dealings with, the Company since December 31, 1996.
After the Closing, there will be no obligations or other liabilities, including
inter-company obligations, between the Company, on the one hand, and any Related
Party, on the other hand, other than as specifically contemplated by this
Agreement.

SECTION 3.22      COMPLIANCE WITH LAWS.

         The operation, conduct and ownership of the property or business of the
Company is being, and at all times have been, conducted, in all material
respects, in full compliance with all federal, state, local and other (domestic
and foreign) laws, rules, regulations and ordinances and all judgments and
orders of any court, arbitrator or governmental authority applicable to the
Company. Without limiting the foregoing, the operation, conduct and ownership of
the property or business of the Company is being, and has at all times been,
conducted in full compliance with all laws, rules and regulations relating to
United States government contracts and subcontracts, including but not limited
to the FAR and related cost accounting standards. The Company has not engaged in
defective pricing with respect to United States government contracts or
subcontracts.

SECTION 3.23      REGULATORY APPROVALS.

         The Company is in compliance with Federal regulations governing the
manufacture and distribution of medical devices, including but not limited to:
registration and listing pursuant to 21 CFR 801; Quality procedures pursuant to
21 CFR 820; Medical Device Reporting pursuant to 21 CFR 803; device clearances
for all products sold pursuant to 21 CFR 807 or compliance with exemptions
permitted thereunder. Schedule 3.23(a) sets forth all Notices of Inspections,
(FD482) issued by the Federal FDA or the State of Texas Health Department, and
all resultant Inspectional Observations issued, (FD483). Schedule 3.23(b) sets
forth all Letters of Substantial Equivalence issued by FDA on products sold, or
otherwise promoted, by the Company.

SECTION 3.24      LITIGATION.

         Except as set forth on Schedule 3.24, there is, and during the past
three (3) years there has been, no legal, administrative, arbitration or other
proceeding, or any governmental investigation pending or, to the knowledge of
the Company, threatened against or otherwise affecting the Company, or any of
its assets, and to the best knowledge of the Company there is no fact that might
reasonably be expected to form the basis for any such proceeding or
investigation.

SECTION 3.25      TAXES.

         Except as set forth on Schedule 3.25:

                  (a) The Company has timely filed all Tax returns and reports
required to have been filed by it for all taxable periods ending on or prior to
the date hereof, and has paid all Taxes as due to any taxing authority with
respect to all taxable periods ending on or prior to the date hereof, or
otherwise attributable to all periods prior to the date hereof. The Tax returns
and reports filed are true and correct in all material respects and reflect
accurately all liability for Taxes for the periods covered thereby;

                                       25

<PAGE>   26
            (b) The Company has not received notice that the IRS or any other
taxing authority has asserted against it any deficiency or claim for additional
Taxes in connection therewith;

            (c) All Tax deficiencies asserted or assessed against the Company
have been paid or finally settled and no issue has been raised by the IRS or any
other taxing authority in any examination which, by application of the same or
similar principles, reasonably could be expected to result in a proposed
deficiency for any other period not so examined. Further, no state of facts
exists or has existed which would constitute grounds for the assessment of any
liability for Taxes with respect to periods which have not been examined by the
IRS or any other taxing authority;

            (d) There is no pending or, to the best knowledge of the Company,
threatened action, audit, proceeding, or investigation with respect to: (i) the
assessment or collection of Taxes or (ii) a claim for refund made by the Company
with respect to Taxes previously paid;

            (e) All amounts that are required to be collected or withheld by the
Company, or with respect to Taxes of the Company, have been duly collected or
withheld; all such amounts that are required to be remitted to any taxing
authority have been duly remitted;

            (f) The Company has not waived any statute of limitations with
respect to the assessment of any Tax; and

            (g) There are no liens for Taxes due and payable upon any assets of
the Company.

SECTION 3.26 INSURANCE.

      Schedule 3.26 sets forth a complete and correct list of all insurance
policies and of all claims made by the Company on any liability or other
insurance policies (or to the extent the Company is self insured that would have
been made on such policies) during the past five years. No notice or other
communication has been received by the Company from any insurance company within
the five years preceding the date hereof canceling or materially amending or
materially increasing the annual or other premiums payable under any of its
insurance policies, and, to the best knowledge of the Company, no such
cancellation, amendment or increase of premiums is threatened.

SECTION 3.27 NO BROKERAGE FEES.

      No Person is entitled to any brokerage or finder's fee or other commission
from Sellers or the Company in respect of this Agreement or the Transactions.

SECTION 3.28 PRODUCT WARRANTY AND LIABILITY.

      Each product designed, used, manufactured, supplied, sold or leased by the
Company and all services performed by the Company have been in conformity with
all applicable contractual commitments and all express and implied warranties,
and the Company has no liability, and there is no basis for any present or
future action, suit or proceeding giving rise to any liability, for

                                       26
<PAGE>   27
replacement or repair thereof or other damages in connection therewith, subject
only to returns of product for warranty in the ordinary course of business
consistent with past experience. The Company has no liability arising out of any
injury to persons or property as a result of any products of the Company
designed, used, manufactured, supplied, sold or leased or any services relating
to or in connection with such products. The Company has not received any notice
that an action, suit or proceeding has been, or in the future may be, made
alleging that products of the Company or services relating to or in connection
with such products are or were defective in any way.

SECTION 3.29 CONSENTS AND APPROVALS.

      Except as set forth on Schedule 3.29, the execution and delivery of this
Agreement by Sellers, and the Company do not, and the performance of the
Transactions contemplated by this Agreement by Sellers, and the Company will
not, require any filing with or notification to, or any consent, approval,
authorization or permit from, any governmental or regulatory authority or any
other Person.

SECTION 3.30 BANK ACCOUNTS.

       Schedule 3.30 is a true and complete list of all accounts maintained by
the Company with any bank, brokerage house or other financial institution. Such
Schedule 3.30 lists for each such account the name and address of the financial
institution, the name and telephone number of the principal contact person at
such institution, the nature of the account, the account number, the name of the
account holder, the names of each person with authority to draw on such account
or to have access to such account, and any passwords or other information
necessary to provide access to such account or to change the persons authorized
to draw on the account.

SECTION 3.31 SECURITIES MATTERS.

            (a) Sellers understand that (i) neither the Stock Consideration
issued by Parent, nor the offer and sale thereof, have been registered or
qualified under the Securities Act of 1933, as amended, or any state securities
or "Blue Sky" laws, on the ground that the sale provided for in this Agreement
and the issuance of stock hereunder is exempt from registration and
qualification under Section 4(2) of the Securities Act of 1933, as amended, and
(ii) Parent and Newco's reliance on such exemptions is predicated on Sellers'
representations set forth herein.

            (b) The Sellers acknowledge that an investment in Parent involves a
high degree of risk, lack of liquidity and substantial restrictions on
transferability and that Sellers may lose their entire investment in the Stock
Consideration issued by Parent (the "SECURITIES").

            (c) Parent has made available to Sellers or Sellers' advisors
information for the purpose of evaluating the merits and risks of the investment
in the Securities, and Sellers have received from Parent all information
requested. Sellers have had an opportunity to ask questions and receive answers
from Parent regarding the terms and conditions of the offering of the Securities
and the business, properties, plans, prospects, and financial condition of
Parent and

                                       27
<PAGE>   28
to obtain additional information as Sellers have deemed appropriate for purposes
of investing in the Securities pursuant to this Agreement.

            (d) Sellers, personally or through advisors, have expertise in
evaluating and investing in private placement transactions of securities of
companies in a similar stage of development to Parent and have sufficient
knowledge and experience in financial and business matters to assess the
relative merits and risks of an investment in Parent. In connection with the
purchase of the Securities, Sellers have relied solely upon independent
investigations made by Sellers, and have consulted its own investment advisors,
counsel and accountants. Sellers have adequate means of providing for current
needs and personal contingencies, and have no need for liquidity and can sustain
a complete loss of the investment in the Securities.

            (e) The Securities to be issued by Parent hereunder will be acquired
for Sellers' own account(s), for investment purposes, not as a nominee or agent,
and not with a view to or for sale in connection with any distribution of the
Securities in violation of applicable securities laws.

            (f) Sellers understand that no federal or state agency has passed
upon the Securities or made any finding or determination as to the fairness of
the investment in the Securities.

            (g) Neither the Company nor Sellers have received any general
solicitation or general advertising concerning the Securities, nor is the
Company or any Seller aware of any such solicitation or advertising.

SECTION 3.32 INDEBTEDNESS.

      Schedule 3.32 lists each person or entity that owns any direct or indirect
debt interest (other than accounts payable incurred in the ordinary course of
the Company's business) in the Company (including, without limitation, any
indebtedness for borrowed money, whether or not evidenced by a note or other
written instrument) and a description of each such debt interest.

SECTION 3.33 DISCLOSURE.

      The information provided by Sellers or the Company in connection with this
Agreement, including, without limitation, the schedules hereto, and in any other
writing pursuant hereto does not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated herein or
therein or necessary to make the statements and facts contained herein or
therein, in light of the circumstances under which they are made, not false or
misleading. Copies of all documents heretofore or hereafter delivered or made
available by Sellers or the Company to Parent or Newco pursuant hereto were or
will be complete and accurate records of such documents.

                                       28
<PAGE>   29
                                   ARTICLE IV
               REPRESENTATIONS AND WARRANTIES OF PARENT AND NEWCO

      Parent and Newco hereby represent and warrant to Sellers that:

SECTION 4.1 ORGANIZATION.

      Parent and Newco are duly organized, validly existing and in good standing
under the laws of their respective states of incorporation with full corporate
power and authority to own or lease their properties and to conduct their
business in the manner and in the places where such properties are owned or
leased or such business is currently conducted. Parent and Newco are qualified
to do business and are in good standing in each other jurisdiction in which
either the ownership or use of the properties owned or used, or the nature of
the activities conducted, requires such qualification, except where the failure
to be qualified, if required, could not result in a material liability for
Parent or Newco.

SECTION 4.2 AUTHORITY OF PARENT AND NEWCO.

      Parent and Newco have all necessary authority and power to enter into this
Agreement and to carry out the Transactions contemplated hereby. The execution,
delivery and performance of this Agreement by Parent and Newco and the
consummation of the Transactions contemplated hereby have been duly authorized
by all necessary corporate action and no other action on the part of Parent or
Newco is required in connection therewith. This Agreement constitutes a valid
and binding obligation of Parent and Newco, enforceable in accordance with its
terms. The execution, delivery and performance of this Agreement does not, and
the performance of the Transactions contemplated hereby will not, directly or
indirectly:

            (i) violate any provision of the Articles of Incorporation or the
Bylaws of Parent or Newco;

            (ii) violate any laws of the United States, or any state or other
jurisdiction applicable to Parent or Newco or require Parent or Newco to obtain
any approval, consent or waiver of, or make any filing with, any person or
entity (governmental or otherwise) that has not been obtained or made; or

            (iii) result in a violation or any breach of, constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, result in the acceleration of any indebtedness under or performance
required by, result in any right of termination of, increase any amounts payable
under, decrease any amounts receivable under, change any other rights pursuant
to, or conflict with, any material note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which Parent or Newco is a party or by which it or its properties is bound.

SECTION 4.3 NO BROKERAGE FEES.

      No Person is entitled to any brokerage or finder's fee or other commission
from Parent or Newco in respect of this Agreement or the Transactions.

                                       29
<PAGE>   30
SECTION 4.4 STOCK CONSIDERATION.

      When issued and delivered to Sellers as contemplated hereunder, the Stock
Consideration will be duly authorized, validly issued, fully paid and
nonassessable, free and clear of any liens, claims or encumbrances attributable
to Parent or Newco.

SECTION 4.5 DISCLOSURE.

      The information provided by Parent and Newco in this Agreement and in any
other writing furnished pursuant hereto does not and will not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated herein or therein or necessary to make the statements and facts contained
herein or therein, in light of the circumstances under which they are made, not
false or misleading. Copies of all documents heretofore or hereafter delivered
or made available by Parent or Newco to Sellers pursuant hereto were or will be
complete and accurate records of such documents.

SECTION 4.6 CONSENTS AND APPROVALS.

      Except as set forth on Schedule 4.6, the execution and delivery of this
Agreement by Parent and Newco does not, and the performance of the transactions
contemplated by this Agreement by Parent and Newco will not, require any filing
with or notification to, or any consent, approval, authorization or permit from,
any governmental or regulatory authority or any other Person, except where the
failure to make or obtain any such filing, notification, consent, approval,
authorization or permit would not have a material adverse effect on the
aggregate business and operations of Parent and Newco.

SECTION 4.7 KNOWLEDGE AND EXPERTISE.

      Parent and Newco acknowledge that each has sufficient knowledge and
expertise in business and financial matters to evaluate the merits and risks
associated with the transactions contemplated by this Agreement. Parent and
Newco each have made its respective decisions to enter into this Agreement and
to consummate the "Transactions" without relying upon any express or implied
warranties and representations from Sellers, Company, and Sellers except as set
forth in this Agreement.

                                    ARTICLE V
                      CERTAIN AGREEMENTS AND UNDERSTANDINGS

SECTION 5.1 COLLECTION OF OTHER ASSETS.

      Subsequent to the Closing, Sellers agree that they will promptly transfer
or deliver to Parent and Newco from time to time, any assets, cash or other
property that Sellers may discover or receive with respect to any contracts,
commitments, sales orders, purchase orders or any other items of the Company.

                                       30
<PAGE>   31
SECTION 5.2 CONDUCT OF BUSINESS.

      From the date hereof to the Closing Date, except as expressly permitted or
required by this Agreement or as otherwise consented to by Parent and Newco in
writing, the Company will and, Sellers will cause the Company to:

            (a) carry on the business of the Company in, and only in, the
ordinary course, in substantially the same manner as heretofore conducted, and
use all reasonable efforts to preserve intact its present business organization,
maintain its properties in good operating condition and repair, keep available
the services of its present significant employees, and preserve its relationship
with customers, suppliers and others having business dealings with it, to the
end that the goodwill and going business of the Company shall be in all material
respects unimpaired following the Closing;

            (b) not offer any payment discounts to customers or take any other
actions to collect accounts receivable other than in the ordinary course of
business consistent with prior practice;

            (c) purchase raw materials, supplies and inventory, and build work
in process inventory in the ordinary course of business consistent with prior
action, and as necessary to timely deliver product to customers under firm
customer backlog and with respect to orders anticipated from customers;

            (d) not pay any salary, wages, vacation pay, sick pay, bonuses or
other compensation except in the ordinary course of business consistent with
prior practice;

            (e) pay accounts payable and other obligations of the Company when
they become due and payable in the ordinary course of business consistent with
prior practice;

            (f) perform in all material respects all of its obligations under
all Contracts and other agreements and instruments relating to or affecting the
Company, and comply in all material respects with all laws applicable to the
Company in its business or operations;

            (g) not enter into or assume any material agreement, contract or
instrument relating to the Company, or enter into or permit any material
amendment, supplement, waiver or other modification in respect thereof;

            (h) not grant (or commit to grant) any increase in the compensation
(including incentive or bonus compensation) of any employee, director,
consultant or agent of the Company or institute, adopt or amend (or commit to
institute, adopt or amend) any compensation or benefit plan, policy, program or
arrangement or collective bargaining agreement applicable to any such employee,
director, consultant, or agent;

            (i) not sell, transfer or convey any of the Company's assets except
in the ordinary course of business;

            (j) not make any dividend or distribution to any holder of the
Shares or repurchase or redeem any of the Shares; and

                                       31
<PAGE>   32
            (k) not take any action or omit to take any action, which action or
omission would result in a breach of any of the representations and warranties
set forth in Sections 3.12 or 3.24.

SECTION 5.3 NO SOLICITATION.

            (a) On and after the date hereof, neither the Company nor any
Seller, nor will the Company permit any of its officers, employees,
shareholders, agents, or representatives (including, without limitation,
investment bankers, attorneys and accountants) directly or indirectly, to (i)
initiate, solicit or encourage any inquiries or proposals by, or (ii) enter into
any discussions or negotiations with, or disclose directly or indirectly any
information concerning the Company's business and properties to, or (iii) afford
any access to the Company's properties, books and records to, any corporation,
partnership, person, or other entity or group in connection with any possible
proposal (an "Acquisition Proposal") regarding a sale or transfer of any of the
Company's capital stock or a merger, consolidation or sale of all or a
substantial portion of the Company's assets, or any similar transaction (a
"Material Transaction"). The Company and/or the Sellers, as the case may be,
will provide written notice to Parent and Newco immediately if any discussions
or negotiations are sought to be initiated, any inquiry or proposal is made, or
any such information is requested with respect to an Acquisition Proposal or
potential Acquisition Proposal or if any Acquisition Proposal is received or
indicated to be forthcoming. The notice will identify the third party, the
particulars of the discussions, inquiries or proposal, and copies of all
relevant written materials.

            (b) In the event that the Company or any Seller breaches the
covenants set forth in the preceding paragraph or receives an Acquisition
Proposal during the term of this Agreement and the Company or any Seller
subsequently enters into a Material Transaction within one (1) year of the date
hereof either with the party (or an affiliate thereof) to or with whom
disclosures, discussions or negotiations were made or entered into, or the party
(or an affiliate thereof) making such Acquisition Proposal, then Parent shall,
immediately upon the execution of documentation relating to such Material
Transaction, be entitled to receive a cash payment from the Company in the
amount of Two Hundred Fifty Thousand Dollars ($250,000.00).

SECTION 5.4 ACCESS AND INFORMATION.

      So long as this Agreement remains in effect, the Company and Sellers will,
and will cause each of their respective Affiliates, accountants, counsel,
consultants, employees and agents to, give and provide Parent and Newco and
Parent and Newco's accountants, counsel, consultants, employees and agents, full
access during normal business hours to, and furnish them with all documents,
records, work papers and information with respect to, all of such Person's
properties, assets, books, contracts, commitments, reports and records relating
to the Company and its businesses and operations, as Parent and Newco shall from
time to time reasonably request for the purpose of Parent and Newco's due
diligence investigation. In addition, the Company and Sellers will permit Parent
and Newco and their accountants, counsel, consultants, employees and agents
reasonable access to such personnel of the Company during normal business hours
as may be necessary or useful to Parent and Newco in their review of the
properties, assets and business affairs of the Company and the above-mentioned
documents,

                                       32
<PAGE>   33
records and information. The Company and Sellers will keep Parent and Newco
generally informed as to the affairs of the Company.

SECTION 5.5 PUBLIC ANNOUNCEMENTS.

      Except as required by applicable law, Sellers and the Company, and each
shall not permit any Affiliate to make any public announcement in respect of
this Agreement or the transactions contemplated hereby without the prior written
consent of Parent and Newco.

SECTION 5.6 CONFIDENTIALITY.

      For purposes hereof, the Company and Sellers will keep the matters
contemplated herein and all information provided by Parent and Newco related to
Parent and Newco and the Transactions confidential, and will not provide
information about such matters to any party or use such information except to
the extent necessary to effect the transactions contemplated hereby. Parent and
Newco will keep the matters contemplated herein and all information provided by
the Company and Sellers, related to the Company and the business confidential,
and will not provide information about such matters to any party or use such
information except to the extent necessary to effect the transactions
contemplated hereby. Parent, Newco and the Company shall each cause their
respective Affiliates, officers, directors, employees, agents, and advisors to
keep confidential all information received in connection with the transactions
contemplated hereby. If this Agreement terminates without consummation of the
Closing, the Company and Sellers, Parent and Newco shall, and shall cause their
Affiliates to, each maintain the confidentiality of any information obtained
from the other in connection with the transactions contemplated hereby and
Parent or Newco's business plans (the "Information"), other than Information
that: (i) was in the public domain before the date of this Agreement or
subsequently came into the public domain other than as a result of disclosure by
the party to whom the Information was delivered; or (ii) was lawfully received
by a party from a third party free of any obligation of confidence of or to such
third party; or (iii) was already in the possession of the party prior to
receipt thereof, directly or indirectly, from the other party; or (iv) is
required to be disclosed in a judicial or administrative proceeding after giving
the other party as much advance notice of the possibility of such disclosure as
practicable so that the other party may attempt to stop such disclosure; or (v)
is subsequently and independently developed by employees of the party to whom
the Information was delivered without reference to the Information. If this
Agreement terminates without consummation of the Closing, Parent and Newco, on
the one hand, and Sellers, and the Company, on the other, shall return to the
other all material containing or reflecting the Information provided by the
other, shall not retain any copies, extracts, or other reproductions thereof or
derived therefrom, and shall thereafter refrain from using the Information and
shall maintain its confidentiality pursuant to this Agreement.

SECTION 5.7 FURTHER ACTIONS.

            (a) The Company and Sellers agree to use all reasonable good faith
efforts to take all actions and to do all things necessary, proper or advisable
to consummate the transactions contemplated hereby by the Closing Date,
including without limitation obtaining the certificates and other documents
specifically referred to in Section 2.5(a).

                                       33
<PAGE>   34
            (b) The Company and Sellers will, as promptly as practicable, file
or supply, or cause to be filed or supplied, all applications, notifications and
information required to be filed or supplied by the Company pursuant to
applicable law in connection with the transactions contemplated hereby.

            (c) The Company and Sellers as promptly as practicable, will obtain,
or cause to be obtained, all consents (including, without limitation, all
governmental approvals and any consents required under any Contract and all
consents listed on Schedule 3.29) necessary to be obtained in order to
consummate the Merger, and to permit the Surviving Corporation to continue the
business and operations of the Company after the Effective Date.

            (d) At all times prior to the Closing, the Company and Sellers shall
promptly notify Parent and Newco in writing of any fact, condition, event or
occurrence that will or may result in the failure of any of the conditions
contained in Section 6.2 to be satisfied, promptly upon either of them becoming
aware of same.

            (e) Prior to Closing, the Company and Sellers shall cause the
ownership of any assets used in the business of the Company as of the date
hereof, including any such intellectual property, owned by any Affiliate of the
Company to be transferred to the Company without encumbrance.

            (f) Prior to the Closing, the Company and Sellers shall cause the
Company to take such actions as may be necessary to terminate any Employee
Benefit Plans.

SECTION 5.8 DOCUMENT RETENTION

      Prior to the Closing Date the Company shall properly maintain its books
and records as necessary or appropriate to the filing of the Tax returns
described in this Agreement, and on or before the Closing Sellers shall cause
all such books and records and all other books and records related to the
Company's Tax returns and Tax matters to be delivered to the Parent and Newco.
Newco shall cause the Company to retain all such books and records delivered as
provided hereunder until the expiration of the statute of limitations (including
any waivers or extensions thereof) with respect to the taxable periods to which
the Tax returns relate.

                                   ARTICLE VI
                               CLOSING CONDITIONS

SECTION 6.1 CONDITIONS TO OBLIGATION OF SELLERS.

      The obligation of Sellers to consummate the transactions to be performed
by it in connection with the Closing is subject to satisfaction of the following
conditions:

            (a) The representations and warranties of Parent and Newco set forth
herein shall be true and correct at and as of the Closing Date;

                                       34
<PAGE>   35
            (b) Parent and Newco shall have fully performed and complied with
all of its covenants hereunder through the Closing;

            (c) No action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge would (i)
prevent consummation of any of the transactions contemplated by this Agreement
or (ii) cause any of the transactions contemplated by this Agreement to be
rescinded following consummation (and no such injunction, judgment, order,
decree, ruling, or charge shall be in effect);

            (d) Parent and Newco shall have delivered to Sellers a certificate
to the effect that each of the conditions specified above in Section 6.1 (a)-(c)
is satisfied in all respects;

            (e) At Closing, Parent shall deliver to Sellers the Cash
Consideration, minus the Holdback and a certificate stating the number of
Unregistered Shares that will be paid in satisfaction of the Stock
Consideration, with the actual certificates to be delivered within 5 business
days from the Closing Date;

            (f) Parent will pay off all debt listed in Schedule 6.1; and

            (g) All actions to be taken by Parent and Newco in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated hereby, as provided in Sections 2.5(b) and 2.5(c) or otherwise,
will be reasonably satisfactory in form and substance to Sellers. Sellers may
waive any condition specified in Section 6.1 if they each execute a writing so
stating at or prior to the Closing.

SECTION 6.2 CONDITIONS TO OBLIGATION OF PARENT AND NEWCO.

      The obligation of Parent and Newco to consummate the transactions to be
performed by it in connection with the Closing is subject to satisfaction of the
following conditions:

            (a) The representations and warranties of the Company and Sellers
set forth herein shall be true and correct at and as of the Closing Date;

            (b) The Company and Sellers shall have performed and complied with
all of their respective covenants hereunder through the Closing;

            (c) The Company and Sellers shall have procured all of the consents
and approvals specified in Schedule 3.29;

            (d) No action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator wherein an
unfavorable injunction, judgment, order, decree, ruling, or charge would (i)
prevent consummation of any of the transactions contemplated by this Agreement,
(ii) cause any of the transactions contemplated by this Agreement to be
rescinded

                                       35
<PAGE>   36
following consummation, or (iii) affect adversely the right of Parent or Newco
to own the Shares or to operate the businesses of the Company;

            (e) The Company and Sellers shall each have delivered to Parent and
Newco a certificate to the effect that each of the conditions specified above in
Section 6.2(a)-(d) is satisfied in all respects;

            (f) Parent and Newco shall be satisfied in their sole discretion
with the results of its due diligence investigation of all aspects of the
Company and its business; and

            (g) All actions to be taken by the Company and Sellers in connection
with consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the transactions
contemplated hereby, as provided in Section 2.5(a) or otherwise will be
reasonably satisfactory in form and substance to Parent and Newco. Parent and
Newco may waive any condition specified in this Section 6.2 if they execute a
writing so stating at or prior to the Closing.

                                   ARTICLE VII
                                 INDEMNIFICATION

SECTION 7.1 INDEMNIFICATION BY SELLERS.

      Sellers shall indemnify and hold harmless the Company and Parent and Newco
and each of their Affiliates, directors, officers, employees, attorneys, agents,
representatives, successors and assigns (collectively, the "Affiliated Parties")
in respect of any and all claims, losses, damages, liabilities, declines in
value, penalties, interest, costs and expenses (including, without limitation,
actual attorneys', accountants' and consultants' fees and other expenses,
including any such expenses incurred in connection with investigating, defending
against or settling any such claims) incurred by the Company, Parent or Newco or
their respective Affiliated Parties, in connection with, arising out of, or
resulting from, any or all of the following (collectively, "Indemnified
Damages"):

            (a) Any breach (or any allegation by a third party that, if true,
would constitute a breach) of any representation or warranty made by Sellers or
the Company in this Agreement or pursuant hereto or in any document or
instrument delivered by Sellers or the Company pursuant hereto;

            (b) Any misrepresentation contained in any written statement or
certificate furnished by any Seller or the Company pursuant to this Agreement or
in connection with the Transactions;

            (c) Any breach of any covenant, agreement or obligation of Sellers
or the Company contained in this Agreement or any other document or instrument
contemplated by this Agreement or delivered pursuant hereto;

            (d) Any litigation, administrative proceeding, investigation, claim,
suit, cause of action, dispute, audit or arbitration to the extent arising out
of or based upon the conduct of the

                                       36
<PAGE>   37
business of the Company prior to Closing (including, without limitation, the
supply, distribution and sale of all products and services); or

            (e) (i) Any Taxes of the Company or its Affiliates relating to
periods before the Closing Date in excess of the provision for unpaid taxes
reflected on the Interim Balance Sheet ("Excess Taxes"), (ii) any Taxes arising
in connection with the Transactions, (iii) any liability of the Company for
Taxes of any other Person, as a transferee or successor, by contract or
otherwise and (iv) any Taxes of the Company arising from or relating to a change
in the method of accounting from a cash and/or hybrid method to an accrual
method, whether such Taxes are owed in respect to periods before the Closing or
after the Closing.

      No claim, demand, suit or cause of action shall be brought against the
Seller under Section 7.1 unless and until the aggregate amount of claims under
this Section exceeds $10,000, in which event the Company, Parent or Newco and
their respective Affiliated Parties shall be entitled to indemnification only
for all such claims.

      None of the rights to indemnification provided by this Section 7.1 shall
be limited, mitigated or in any manner nor to any extent ameliorated or
diminished by virtue of Parent or Newco having conducted, or having had the
right to conduct, a due diligence investigation, nor by any information actually
or purportedly received or made available to Parent or Newco which is not a part
of this Agreement.

SECTION 7.2 INDEMNIFICATION BY PARENT AND NEWCO.

      Parent and Newco shall indemnify and hold harmless Sellers in respect of
any and all claims, losses, damages, liabilities, declines in value, penalties,
interest, costs and expenses (including, without limitation, actual attorneys',
accountants' and consultants' fees and other expenses, including any such
expenses incurred in connection with investigating, defending against or
settling any such claims) incurred by Sellers, in connection with, arising out
of, or resulting from, any or all of the following:

            (a) Any breach (or any allegation by a third party that, if true,
would constitute a breach) of any representation or warranty made by Parent or
Newco in this Agreement or pursuant hereto or in any document or instrument
delivered by Parent or Newco to Sellers pursuant to this Agreement;

            (b) Any misrepresentation contained in any written statement or
certificate furnished by Parent or Newco pursuant to this Agreement or in
connection with the Transactions;

            (c) Any breach of any covenant, agreement or obligation of Parent or
Newco contained in this Agreement or any other document or instrument
contemplated by this Agreement or delivered pursuant hereto; or

            (d) Any litigation, administrative proceeding, investigation, claim,
suit, cause of action, dispute, audit or arbitration to the extent arising out
of or based upon the conduct of the business of the Company after Closing.

                                       37
<PAGE>   38
            No claim, demand, suit or cause of action shall be brought against
Parent or Newco under this Section unless and until the aggregate amount of
claims under this Section exceeds $10,000, in which event, Sellers shall be
entitled to indemnification from Parent and Newco for all such claims.

SECTION 7.3 CLAIMS FOR INDEMNIFICATION.

      Whenever any claim shall arise for indemnification hereunder, the party or
parties entitled to indemnification (the "indemnified party") shall promptly
notify the party or parties obligated to provide indemnification (the
"indemnifying party") of the claim and, when known, the facts constituting the
basis for such claim; provided, however, that the failure to so notify the
indemnifying party shall not relieve the indemnifying party of its obligation
hereunder to the extent such failure does not materially prejudice the
indemnifying party. In the event of any claim for indemnification hereunder
resulting from, arising out of, or in connection with any claim or legal
proceedings by a third party, the notice to the indemnifying party shall
specify, if known, the amount or an estimate of the amount of the liability
arising therefrom.

SECTION 7.4 DEFENSE CLAIMS.

      In connection with any claim giving rise to indemnity hereunder resulting
from or arising out of any claim or legal proceeding by a person who is not a
party to this Agreement, the indemnifying party at its sole cost and expense and
with counsel reasonably satisfactory to the indemnified party may, upon written
notice to the indemnified party, assume the defense of any such claim or legal
proceeding if:

            (a) the indemnifying party acknowledges to the indemnified party
in writing, within fifteen (15) calendar days after receipt of notice from the
indemnified party, its obligations to indemnify the indemnified party with
respect to all elements of such claim;

            (b) the indemnifying party provides the indemnified party with
evidence reasonably acceptable to the indemnified party that the indemnifying
party will have the financial resources to defend against such third-party claim
and fulfill its indemnification obligations hereunder;

            (c) the third-party claim involves only money damages and does not
seek an injunction or other equitable relief; and

            (d) settlement or an adverse judgment of the third-party claim is
not, in the good faith judgment of the indemnified party, likely to establish a
pattern or practice adverse to the continuing business interests of the
indemnified party.

      The indemnified party shall be entitled to participate in (but not
control) the defense of any such action, with its counsel and at its own
expense; provided, however, that if there are one or more legal defenses
available to the indemnified party that conflict with those available to the
indemnifying party, or if the indemnifying party fails to take reasonable steps
necessary to defend diligently the claim after receiving notice from the
indemnified party that it believes the indemnifying party has failed to do so,
the indemnified party may assume the defense of such claim; provided, further,
that the indemnified party may not settle such claim without the prior

                                       38
<PAGE>   39
written consent of the indemnifying party, which consent may not be unreasonably
withheld, delayed or conditioned. If the indemnified party assumes the defense
of the claim, the indemnifying party shall reimburse the indemnified party on a
monthly basis for the actual fees and expenses of counsel retained by the
indemnified party and the indemnifying party shall be entitled to participate in
(but not control) the defense of such claim, with its counsel and at its own
expense. If the indemnifying party thereafter seeks to question the manner in
which the indemnified party defended such third party claim or the amount or
nature of any such settlement, the indemnifying party shall have the burden to
prove by a preponderance of the evidence that the indemnified party did not
defend or settle such third party claim in a reasonably prudent manner. The
parties agree to render, without compensation, to each other such assistance as
they may reasonably require of each other in order to ensure the proper and
adequate defense of any action, suit or proceeding, whether or not subject to
indemnification hereunder.

SECTION 7.5 INTEREST.

      Any amount of money owed by an indemnifying party to an indemnified party
hereunder shall be paid with interest, at an annual rate equal to the Prime Rate
then in effect (or, if less, the maximum rate permitted by law), from the date
that the loss or damage was sustained or cash disbursement made by the
indemnified party until such amount is paid by the indemnifying party.

SECTION 7.6 MANNER OF INDEMNIFICATION.

      All indemnification payments hereunder shall be effected by payment of
cash or delivery of a certified or official bank check in the amount of the
indemnification liability.

SECTION 7.7 ADDITIONAL LIMITATIONS ON INDEMNIFICATION.

            (a) No claim for indemnification shall be made by Parent or Newco
pursuant to Section 7.1 or by Sellers pursuant to Section 7.2 if made more than
three (3) years after the Closing Date.

            (b) Notwithstanding the provisions of this Section 7.7 to the effect
that an indemnifying party's obligations under such section shall expire at the
specified time set forth herein, such obligations shall continue: (i) as to any
matter as to which a claim is submitted in writing to the indemnifying party
prior to such specified time and identified as a claim for indemnification
pursuant to this Agreement, and (ii) as to any matter that is based upon fraud
or willful misconduct by the indemnifying party, until such time as such claims
and matters are resolved.

SECTION 7.8 RELEASE OF CLAIMS AGAINST THE COMPANY.

            (a) In consideration of and subject to the terms of this Agreement,
Sellers on behalf of themselves and their Affiliates and all persons acting by,
through, under or in concert with them, if any, effective as of the Closing
release and discharge the Company, Parent and Newco and their respective
Affiliates from any and all rights, causes of action, demands, damages, costs,
loss of services, expenses and compensation whatsoever, claims, duties,

                                       39
<PAGE>   40
obligations and actions which Sellers and their Affiliates now have or as may
hereinafter arise against the Company, whether matured or contingent, and
whether known or unknown. In no event shall the Sellers' rights hereunder
arising out of or relating to any representations or warranties made by Parent
or Newco in this Agreement be affected in any way by the release in this Section
7.8.

            (b) In connection with the release contained in this Section 7.8,
Sellers (on behalf of themselves and their Affiliates and all Persons acting by,
through, under or in concert with them, if any) hereby expressly waive the
benefits of Section 1542 of the California Civil Code, which provides that:

            A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
            NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING
            THE AGREEMENT, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED
            HIS SETTLEMENT WITH THE DEBTOR.

This Section 7.8 releases any and all rights, causes of action, demands,
damages, costs, loss of services, expenses and compensation whatsoever, claims,
duties, obligations and actions to the maximum extent permitted by law. Sellers
acknowledge that they understand and acknowledge the significance and
consequences of such specific waiver of Section 1542.

                                  ARTICLE VIII
                                   TERMINATION

SECTION 8.1 TERMINATION.

      This Agreement may be terminated at any time prior to the Closing Date:

            (a) by the written agreement of Parent and Newco on the one hand and
the Sellers on the other hand;

            (b) by Parent and Newco by written notice to the Company and Sellers
if: (i) the representations and warranties of Sellers or the Company shall not
have been true and correct in all respects as of the date when made, or (ii) if
any of the conditions set forth in Section 6.2 shall not have been, or if it
becomes apparent that any of such conditions will not be, fulfilled by 5:00 p.m.
California time on January 21, 2000, unless such failure shall be due to the
failure of Parent or Newco to perform or comply with any of the covenants,
agreements or conditions hereof to be performed or complied with by it prior to
the Closing; or

            (c) by Sellers, by written notice to Parent and Newco if: (i) the
representations and warranties of Parent or Newco shall not have been true and
correct in all respects as of the date when made, or (ii) if any of the
conditions set forth in Section 6.1 shall not have been, or if it becomes
apparent that any of such conditions will not be, fulfilled by 5:00 p.m.
California time on January 21, 2000, unless such failure shall be due to the
failure of Sellers or any of them to perform or comply with any of the
covenants, agreements or conditions hereof to be performed or complied with by
it prior to the Closing.

                                       40
<PAGE>   41
SECTION 8.2 EFFECT OF TERMINATION.

      In the event of the termination of this Agreement pursuant to the
provisions of Section 8.1, this Agreement shall become void and have no effect,
without any liability to any Person in respect hereof or of the transactions
contemplated hereby on the part of any party hereto, or any of its directors,
officers, employees, agents, consultants, representatives, advisers,
stockholders or Affiliates except for any liability resulting from such party's
breach of this Agreement.

                                   ARTICLE IX
                                  MISCELLANEOUS

SECTION 9.1 FEES AND EXPENSES.

      Sellers, on the one hand, and Parent and Newco, on the other hand, will
bear their own expenses in connection with the negotiation and the consummation
of the Transactions contemplated by this Agreement, including, without
limitation, any broker's commission or finder's fee incurred by such party.
Neither the Company nor Parent nor Newco shall assume, directly or indirectly,
any of Sellers' or the Company's fees, costs and expenses incurred in connection
with the negotiation and preparation of this Agreement, due diligence, or
consummation of the transactions contemplated by this Agreement. At Sellers'
option, all or any portion of such expenses of Sellers and the Company may be
paid at Closing by the Company, in which event the cash portion of the Purchase
Price referred to at Section 2.2(a) shall be reduced dollar-for-dollar by the
amount of all such expenses paid and accrued and payable.

SECTION 9.2 NOTICES.

      All notices, requests, demands and other communications hereunder shall be
in writing and shall be deemed given if delivered personally or by facsimile
transmission (with subsequent letter confirmation by mail) or three calendar
days after being mailed by certified or registered mail, postage prepaid, return
receipt requested, to the parties, their successors in interest or their
assignees at the following addresses, or at such other addresses as the parties
may designate by written notice in the manner aforesaid:

If to Parent or Newco:        I-Flow Corporation
                              20202 Windrow Dr.
                              Lake Forest, California 92630
                              Facsimile:  (949) 206-2603
                              Attention:  President and Chief Executive Officer

With a concurrent copy to:    Gibson, Dunn & Crutcher LLP
                              4 Park Plaza
                              Irvine, California 92614
                              Facsimile:  (949) 451-4200
                              Attention:  Mark W. Shurtleff, Esq.

If to Sellers:                To the address of each such Seller as set forth
                              opposite his, her or its name on Exhibit A.

                                       41
<PAGE>   42
If to the Company:            Spinal Specialties, Inc.
                              12001 Network, Building F, Suite 208
                              San Antonio, Texas  78249
                              Facsimile:  (210) 558-8101
                              Attention:  Michael Wakely and Robert B. Keahey

With a concurrent copy to:    R. Bryan Stone
                              Law Offices of Stone & Stone
                              900 Tower II
                              555 N. Carancahua
                              Corpus Christi, TX 78478
                              Facsimile:  (361) 884-3853

SECTION 9.3 ATTORNEYS' FEES AND COSTS.

      Should any party institute any action or proceeding in any court to
enforce any provision of this Agreement, the prevailing party shall be entitled
to receive from the losing party actual attorneys' fees and costs incurred in
such action or proceeding, whether or not such action or proceeding is
prosecuted to judgment.

SECTION 9.4 ASSIGNABILITY AND PARTIES IN INTEREST.

      This Agreement shall not be assignable by any of the parties. This
Agreement shall inure to the benefit of and be binding upon the parties and
their respective permitted successors and assigns.

SECTION 9.5 GOVERNING LAW.

      This Agreement shall be governed by, and construed and enforced in
accordance with, the internal law, and not the law pertaining to conflicts or
choice of law, of the State of California.

SECTION 9.6 COUNTERPARTS.

      This Agreement may be executed in several counterparts, each of which
shall be deemed an original, but all of which shall constitute one and the same
instrument.

SECTION 9.7 COMPLETE AGREEMENT.

      This Agreement, the Exhibits and Schedules and the documents delivered or
to be delivered pursuant to this Agreement contain or will contain the entire
agreement among the parties with respect to the Transactions and shall supersede
all previous oral and written and all contemporaneous oral negotiations,
commitments and understandings.

                                       42
<PAGE>   43
SECTION 9.8 MODIFICATIONS AMENDMENTS AND WAIVERS.

      This Agreement may be modified, amended or otherwise supplemented only by
a writing signed by all of the parties. No waiver of any right or power
hereunder shall be deemed effective unless and until a writing waiving such
right or power is executed by the party waiving such right or power.

SECTION 9.9 DUE DILIGENCE INVESTIGATION; KNOWLEDGE.

      All representations and warranties contained herein that are made to the
knowledge of a party shall require that such party make reasonable investigation
and inquiry with respect thereto to ascertain the correctness and validity
thereof. Without limiting the foregoing sentence, when any fact is stated to be
to the "knowledge of Sellers or the Company" or similar such language, such
reference shall mean that any one or more of the Sellers know or should have
known of the existence or non-existence of such fact based upon a reasonable
investigation and inquiry of the books and records, employees, accountants and
attorneys of the Company.

SECTION 9.10 LIMIT ON INTEREST.

      Notwithstanding anything in this Agreement to the contrary, no party shall
be obligated to pay interest at a rate higher than the maximum rate permitted by
applicable law. In the event that an interest rate provided in this Agreement
exceeds the maximum rate permitted by applicable law, such interest rate shall
be deemed to be reduced to such maximum permissible rate.

SECTION 9.11 POST CLOSING MATTERS; FURTHER ASSURANCES.

      Each party shall promptly execute and deliver such further instruments and
take such further actions as any other party may reasonably require or request
in order to carry out the intent of this Agreement and to consummate the
transactions contemplated hereunder.

SECTION 9.12 CONTRACT INTERPRETATION; CONSTRUCTION OF AGREEMENT.

            (a) The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Article, section, exhibit, schedule, preamble, recital and party
references are to this Agreement unless otherwise stated.

            (b) No party, nor its respective counsel, shall be deemed the
drafter of this Agreement for purposes of construing the provisions of this
Agreement, and all language in all parts of this Agreement shall be construed
simply and in accordance with its fair meaning, and not strictly for or against
any party.

SECTION 9.13 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.

      The various representations and warranties made by Parent, Newco, Sellers,
and the Company hereunder will survive for a period of three (3) years from the
date of this Agreement.

                                       43
<PAGE>   44
SECTION 9.14 ARBITRATION.

            (a) Any controversy, dispute or claim arising under this Agreement
shall be settled by arbitration conducted in Orange County, California in
accordance with the then existing Commercial Arbitration Rules of the American
Arbitration Association, and judgment upon any award rendered by the arbitrator
may be entered by any federal or state court having jurisdiction thereof. The
parties expressly provide that the provisions of Section 1283.05 of the
California Code of Civil Procedure are incorporated into, and made a part of,
this Section 9.14. The decision of the arbitrator shall be final and binding
upon the parties. The arbitrator shall be authorized to award any relief,
whether legal or equitable, to the party so entitled to such relief.

            (b) In respect of any action, suit or other proceeding relating to
the enforcement of the award rendered by the arbitrator pursuant to this Section
9.14, each party hereby irrevocably submits to the non-exclusive jurisdiction of
any state or federal court located in the County of Orange, State of California.
EACH PARTY HEREBY WAIVES ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM
NON CONVENIENS, TO ASSERT THAT IT IS NOT SUBJECT TO THE JURISDICTION OF THE
AFORESAID COURTS, OR TO OBJECT TO VENUE TO THE EXTENT THAT ANY ACTION, SUIT OR
OTHER PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 9.14.

SECTION 9.15 SEVERABLE PROVISIONS.

      The terms, provisions and covenants of this Agreement are severable, and
if one or more terms or provisions are determined to be unenforceable, in full
or part, by a court of competent jurisdiction, the validity of the remaining
provisions, including any partially unenforceable terms or provisions, to the
extent enforceable, shall not be affected in any respect whatsoever.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       44
<PAGE>   45
      IN WITNESS WHEREOF, each of the parties has executed this Agreement as of
the date first above written.

                                    PARENT:

                                    I-FLOW CORPORATION,
                                    a California corporation

                                    By:
                                       -----------------------------------------
                                          Donald M. Earhart
                                          President and Chief Executive Officer

                                    NEWCO:

                                    SPINAL ACQUISITION CORP.,
                                    a Delaware corporation

                                    By:
                                       -----------------------------------------
                                          Donald M. Earhart
                                          President

                                    COMPANY:

                                    SPINAL SPECIALTIES, INC.,
                                    a Texas corporation

                                    By:
                                       -----------------------------------------
                                    Name:
                                    Title:

                                    SELLERS:

                                    --------------------------------------------
                                    Michael Wakely

                                    --------------------------------------------
                                    Robert B. Keahey

                                       45
<PAGE>   46
                                    --------------------------------------------
                                    Robert A. Keahey

                                    --------------------------------------------
                                    Robert D. Duffet

                                    --------------------------------------------
                                    Camilla B. Doe

                                    --------------------------------------------
                                    R. Bryan Stone

                                    --------------------------------------------
                                    J. Elliot Cunningham

                                       46

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