Document:

EXHIBIT 4.2

                                [G&P LETTERHEAD]

July 25, 2004

Mr. Richard Goldring
Scores Holding Company, Inc.
533-535 West 27th Street
New York, NY 10001

         RE:      MODIFIED RETAINER AGREEMENT

Dear Mr. Goldring:

      Please accept this letter as  confirmation  that Scores  Holding  Company,
Inc. (the "Company"),  has agreed to modify the retainer agreement dated June 7,
2000 (the  "Retainer")  between  the  Company and  Gottbetter  & Partners,  LLP.
("G&P"),  effective  July 25, 2004.  The  modification,  which we understand was
approved by the Company's Board of Directors,  is for the Company to pay part of
its  outstanding  bill for legal  services with shares of the  Company's  common
stock, $.001 par value.

      We understand that part of the  outstanding  bill will be satisfied by the
issuance  of  330,000  shares  valued at  $33,000.  The board of  directors  has
approved the filing of a registration on Form S-8 for these 330,000 shares.  The
legal  services for which these  shares are being  registered  and  subsequently
issued to Adam S. Gottbetter,  a partner in G&P, did not include any services in
connection   with  the  offer  or  sale  of  securities  in  a  capital  raising
transaction, and did not directly or indirectly promote or maintain a market for
the Company's securities.

      Please  note that this  letter may be filed as an exhibit to the Form S-8.
In order to effectuate the modification of the Retainer, please sign this letter
and return it to my office. If you have any questions, please call me.

Sincerely,

GOTTBETTER & PARTNERS, LLP

/s/ Gottbetter & Partners, LLP

ACCEPTED AND AGREED:

SCORES HOLDING COMPANY, INC.

By:      /s/ Richard Goldring
         -----------------------
Name:    Richard Goldring
Title:   President

                                       11Exhibit 10.1

                 AGREEMENT AND PLAN OF MERGER AND REORGANIZATION

                                  BY AND AMONG

                    BIODELIVERY SCIENCES INTERNATIONAL, INC.

                             ARIUS ACQUISITION CORP.

                                       AND

                           ARIUS PHARMACEUTICALS, INC.

                                  MARK A. SIRGO

                                       AND

                                 ANDREW L. FINN

                                 August 10, 2004

<PAGE>

<TABLE>
<CAPTION>
                                TABLE OF CONTENTS

                                                                                       PAGE
                                                                                       ----
<S>                                                                                     <C>
ARTICLE I. DEFINITIONS                                                                   1

Section 1.1     Defined Terms                                                            1

ARTICLE II. THE MERGER                                                                   2

Section 2.1      The Merger                                                              2
Section 2.2      Closing; Effective Time                                                 2
Section 2.3      Effect of the Merger                                                    2
Section 2.4      Certificate of Incorporation; Bylaws.                                   3
Section 2.5      Directors and Officers                                                  3
Section 2.6      Effect on Capital Stock                                                 3
Section 2.7      No Further Ownership Rights in the Company Capital Stock                4
Section 2.8      Tax Consequences                                                        4
Section 2.9      Withholding Rights                                                      4
Section 2.10     Taking of Necessary Action; Further Action                              4
Section 2.11     Restricted Securities                                                   5

ARTICLE III.     REPRESENTATIONS AND WARRANTIES OF THE COMPANY
                 AND THE STOCKHOLDERS                                                    5

Section 3.1      Organization, Standing and Power                                        5
Section 3.2      Capital Structure                                                       6
Section 3.3      Authority; No Conflicts or Consents                                     7
Section 3.4      Financial Statements; Liabilities                                       8
Section 3.5      Absence of Certain Changes                                              9
Section 3.6      Absence of Undisclosed Liabilities                                      9
Section 3.7      Litigation                                                              9
Section 3.8      Governmental Authorization                                              9
Section 3.9      Title to Personal Property                                             10
Section 3.10     Intellectual Property                                                  10
Section 3.11     Company Products and FDA Matters                                       12
Section 3.12     Compliance With Laws                                                   13
Section 3.13     Environmental Matters                                                  13
Section 3.14     Taxes                                                                  15
Section 3.15     Employee Benefit Plans                                                 16
Section 3.16     Certain Agreements Affected by the Merger                              18
Section 3.17     Employee Matters                                                       18
Section 3.18     Insurance                                                              19
Section 3.19     Customers and Suppliers                                                20
Section 3.20     Material Contracts                                                     20
Section 3.21     No Breach of Material Contracts                                        21
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
<S>                                                                                     <C>
Section 3.22     Real Property and Real Property Leases                                 21
Section 3.23     Certain Business Practices                                             23
Section 3.24     Interested-Party Transactions                                          24
Section 3.25     Information Supplied                                                   24
Section 3.26     Brokers' and Finders' Fees                                             24
Section 3.27     Vote Required                                                          24
Section 3.28     Board Approval                                                         24
Section 3.29     Reorganization Matters                                                 25
Section 3.30     No Opinion of Financial Advisor                                        25
Section 3.31     Investigation by the Company and the Stockholders                      25
Section 3.32     Company Disclosure Schedule                                            25

ARTICLE IV.      REPRESENTATIONS AND WARRANTIES OF PARENT AND
                 MERGER SUB                                                             25

Section 4.1      Organization, Standing and Power                                       25
Section 4.2      Capital Structure                                                      26
Section 4.3      Authority                                                              27
Section 4.4      SEC Documents; Financial Statements                                    28
Section 4.5      Absence of Undisclosed Liabilities                                     28
Section 4.6      Litigation                                                             29
Section 4.7      Reorganization Matters                                                 29
Section 4.8      Brokers' and Finders' Fees                                             29
Section 4.9      Board Approval                                                         29
Section 4.10     Investigation by Parent                                                29
Section 4.11     Absence of Certain Changes                                             30
Section 4.12     Information Supplied                                                   30
Section 4.13     Parent Disclosure Schedule                                             30

ARTICLE V.       CONDUCT PRIOR TO THE EFFECTIVE TIME                                    30

Section 5.1      Conduct of Business                                                    30
Section 5.2      Restriction on Conduct of Business of the Company                      31
Section 5.3      No Solicitation                                                        32

ARTICLE VI.      ADDITIONAL AGREEMENTS                                                  33

Section 6.1      Access to Information; Disclosure Schedule Updates                     33
Section 6.2      No Dissenters' Rights                                                  34
Section 6.3      Confidentiality                                                        34
Section 6.4      Public Disclosure                                                      34
Section 6.5      Consents; Cooperation                                                  34
Section 6.6      Legal Requirements                                                     35
Section 6.7      Treatment as Reorganization                                            35
Section 6.8      Listing of Additional Shares                                           35
Section 6.9      Location of Arius                                                      35
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
<S>                                                                                     <C>
Section 6.10     Financing of the Surviving Corporation                                 35
Section 6.11     Atrix License Payment                                                  35
Section 6.12     Board Observation and Nomination Rights                                36
Section 6.13     Non-Competition                                                        36
Section 6.14     Certain Stockholder Approval                                           37
Section 6.15     Further Assurances                                                     37

ARTICLE VII.     CONDITIONS TO THE MERGER                                               37

Section 7.1      Conditions to Obligations of Each Party to Effect the Merger           37
Section 7.2      Additional Conditions to Obligations of the
                   Company and the Stockholders                                         38
Section 7.3      Additional Conditions to the Obligations of Parent                     39

ARTICLE VIII.    TERMINATION                                                            41

Section 8.1      Termination                                                            41
Section 8.2      Effect of Termination                                                  42
Section 8.3      Expenses                                                               42

ARTICLE IX.      SURVIVAL; INDEMNIFICATION                                              43

Section 9.1      Survival                                                               43
Section 9.2      Obligation of the Company and the Stockholders to Indemnify            43
Section 9.3      Obligation of Parent to Indemnify                                      43
Section 9.4      Limitations on Liability                                               44
Section 9.5      Notice and Opportunity to Defend                                       44

ARTICLE X.       GENERAL PROVISIONS                                                     45

Section 10.1     Amendment                                                              45
Section 10.2     Extension; Waiver                                                      45
Section 10.3     Notices                                                                45
Section 10.4     Certain Interpretive Conventions                                       46
Section 10.5     Entire Agreement                                                       47
Section 10.6     Severability                                                           47
Section 10.7     Remedies Cumulative                                                    48
Section 10.8     Governing Law; Waiver of Jury Trial                                    48
Section 10.9     Attorneys' Fees                                                        48
Section 10.10    Rules of Construction                                                  48
Section 10.11    Assignment                                                             48
Section 10.12    Successors and Assigns                                                 48
Section 10.13    Counterparts; Facsimile Delivery                                       48
</TABLE>

<PAGE>

SCHEDULES AND EXHIBITS

Schedule A       Defined Terms

Exhibit A        Form of Certificate of Merger
Exhibit B        Form of Certificate of Designations of Parent Preferred Stock
Exhibit C        Form of Registration Rights Agreement
Exhibit D        Form of Employment Agreement
Exhibit E        Form of Legal Opinion of Ellenoff Grossman & Schole LLP
Exhibit F        Form of Legal Opinion of Wyrick Robbins Yates & Ponton LLP
Exhibit G        Form of Parent Stockholder Voting Agreements
Exhibit H        Form of Stockholder Voting Agreements

<PAGE>

                 AGREEMENT AND PLAN OF MERGER AND REORGANIZATION

      This AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (this "AGREEMENT") is
made as of August  10,  2004  (the  "EXECUTION  DATE") by and among  BioDelivery
Sciences  International,   Inc.,  a  Delaware  corporation   ("PARENT"),   Arius
Acquisition Corp, a Delaware corporation and a wholly-owned subsidiary of Parent
("MERGER  SUB") and Arius  Pharmaceuticals,  Inc., a Delaware  corporation  (the
"COMPANY"), Mark A. Sirgo ("SIRGO") and Andrew L. Finn ("FINN" and, collectively
with Sirgo, the "STOCKHOLDERS").

                                    RECITALS

      WHEREAS,  Sirgo  and Finn each hold  49.54% of the  outstanding  shares of
Company Common Stock as of the Execution Date;

      WHEREAS,  Merger Sub is a wholly-owned  subsidiary of Parent formed solely
for the purpose of engaging in the Merger;

      WHEREAS,  the Boards of  Directors  of Parent,  Merger Sub and the Company
each have  determined  that the  business  combination  between  Parent  and the
Company  through the merger of the Company  with and into Merger Sub pursuant to
the terms and  subject to the  conditions  set forth  herein (the  "MERGER")  is
advisable  and  in  the  best  interests  of  their  respective   companies  and
stockholders;

      WHEREAS,  pursuant to the Merger,  among other  things:  (i) the aggregate
shares of Company  Common Stock  outstanding  as of the Effective  Time shall be
converted  into the right to receive an aggregate of 1,647,059  shares of Parent
Preferred  Stock and (ii) each  outstanding  share of common stock of Merger Sub
shall remain issued and  outstanding as a share of common stock of the Surviving
Corporation (as hereinafter defined);

      WHEREAS,  the Company,  the Stockholders and Parent desire to make certain
representations,  warranties,  covenants and other agreements in connection with
the Merger; and

      WHEREAS, the parties intend, by executing this Agreement,  to adopt a plan
of reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986,  as  amended  (the  "CODE"),  and to cause the  Merger to  qualify as a
tax-deferred reorganization under the provisions of Sections 368(a) of the Code.

      NOW, THEREFORE,  in consideration of the covenants and representations set
forth  herein,  and for other good and valuable  consideration,  the receipt and
sufficiency of which is hereby  acknowledged by all parties,  the parties hereto
agree as follows:

                                   ARTICLE I .
                                   DEFINITIONS

      Section  1.1  Defined  Terms.  Certain  capitalized  terms  used  in  this
Agreement are defined on Schedule A hereto.  Other capitalized terms are defined
elsewhere herein.

                                       1
<PAGE>

ARTICLE II THE MERGER

      Section 2.1 The Merger.  Subject to and in  accordance  with the terms and
conditions  set  forth in this  Agreement,  at the  Effective  Time (as  defined
below), the Company shall be merged with and into Merger Sub, which shall be the
surviving corporation in the Merger ("SURVIVING CORPORATION"),  and the separate
existence  of  the  Company  shall  thereupon   cease.  The  name  of  Surviving
Corporation  shall be "Arius  Pharmaceuticals,  Inc." The Merger  shall have the
effects  set  forth  in  the  applicable  provisions  of  the  Delaware  General
Corporation Law ("DELAWARE LAW").

      Section 2.2  Closing;  Effective  Time.  The  closing of the  transactions
contemplated  hereby (the "CLOSING") shall take place as soon as practicable and
in any event not later  than two (2)  business  days after the  satisfaction  or
waiver of each of the  conditions  set forth in  Article  VII  hereof or at such
other time as the parties hereto agree (the "CLOSING  DATE").  The Closing shall
take place at the  offices of  Ellenoff  Grossman & Schole  LLP,  370  Lexington
Avenue,  New York,  New York,  or at such other  location as the parties  hereto
agree. In connection with the Closing, the parties hereto shall cause the Merger
to be consummated by filing the Certificate of Merger, in substantially the form
attached hereto as Exhibit A (the  "CERTIFICATE  OF MERGER"),  together with any
required  officers'  certificates,  with the  Secretary of State of the State of
Delaware,  in accordance with the relevant  provisions of Delaware Law (the time
of such filing with the Secretary of State of Delaware, the ("EFFECTIVE TIME").

      Section 2.3 Effect of the Merger.

      (a) At the Effective  Time,  the effect of the Merger shall be as provided
in this Agreement,  the Certificate of Merger, and the applicable  provisions of
Delaware Law.  Without  limiting the  generality of the  foregoing,  and subject
thereto, at the Effective Time, all the property, rights, privileges, powers and
franchises  of the Company  (including,  without  limitation,  all rights to the
Company  Intellectual  Property)  and  Merger  Sub shall  vest in the  Surviving
Corporation, and all debts, liabilities and duties of the Company and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.

      (b) It is specifically understood and agreed by the parties that:

            (i) the accrued  legal fees of the Company  will be assumed and paid
by the Surviving Corporation; and

            (ii)  notwithstanding  the  provisions  of  Section  2.3(a)  to  the
contrary,  that portion of the pre-Closing Date debt of the Company representing
accrued  salaries as of the  Execution  Date shall be formally  extinguished  in
writing effective as of the Execution Date by the  beneficiaries  thereof on the
Books and  Records of the  Company  and shall not be  assumed  by the  Surviving
Corporation.

                                       2
<PAGE>

      Section 2.4 Certificate of Incorporation; Bylaws.

      (a) At the Effective Time, the Certificate of  Incorporation of Merger Sub
shall be the Certificate of  Incorporation  of the Surviving  Corporation  until
thereafter further amended as provided by Delaware Law.

      (b) At the Effective Time, the Bylaws of Merger Sub shall be the Bylaws of
the  Surviving  Corporation  until  thereafter  further  amended as  provided by
Delaware Law and such Bylaws.

      Section  2.5  Directors  and  Officers.  At the  Effective  Time:  (i) the
existing  directors and officers of the Company shall resign their  positions in
writing,  (ii) the  directors  of  Merger  Sub shall  become  the  directors  of
Surviving  Corporation,  until their  respective  successors are duly elected or
appointed  and  qualified,  and (ii) the  officers  of Merger Sub shall hold the
offices of President, Vice President, Secretary and Treasurer,  respectively, of
the Surviving Corporation, until their respective successors are duly elected or
appointed and qualified.

      Section 2.6 Effect on Capital Stock.

      (a) Conversion of the Company  Capital Stock.  By virtue of the Merger and
without any further action on the part of Parent, the Company, Merger Sub or any
of their  respective  stockholders,  at the  Effective  Time,  each share of the
Company Common Stock issued and outstanding  immediately  prior to the Effective
Time, but excluding any shares  cancelled  pursuant to Section  2.6(c),  will be
automatically  cancelled,  extinguished and converted,  at the Closing, into the
right to  receive a number of shares  of  Parent  Preferred  Stock  equal to the
quotient  of:  (i)  1,647,059  divided  by (ii) the  number of shares of Company
Common Stock outstanding immediately prior to the Effective Time.

      (b) Cancellation of the Company Capital Stock Owned by the Company. At the
Effective  Time,  all shares of the Company  Capital Stock that are owned by the
Company as treasury stock shall be cancelled and extinguished without any rights
to  conversion  thereof  and no  consideration  shall be  delivered  in exchange
therefore.

      (c) Treatment of the Company Option Plans and the Company  Options Rights.
At the  Effective  Time,  the  Company  Stock  Option  Plans and all the Company
Options then outstanding under the Company Stock Option Plans shall be cancelled
and of no  further  force  and  effect.  All  Company  Options  shall  either be
exercised  prior to the Effective  Time or shall be terminated and of no further
force and effect  following the Effective  Time in accordance  with this Section
2.6(c).  The Company  covenants that there will be no shares of Company  Capital
Stock authorized or issued as of the Effective Time other than shares of Company
Common Stock.

      (d) Adjustments. If at any time during the period between the date of this
Agreement and the Effective Time, any change in the outstanding capital stock of
Parent   shall   occur,   including   by   reason   of   any   reclassification,
recapitalization,  stock  dividend,  stock split,  or  combination,  exchange or
readjustment of shares of capital stock of Parent, or any stock dividend thereof
(but  excluding  any  issuance  of any  shares  of  capital  stock of  Parent or
securities  convertible  into any shares of capital stock of Parent,  including:
(i) any  issuances  pursuant  to the  Parent  Stock  Option  Plan  and  (ii) any
exercises  of Parent  Options  or Parent  Warrants),  the  shares of the  Parent
Preferred  Stock to be  received  by the  Stockholders  shall  be  appropriately
adjusted.

                                       3
<PAGE>

      (e) No Fractional Shares. No fraction of a share of Parent Preferred Stock
will be issued in connection with the Merger. Each fraction of a share of Parent
Preferred Stock shall be rounded to the nearest whole number.

      (f)  Capital  Stock of Merger Sub. At the  Effective  Time,  each share of
common  stock of Merger  Sub  issued and  outstanding  immediately  prior to the
Effective Time shall be converted into and exchanged for one (1) validly issued,
fully  paid  and   non-assessable   share  of  common  stock  of  the  Surviving
Corporation.  Each stock  certificate of Merger Sub evidencing  ownership of any
such shares shall continue to evidence  ownership of such shares of Common Stock
of the Surviving Corporation.

      Section 2.7 No Further  Ownership Rights in the Company Capital Stock. All
shares of Parent  Preferred  Stock  issued upon the  surrender  for  exchange of
shares of the Company Capital Stock in accordance with the terms hereof shall be
deemed to have been issued in full satisfaction of all rights pertaining to such
shares of the Company Capital Stock, and after the Effective Time there shall be
no further registration of transfers on the records of the Surviving Corporation
of shares of the Company Capital Stock which were outstanding  immediately prior
to the Effective Time. If, after the Effective Time,  certificates are presented
to the  Surviving  Corporation  for any  reason,  they  shall be  exchanged  and
cancelled as provided in this Article II.

      Section 2.8 Tax  Consequences.  It is intended by the parties  hereto that
the Merger shall constitute a tax-deferred  reorganization within the meaning of
Section  368 of the Code.  The  parties  to this  Agreement  hereby  adopt  this
Agreement  as  a  "plan  of  reorganization"  within  the  meaning  of  Sections
1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations.

      Section 2.9 Withholding Rights. Parent and the Surviving Corporation shall
be entitled to deduct and withhold from the number of shares of Parent Preferred
Stock otherwise  deliverable  under this Agreement,  and from any other payments
made  pursuant  to this  Agreement,  such  amounts as Parent  and the  Surviving
Corporation  are required to deduct and withhold  with respect to such  delivery
and payment  under the Code or any  provision  of state,  local,  provincial  or
foreign tax Law.  To the extent that  amounts  are so  withheld,  such  withheld
amounts  shall be treated  for all  purposes  of this  Agreement  as having been
delivered  and paid to the  Stockholders  and the other holders of shares of the
Company  Capital Stock in respect of which such  deduction and  withholding  was
made by Parent and the Surviving Corporation.

      Section 2.10 Taking of Necessary Action;  Further Action.  If, at any time
after the Effective  Time, any further action is necessary or desirable to carry
out the purposes of this  Agreement and to vest the Surviving  Corporation  with
all right,  title and possession to all assets,  property,  rights,  privileges,
powers  and  franchises  of the  Company  and  its  assets  (including,  without
limitation,  all rights to the Company Intellectual Property),  the officers and
directors  of the  Company,  Parent  and the  Surviving  Corporation  are  fully
authorized in the name of their  respective  corporations  or otherwise to take,
and will take, all such lawful and necessary  action,  so long as such action is
not inconsistent with this Agreement.

                                       4
<PAGE>

      Section 2.11 Restricted  Securities.  The shares of Parent Preferred Stock
to be issued  pursuant to Section 2.6(a) hereof (and the shares of Parent Common
Stock  underlying  such shares of Parent  Preferred  Stock) shall be  restricted
securities  within  the  meaning  of the  Securities  Act,  will not  have  been
registered  with the Securities and Exchange  Commission (the "SEC") pursuant to
the Securities Act and may not be sold or transferred  absent such  registration
or  unless  an  exception  from  registration  is  available.  The  certificates
evidencing   such  shares  of  Parent   Preferred  Stock  shall  bear  a  legend
substantially  in the following form, in addition to any other legends  required
by applicable state Law:

      "THE SECURITIES  REPRESENTED  HEREBY HAVE NOT BEEN REGISTERED  UNDER
      THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR THE SECURITIES
      LAWS OF ANY STATE,  AND MAY NOT BE OFFERED OR SOLD  EXCEPT  PURSUANT
      TO: (I) AN EFFECTIVE  REGISTRATION  STATEMENT UNDER THE ACT, (II) TO
      THE EXTENT  APPLICABLE,  RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE
      UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES),  OR (III)
      AN  OPINION  OF  COUNSEL,   IF  SUCH  OPINION  SHALL  BE  REASONABLY
      SATISFACTORY  TO  COUNSEL  TO THE  ISSUER,  THAT AN  EXEMPTION  FROM
      REGISTRATION UNDER SUCH ACT IS AVAILABLE."

      Upon the written  request from a holder  thereof,  Parent shall remove the
restrictive  legend from the shares of Parent Common Stock underlying the Parent
Preferred  Stock (when and if issued),  which request shall be accompanied by an
opinion of  counsel,  reasonably  acceptable  to Parent,  to the effect that the
holders  thereof  are  entitled  to have such  legend  removed  pursuant  to the
provisions of the Securities Act and Rule 144 promulgated  thereunder.  Parent's
obligation to remove such legend shall be  conditioned  upon the receipt of such
legal opinion. Parent shall have no obligation to remove any restrictive legends
from the shares of Parent Preferred Stock.

                                   ARTICLE III
                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY
                              AND THE STOCKHOLDERS

      Except as disclosed in the Company Disclosure  Schedule or as specifically
provided for in this Article III, the Company and the Stockholders,  jointly and
severally, represent and warrant to Parent and Surviving Corporation as follows:

      Section 3.1 Organization,  Standing and Power. Each of the Company and its
corporate  Affiliates is a corporation  duly organized,  validly existing and in
good standing under the Laws of its  jurisdiction of  organization.  The Company
has the corporate  power to own its  properties  and to carry on its business as
now being  conducted  and as  currently  proposed  to be  conducted  and is duly
qualified to do business and is in good standing in each  jurisdiction  in which
the failure to be so qualified and to be in good  standing  would have a Company
Material Adverse Effect.  The Company has delivered or made available a true and
correct copy of the  Certificate  of  Incorporation  and Bylaws or other charter
documents,  as applicable,  of the Company and each of its corporate Affiliates,
each as amended to the execution of this  Agreement,  to Parent.  The Company is
not in violation of any of the provisions of its Certificate of Incorporation or
Bylaws or equivalent  organizational documents. The Company has no subsidiaries.
The Company does not directly or indirectly  own any equity or similar  interest
in, or any interest  convertible or exchangeable or exercisable  for, any equity
or similar interest in, any non-individual Person.

                                       5
<PAGE>

      Section 3.2 Capital Structure.

      (a) The  authorized  capital  stock of the Company  consists of  1,000,000
shares of Company  Common Stock,  of which there were 504,688  shares issued and
outstanding  as of the close of business  on the  Execution  Date.  No shares of
preferred stock are authorized for issuance by the Company.  Except as set forth
on Schedule  3.2(a) to the Company  Disclosure  Schedule,  on the Execution Date
there  are,  and  as of  the  Effective  Time  there  will  be,  no  outstanding
commitments to issue any shares of Company Capital Stock. Schedule 3.2(a) to the
Company Disclosure Schedule lists all of the stockholders of the Company and all
of the holders of Company  Options or Company  Convertible  Securities  (and the
shares of Company Common Stock  issuable  under such Company  Options or Company
Convertible Securities).

      (b)  All  outstanding  shares  of  the  Company  Capital  Stock  are  duly
authorized,  validly issued,  fully paid and  non-assessable and are free of any
Liens, other than any Liens created by or imposed upon the holders thereof,  and
are not  subject  to  preemptive  rights or rights of first  refusal  created by
Delaware Law, the Certificate of  Incorporation  or Bylaws of the Company or any
agreement  to  which  the  Company  is a party  or by  which  it is  bound.  All
outstanding shares of the Company Capital Stock were issued in compliance in all
material respects with all applicable  federal and state securities Laws. Except
as set forth on Schedule  3.2(b) to the Company  Disclosure  Schedule and except
for the rights created  pursuant to this  Agreement and for all Company  Options
(which shall be  accelerated  and exercised  into shares of Company Common Stock
pursuant to the terms of this Agreement), as of the Execution Date there are no,
and as of the Effective Time, there will be no, other options,  warrants, calls,
rights,  commitments  or  agreements  of any character to which the Company is a
party or by which it is bound  obligating the Company to issue,  deliver,  sell,
repurchase or redeem,  or cause to be issued,  delivered,  sold,  repurchased or
redeemed,  any shares of the Company  Capital Stock or obligating the Company to
grant,  extend,  accelerate  the vesting of,  change the price of, or  otherwise
amend or enter  into  any such  option,  warrant,  call,  right,  commitment  or
agreement.  Except for the  agreements  contemplated  by this  Agreement and the
agreements  set forth on  Schedule  3.2(b) to the Company  Disclosure  Schedule,
there are no contracts,  commitments or agreements relating to voting,  purchase
or sale of the Company  Capital Stock:  (i) between or among the Company and any
of its security holders and (ii) between or among any of the Company's  security
holders, including the Stockholders.

      (c)  Except as set forth on  Schedule  3.2(c)  to the  Company  Disclosure
Schedule,   none  of  the  outstanding  Company  Options,   Company  Convertible
Securities or the Company Notes, nor any employment or consulting  agreements by
and  between  the Company  and others  provide  for any  accelerated  vesting or
exercisability of those options,  securities or notes, as applicable,  by reason
of the Merger or any other transactions contemplated by this Agreement. True and
complete  copies of all agreements and  instruments  relating to or issued under
the Company Stock Option Plans, the Company Options or otherwise relating to the
issuance of the Company  Options,  the Company  Convertible  Securities  and the
Company  Notes,  have  been  provided  or made  available  to  Parent  and  such
agreements and instruments have not been amended, modified or supplemented, and,
except as otherwise  expressly  contemplated herein or as otherwise disclosed on
Schedule 3.2(c) to the Company Disclosure  Schedule,  there are no agreements to
amend,  modify or supplement such agreements or instruments in any case from the
forms provided to Parent.

                                       6
<PAGE>

      Section 3.3 Authority; No Conflicts or Consents.

      (a) The Company has all requisite  corporate  power and authority to enter
into this Agreement and to consummate the transactions  contemplated hereby. The
execution  and  delivery  of  this  Agreement  and  the   consummation   of  the
transactions  contemplated  hereby have been duly  authorized  by all  necessary
corporate  action  on  the  part  of  the  Company,  including  approval  by the
Stockholders and any other Person.

      (b) This Agreement has been duly executed and delivered by the Company and
constitutes the valid and binding obligation of the Company  enforceable against
the Company by Parent and Merger Sub in accordance with its terms. The execution
and delivery of this Agreement by the Company does not, and the execution of the
other  agreements  contemplated  by this Agreement and the  consummation  of the
transactions  contemplated  hereby and thereby will not, conflict with or result
in any violation of, or default under (with or without  notice or lapse of time,
or both), or give rise to a right of  termination,  cancellation or acceleration
of any  obligation  or loss of any  benefit  under:  (i)  any  provision  of the
Certificate  of  Incorporation  or Bylaws of the  Company,  (ii) any the Company
Authorization (as defined in Section 3.8) or (ii) any Material Contract.

      (c)  Except as set forth on  Schedule  3.3(c)  to the  Company  Disclosure
Schedule,  no consent,  approval,  order or  authorization  of, or registration,
declaration  or  filing  with,  any  foreign,  federal,  state or  local  court,
administrative   agency  or  commission  or  other  governmental   authority  or
instrumentality  (each, a "GOVERNMENTAL ENTITY") is required with respect to the
Company in connection  with the execution and delivery of this  Agreement or the
consummation  of the  transactions  contemplated  hereby,  except  for:  (i) the
filings of the  Certificate  of Merger,  together  with the  required  officers'
certificates,  (ii) any notice  described  in Section 6.16 hereof and (iii) such
other consents,  authorizations,  filings, approvals and registrations which, if
not obtained or made,  would not prevent,  materially  alter or delay any of the
transactions contemplated by this Agreement.

(d) Except as set forth on Schedule 3.3(d) to the Company  Disclosure  Schedule,
neither the Company, the Stockholders nor their respective Affiliates is subject
to or bound by any provision of:

                                       7
<PAGE>

            (i) any Law;

            (ii) any contract,  mortgage, deed of trust, lease, note, agreement,
understanding,  proxy, bond, indenture, other instrument or agreement,  license,
permit, trust, custodianship or other restriction, or

            (iii) any consent,  judgment,  order,  writ,  award,  injunction  or
decree of any Governmental Authority or arbitrator,

that would conflict with,  prevent or be violated by or that would result in the
creation  of any Lien as a result of, or under which there would be a default or
right of  termination,  amendment,  acceleration,  revocation,  cancellation  or
suspension  as a result of,  the  execution,  delivery  and  performance  by the
Company or the Stockholders of this Agreement,  any other document  contemplated
hereby,  including all  agreements  and  instruments  which are Exhibits  hereto
(each,  an  "OTHER  DOCUMENT"),  the  consummation  of the  Merger  or the other
transactions  contemplated  hereby or  thereby.  Except as set forth on Schedule
3.3(d) to the Company Disclosure Schedule, no consent, novation, order, license,
permit,  approval or authorization of or declaration,  notice or filing with any
Person is required for: (i) the valid execution, delivery and performance by the
Company and the  Stockholders  of this  Agreement or any Other  Document and the
consummation  of the Merger or the other  transactions  contemplated  hereby and
thereby or (ii) the  ability  of Parent to operate  the  Company's  business  in
substantially and materially the same manner as the business was operated by the
Company prior to the Effective Time.

      Section 3.4 Financial Statements; Liabilities.

      (a) The Company was formed on April 22, 2003.  The Company has  heretofore
furnished  Parent  with  copies of the  following  financial  statements  of the
Company:  (i)  balance  sheet  as at  December  31,  2003;  (ii)  statements  of
operations  for the year ended on December 31, 2003;  (iii) a balance sheet (the
"REFERENCE  BALANCE  SHEET") as at July 31, 2004 (the  "REFERENCE  BALANCE SHEET
DATE");  and (iv) a statement of operations (the "REFERENCE  INCOME  STATEMENT")
for the seven months ended July 31, 2004. Except as set forth on Schedule 3.4(a)
to the Company Disclosure  Schedule,  all such financial statements are complete
and correct in all material respects, were prepared in accordance with generally
accepted  accounting  principles  of the United  States  ("GAAP"),  consistently
applied throughout the periods  indicated,  and have been prepared in accordance
with the Books and  Records of the  Company,  and present  fairly the  financial
position of the Company at such dates and the results of its operations and cash
flows for the periods then ended, subject to normal year end adjustments made in
accordance with GAAP and to such inaccuracies, if any, which are not material in
nature or amount.  The financial  statements  of the Company  provided to Parent
pursuant to this Section 3.4(a) are referred to herein as the "COMPANY FINANCIAL
STATEMENTS."

      (b) To the Company's knowledge, there are no Liabilities of or against the
Company  of  any  nature  (accrued,   absolute  or  contingent,   unasserted  or
otherwise),  except:  (i) as and to the extent  reflected or reserved against on
the Reference Balance Sheet; (ii) as set forth on Schedule 3.4(b) to the Company
Disclosure Schedule; (iii) those that are individually, or in the aggregate, not
material to the Company; or (iv) open purchase or sales orders or agreements for
delivery of goods and  services in the  ordinary  course of business  consistent
with prior practice.

                                       8
<PAGE>

      Section  3.5 Absence of Certain  Changes.  Except as set forth on Schedule
3.5 to the Company  Disclosure  Schedule or as  expressly  contemplated  by this
Agreement,  since the Reference  Balance Sheet Date there has not occurred:  (i)
any change,  event or condition  (whether or not covered by insurance or similar
indemnification agreement) that has resulted in, or would reasonably be expected
to result in, a Company Material Adverse Effect,  (ii) any acquisition,  sale or
transfer of any material  asset of the Company or any of its  Affiliates,  (iii)
any  change  in  accounting  methods  or  practices  (including  any  change  in
depreciation  or  amortization   policies  or  rates)  by  the  Company  or  any
revaluation by the Company of any of its or any of its Affiliates'  assets, (iv)
any declaration,  setting aside, or payment of a dividend or other  distribution
with respect to the shares of the Company, or any direct or indirect redemption,
purchase or other  acquisition by the Company of the Company Capital Stock,  (v)
any action to amend or change the Certificate of  Incorporation or Bylaws of the
Company (nor will there be prior to the Effective  Time) or (vi) any negotiation
or  agreement  by the Company or any of its  Affiliates  to do any of the things
described in the preceding clauses (i) through (v) (other than negotiations with
Parent and its representatives  regarding the transactions  contemplated by this
Agreement).

      Section  3.6  Absence  of  Undisclosed   Liabilities.   To  the  Company's
knowledge,  and except as set forth on Schedule  3.6 to the  Company  Disclosure
Schedule,  the  Company has no material  Liabilities  of any nature  (matured or
unmatured,  fixed or  contingent)  other than: (i) those set forth or adequately
reflected  or  reserved  against  on the  Reference  Balance  Sheet,  (ii) those
incurred in the ordinary  course of business  since the Reference  Balance Sheet
Date,  (iii) those incurred in connection  with the execution of this Agreement,
and (iv) those disclosed on Schedule 3.7 to the Company Disclosure Schedule.

      Section 3.7 Litigation. Except as set forth on Schedule 3.7 to the Company
Disclosure  Schedule,  there is no civil or  criminal,  private or  governmental
action, suit, proceeding, claim, arbitration,  governmental investigation, or to
the knowledge of the Company, any governmental or private regulatory activity or
investigation  pending  before  or  being  undertaken  by any  agency,  court or
tribunal,  foreign or domestic (each a "PROCEEDING") against the Company, any of
its Affiliates, the Stockholders or any of their respective properties or any of
their  respective  officers or directors (in their  capacities as such).  To the
knowledge of the Company, no Proceeding is being threatened against the Company,
any of its Affiliates, the Stockholders or any of their respective properties or
any of their  respective  officers or directors  (in their  capacities as such).
There is no Proceeding,  judgment, decree or order against the Company or any of
its  Affiliates  (including  the  Stockholders),  or,  to the  knowledge  of the
Company, or any of its Affiliates (including the Stockholders),  or any of their
respective  directors  or officers  (in their  capacities  as such),  that could
prevent,  enjoin,  or  materially  alter or delay the Merger or any of the other
transactions  contemplated  by this  Agreement,  or  that  could  reasonably  be
expected to have a Company Material Adverse Effect.

      Section 3.8 Governmental  Authorization.  The Stockholders and the Company
have  obtained  each  federal,  state,  county,  local or  foreign  governmental
consent,  license,  permit,  grant,  or other  authorization  of a  Governmental
Entity:  (i)  pursuant  to which the  Company  currently  operates  or holds any
interest in any of its  properties or (ii) that is required for the operation of
the  Company's  business  as  currently  conducted  or the  holding  of any such
interest ((i) and (ii) herein collectively called the "COMPANY AUTHORIZATIONS"),
and all of such the Company  Authorizations are in full force and effect, except
where the  failure to obtain or have any such the Company  Authorizations  could
not reasonably be expected to have a Company Material Adverse Effect.

                                       9
<PAGE>

      Section  3.9 Title to Personal  Property.  Except as set forth on Schedule
3.9 to the  Company  Disclosure  Schedule,  the  Company  has  good,  valid  and
marketable  title  to  all of  its  personal  property,  interests  in  personal
properties  and material  assets  reflected in the  Reference  Balance  Sheet or
acquired after the Reference Balance Sheet Date. Such properties and assets with
a book  value of  $10,000 or above are  listed on  Schedule  3.9 to the  Company
Disclosure Schedule (except properties,  interests in properties and assets sold
or otherwise  disposed of since the Company  Balance  Sheet Date in the ordinary
course of  business),  or with respect to leased  properties  and assets,  valid
leasehold interests, free and clear of all Liens, except: (i) a lien for current
taxes not yet due and  payable,  (ii)  such  imperfections  of title,  liens and
easements as do not and will not  materially  detract from or interfere with the
use  of the  properties  subject  thereto  or  affected  thereby,  or  otherwise
materially  impair business  operations  involving such properties,  (iii) liens
securing debt which are reflected on the Reference Balance Sheet, and (iv) liens
that in the aggregate would not have a Company Material  Adverse Effect.  To the
Company's knowledge,  the plants, property and equipment of the Company that are
used in the  operations  of its business  are in good  operating  condition  and
repair,  subject to normal wear and tear.  All personal  properties  used in the
operations of the Company are  reflected in the  Reference  Balance Sheet to the
extent GAAP requires the same to be reflected.

      Section 3.10 Intellectual Property.

      (a) Set forth on Schedule 3.10(a)(i) to the Company Disclosure Schedule is
a true,  accurate and complete  list of all  Intellectual  Property  directly or
indirectly owned, licensed, optioned or otherwise used or proposed to be used by
the  Company  or its  Affiliates  in its  business  and by the  Stockholders  in
connection  with  the  business  of  the  Company  (collectively,  the  "COMPANY
INTELLECTUAL  PROPERTY").  Set  forth on  Schedule  3.10(a)(ii)  to the  Company
Disclosure Schedule is a true, accurate and complete list of all grant, license,
acquisition,  purchase,  assignment,  option,  product development,  evaluation,
confidentiality,  non-disclosure,  marketing and similar agreements, instruments
or arrangements (and any letters of intent relating to any potential  agreement)
(collectively, the "COMPANY IP AGREEMENTS") to which the Company, its Affiliates
or  the   Stockholders  is  a  party  relating  or  pertaining  to  the  Company
Intellectual Property.

      (b) The  Company  either:  (i) owns and is  listed in the  records  of the
appropriate  United  States,  state or foreign  registry as the current owner of
record for each application and registration of Company Intellectual Property or
(ii) has a legally  enforceable  license or other valid and lawful rights to use
(in each case,  free and clear of any Liens,  except for Liens  contained in the
Company IP Agreements or Liens which do not directly encumber the Company or its
assets) all Company  Intellectual  Property used in or necessary for the conduct
of its business as currently conducted, including without limitation all patents
and  patent   applications  and  all  trademark   registrations   and  trademark
applications.

                                       10
<PAGE>

      (c) To the  Company's  knowledge,  and  except  as set  forth on  Schedule
3.10(f) to the Company Disclosure  Schedule,  the conduct of the business of the
Company as currently  conducted does not infringe on or  misappropriate,  either
directly or indirectly (such as through contributory  infringement or inducement
to infringe), the Intellectual Property rights of any Person, and the use by the
Company  of  any  Company  Intellectual  Property  is  in  accordance  with  the
applicable Company IP Agreement.

      (d) To the  Company's  knowledge,  and  except  as set  forth on  Schedule
3.10(f)  to the  Company  Disclosure  Schedule,  no Person is  misappropriating,
infringing,  diluting  or  otherwise  violating  any right of the  Company  with
respect to any Company  Intellectual  Property owned or used by the Company, and
no such claims, suits,  arbitrations or other adversarial  proceedings have been
brought or threatened against any Person by the Company or any of its Affiliates
or the Stockholders.

      (e)  Except as set forth on  Schedule  3.10(e) to the  Company  Disclosure
Schedule,  neither  Company nor any of its Affiliates or the  Stockholders  have
received any written or other notice by any Person of any pending or  threatened
claim,  suit,  action,  mediation,   arbitration,  order  or  other  adversarial
proceeding: (i) alleging infringement (or other violation) by the Company or any
of its Affiliates or the  Stockholders of Intellectual  Property or other rights
of any  Person  or (ii)  challenging  the  Company's  or its  Affiliates  or the
Stockholders' ownership or use of, or the validity, enforcement,  registrability
or  maintenance  of,  any  Company  Intellectual  Property  owned or used by the
Company, its Affiliates or the Stockholders.  No Company  Intellectual  Property
owned or used by the Company or any of its  Affiliates is being used or enforced
in a manner that would  reasonably  be  expected  to result in the  abandonment,
cancellation or unenforceability of such Company Intellectual Property.

      (f)  Except as set forth on  Schedule  3.10(f) to the  Company  Disclosure
Schedule,  the Company Intellectual Property owned or used by the Company or its
Affiliates:  (i) is being owned or used by the Company in accordance  with,  and
not in breach of any, all Company IP Agreements,  (ii) has been duly maintained,
(iii) is  subsisting,  in full  force  and  effect,  (iv) is,  to the  Company's
knowledge,  valid  and  enforceable,  (v) has not  expired,  been  cancelled  or
abandoned and (vi) all  maintenance,  registration and renewal fees necessary to
preserve the rights of the Company in connection with such Company  Intellectual
Property  which are  required  to be paid by the  Company  or, to the  Company's
knowledge,  any other Person, have been paid in a timely manner, and (vi) except
as set forth on Schedule 3.10(f) to the Company Disclosure  Schedule,  there are
no actions that must be taken by the Company, its Affiliates or the Stockholders
within  ninety (90) days of the  Execution  Date,  including  the payment of any
registration,  maintenance  or renewal fees or the filing with the United States
Patent and Trademark Office or such other  appropriate U.S. or foreign office or
similar administrative agency of documents, applications or certificates for the
purposes of  obtaining,  maintaining,  perfecting,  preserving  or renewing  any
rights in the registered or applied-for Company Intellectual Property.

      (g) Except as  provided  for in the  Company IP  Agreements,  neither  the
Company,  its  Affiliates  or the  Stockholders  has entered into any  consents,
judgments, orders, indemnifications, forbearances to sue, settlement agreements,
licenses  or  other  arrangements  which:  (i)  restrict  the  Company's  or its
Affiliates or the Stockholders' right to use any Company Intellectual  Property,
(ii)  restrict  the  business of the  Company's  or its  Affiliates  in order to
accommodate a third Person's  Intellectual  Property rights,  (iii) permit third
parties to use any  Company  Intellectual  Property,  (iv)  reasonably  would be
expected  to  provide  any third  party a  defense  to  patent  infringement  in
connection with any Company Intellectual Property.

                                       11
<PAGE>

      (h) All Company  Intellectual  Property  developed by and belonging to the
Company or its Affiliates which has not been patented has been kept confidential
so as, among other things, all such information may be deemed proprietary to the
Company. Each Person (including any current and former employee of or consultant
to  the  Company)  who  has  contributed  to or  participated  in  research  and
development  activities  of the Company  will not,  after  giving  effect to the
Merger and the other transactions  contemplated by this Agreement, own or retain
any  rights to use any of the  Company  Intellectual  Property.  Except for such
rights as are  specifically  provided for in the Company IP Agreements,  neither
the Company nor its  Affiliates  has granted or assigned to any other Person any
right to manufacture,  have manufactured,  assemble or sell the current products
and services of the Company.

      Section 3.11 Company Products and FDA Matters.

      (a)  Schedule  3.11(a) to the  Company  Disclosure  Schedule  sets forth a
complete  and  accurate  listing and  description  of: (i) any and all  products
designed,  developed,  licensed,   manufactured,   sold,  promoted,  labeled  or
distributed  by, or on behalf of, the Company,  including any proposed  products
which are under active pre-clinical or clinical  development as of the Execution
Date (collectively, the "COMPANY PRODUCTS") and (ii) a brief description of all:
(A) active pre-clinical  activities,  including laboratory studies, (B) clinical
testing and  laboratory  studies  and (C) any other  material  activities  being
undertaken  or proposed to be undertaken by the Company or any other Person with
respect to each  Company  Product,  in each case as of the  Execution  Date (the
"DEVELOPMENT ACTIVITIES").

      (b)  Except as set forth on  Schedule  3.11(b) to the  Company  Disclosure
Schedule, the Company has no: (i) approvals for the operation of its business as
currently   conducted   or  (ii)   clearances,   authorizations,   licenses  and
registrations   required  by  any  foreign  or  domestic   Governmental   Entity
(including,  without  limitation,  the U.S.  Food and Drug  Administration  (the
"FDA")), to permit the design,  development,  pre-clinical and clinical testing,
manufacture, labeling, sale, distribution and promotion of the Company Products.
The  approvals  and  authorizations  listed on  Schedule  3.11(b) to the Company
Disclosure  Schedule  are those  which are  required  to operate  the  Company's
business as currently conducted.

      (c)  Except as set forth on  Schedule  3.11(c) to the  Company  Disclosure
Schedule,  neither the Company nor its Affiliates  (including the  Stockholders)
has received any data or other  information  which would have a Company Material
Adverse Effect.

      (d) The  Company  is  and,  to the  Company's  knowledge,  its  designated
manufacturers  in connection with the Development  Activities are, in compliance
in all material  respects with all  applicable  terms and conditions of each Law
pertaining  to the  design,  development,  pre-clinical  and  clinical  testing,
manufacture,  labeling, sale, distribution and promotion of the Company Products
(including, without limitation, all Laws administered by the FDA).

                                       12
<PAGE>

      (e) The  Company  is  and,  to the  Company's  knowledge,  its  designated
manufacturers  in connection with the Development  Activities are, in compliance
in all  material  respects  with all  applicable  Laws  regarding  registration,
license, certification for each site at which a Company Product is manufactured,
labeled, sold or distributed.

      (f) To the extent any Company  Product has been exported by the Company or
Persons with whom the Company is in privity of contract from the United  States,
the  Company  has and,  to the  Company's  knowledge,  such other  Persons  have
exported such Company  Products in compliance in all material  respects with all
applicable Laws.

      (g) The Company does not directly  manufacture  any Company Product or any
component part thereof.  With respect to all manufacturing or related operations
undertaken  by Persons with whom the Company is in privity of contract  relating
to any Company Product, to the Company's knowledge such operations have been and
are being  conducted  in all material  respects in  compliance  with  applicable
current good  manufacturing  practices and regulations issued by the FDA and, to
the extent  applicable,  counterpart  regulations  in the European Union and all
other countries where compliance is required.

      (h) To the Company's knowledge, all Development Activities sponsored by or
involving  the Company  (whether  undertaken  by the  Company or other  Persons)
relating to any Company  Product and  intended to be used to support  regulatory
clearance  or  approval  have been and are being  conducted:  (i) to the  extent
applicable,  in  compliance  in all  material  respects  with the  current  good
laboratory  practice  regulations of Governmental  Entities in the United States
and (ii) to the extent applicable, counterpart regulations in the European Union
and all other countries.

      (i) To the knowledge of the Company, no filing or submission to the FDA or
any other  Governmental  Entity with regard to the Company  Products that is the
basis for any approval or clearance contains any material omission or materially
false information.

      (j) The  Company  has not  received  any  formal  written  notice or other
written  communication  from  the  FDA or any  other  Governmental  Entity:  (i)
rejecting or overtly  contesting  the  pre-market  clearance or approval of, the
uses of or the  labeling and  promotion  of any of the Company  Products or (ii)
otherwise  alleging any violation of any Laws by the Company or the Stockholders
in connection with the Company.

      Section 3.12  Compliance  With Laws. The Company and the  Stockholders  in
connection  with the Company have  complied  with,  are not in violation of, and
have not received any notices of violation  with respect to any Law with respect
to the  ownership,  operation or conduct of the Company's  business,  except for
such  violations  or failures to comply as could not be  reasonably  expected to
have a Company Material Adverse Effect.

      Section 3.13 Environmental  Matters.  Except as disclosed on Schedule 3.13
to the Company Disclosure Schedule:

                                       13
<PAGE>

      (a) To the  knowledge of the Company,  the  operations of the Company (and
the actions of the  Stockholders in connection  therewith) has at all times been
and are in full compliance with all Environmental  Laws. To the knowledge of the
Company,   the  Company  has  obtained  and  is  in  full  compliance  with  all
Environmental  Approvals,  and each such Environmental Approval is in full force
and effect, and each such  Environmental  Approval will remain in full force and
effect after the execution, delivery and performance of this Agreement, provided
any transfer  documents  required by  Environmental  Law for such  Environmental
Approval are completed as required by Environmental Law.

      (b) Neither the Company nor any of its Property or  Facilities  is subject
to any order or proposed order under any Environmental  Law. The Company has not
received  any  notice  from any  Person  or  Governmental  Entity  regarding  or
alleging,  and, to the  knowledge of the Company,  no condition or  circumstance
exists that is reasonably  likely to result in (with or without  notice or lapse
of time or both) a violation  or failure to comply with any term or  requirement
of any Environmental Law or Environmental Approval.

      (c) There are no Proceedings (whether adjudicatory,  rulemaking, licensing
or otherwise) pending or, to the knowledge of the Company,  threatened in law or
in  equity,  or under any  administrative  or  regulatory  authority  before any
Governmental Entity, by, against or affecting the Company or any of its Property
or  Facilities  involving  any  actual  or  alleged  Environmental  Claim or any
potential suspension, revocation, revision, limitation, restriction, termination
or invalidation of any Environmental  Approval. The Company has not received any
notice or other  communication  (whether  written  or oral)  from any  person or
Governmental  Entity,  and no condition or  circumstance  exists,  that (with or
without notice or lapse of time or both) might directly or indirectly  give rise
to, or serve as a basis for, the commencement of any such Proceeding.

      (d) To the  knowledge  of the  Company,  the Company  has not  Released or
threatened  to  Release,  or  arranged  for any  other  person to  Release,  any
Hazardous Material in connection with or resulting from the operation or conduct
of the Company's  business at, on, under, from or to any Property or Facilities,
or any  other  location,  except  in  each  case:  (i) in full  compliance  with
Environmental   Law,  (ii)  in  a  manner  that  would  not  give  rise  to  any
Environmental Claim and (iii) at a location that (A) is fully permitted for such
Release,  (B) has not been  listed  or  proposed  for  listing  on the  National
Priorities List under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980,  42 U.S.C.  ss. 9601 et seq.  ("CERCLA"),  or any similar
list under any other  Environmental Law and (C) is not subject to any Proceeding
or Order for  investigation  or  cleanup  under any  Environmental  Law.  To the
knowledge  of the Company,  no Release or  threatened  Release of any  Hazardous
Material has occurred,  or is occurring,  at, on, under, from or to any Property
or Facilities,  and, to the knowledge of the Company,  no Hazardous  Material is
present in, on, under or about,  or  migrating  to or from any such  Property or
Facilities that could give rise to any  Environmental  Claim or cause of action.
Neither the Company nor the  Stockholders  in  connection  with the Company is a
potentially responsible party under CERCLA, or state analog statute, arising out
of events occurring prior to the Closing Date.

                                       14
<PAGE>

      (e) There are no Liens, declarations or deed restrictions that have arisen
or been imposed pursuant to any Environmental Law on any Property or Facilities,
and no action of any Governmental  Entity has been taken or, to the knowledge of
the  Company,  is in  process  which  could  subject  any of  such  Property  or
Facilities to such Liens, declarations or deed restrictions.

      (f) To the knowledge of the Company,  none of the following  exists at any
Property or Facilities:  any  asbestos-containing  material in any form which is
friable; urea formaldehyde foam insulation; polychlorinated biphenyls; active or
out-of-service  or  underground  storage  tanks or sites from which such storage
tanks have been removed; or landfills, surface impoundments, waste piles or land
disposal areas.

      Section 3.14 Taxes.  Except as  disclosed on Schedule  3.14 to the Company
Disclosure Schedule:

      (a) The Company has timely  filed all Tax Returns (as defined  below) that
it was required to file, and such Tax Returns are true,  correct and complete in
all material respects.  All Taxes (as defined below) shown to be payable on such
Tax Returns or on subsequent  assessments with respect thereto have been paid in
full on a timely  basis,  and no other  Taxes are  payable by the Company or any
subsidiary  with  respect  to any  period  ending  prior  to the  date  of  this
Agreement,  whether or not shown due or  reportable  on such Tax Returns,  other
than Taxes for which  adequate  accruals have been provided and are reflected in
the Company  Financial  Statements or amounts payable with respect to periods or
portions  of periods  after the  Company  Balance  Sheet  Date.  The Company has
withheld and paid over all Taxes  required to have been  withheld and paid over,
and complied with all information reporting and backup withholding requirements,
including  maintenance  of required  records with respect  thereto.  Neither the
Company nor any subsidiary has any material  liability for unpaid Taxes accruing
after the date of its Reference Balance Sheet Date, except for Taxes incurred in
the ordinary course of business.  There are no Liens for Taxes on the properties
of the Company.

      (b) No Tax  Returns of the  Company  have been  audited.  The  Company has
delivered  or made  available to Parent  correct and complete  copies of all Tax
Returns filed,  examination reports, and statements of deficiencies  assessed or
agreed to by the Company since inception. The Company has not waived any statute
of  limitations  in  respect of any Tax or agreed to an  extension  of time with
respect to any Tax assessment or deficiency.

      (c)  Neither  the  Company nor the  Stockholders  in  connection  with the
Company  is a party to or  bound by any tax  indemnity  agreement,  tax  sharing
agreement or similar  contract.  Neither the Company nor the  Stockholders  is a
party to any joint venture,  partnership, or other arrangement or contract which
could be treated as a  partnership  or  "disregarded  entity" for United  States
federal income tax purposes.

      (d)  Neither  the  Company nor the  Stockholders  is  obligated  under any
agreement, contract or arrangement that will result in the payment of any amount
that would not be deductible by reason of Sections 162(m) or 280G of the Code.

                                       15
<PAGE>

      (e) The  Company  has not been nor, to the  Company's  knowledge,  will be
required to include any material adjustment in Taxable income for any Tax period
(or  portion  thereof)  pursuant  to  Section  481 or  263A  of the  Code or any
comparable   provision   under  state  or  foreign  Tax  Laws  as  a  result  of
transactions,  events or accounting  methods  employed prior to the Merger other
than any such  adjustments  required as a result of the Merger.  The Company has
filed or will file any consent to have the provisions of paragraph 341(f) of the
Code (or comparable  provisions of any state Tax Laws) apply to the Company. The
Company  has  not  filed  any  disclosures  under  Section  6662  or  comparable
provisions of state, local or foreign Law to prevent the imposition of penalties
with respect to any Tax reporting  position taken on any Tax Return. The Company
is not  currently  and  has not  been a  United  States  real  property  holding
corporation  (within the meaning of Section  897(c)(2)  of the Code)  during the
applicable periods specified in Section 897(c)(1)(A)(ii) of the Code.

      (f) The Company  has not  incurred  any  liability  for Taxes  pursuant to
Section 1374 or 1375 of the Code (and any predecessor  provision and any similar
provision of applicable state or local or other Tax Law).

      (g) The Company has not been the  "distributing  corporation"  (within the
meaning  of  Section  355(c)(2)  of the  Code)  with  respect  to a  transaction
described in Section 355 of the Code within the three (3) year period  ending as
of the date of this Agreement.

      Section 3.15 Employee Benefit Plans.

      (a) Schedule 3.15(a) to the Company's  Disclosure  Schedule lists: (i) all
"employee  benefit plans" within the meaning of Section 3(3) of ERISA,  (ii) all
employment  agreements,  including,  but not limited to, any individual  benefit
arrangement,  policy or practice with respect to any current or former  employee
or director of the Company, and (iii) all other employee benefit, bonus or other
incentive  compensation,  stock  option,  stock  purchase,  stock  appreciation,
severance  pay,  lay-off or  reduction  in force,  change in control,  sick pay,
vacation  pay,  salary  continuation,  retainer,  leave of absence,  educational
assistance,   service   award,   employee   discount,   fringe   benefit  plans,
arrangements,  policies or practices,  whether legally binding or not, which the
Company  maintains,  to which any of them contributes,  or for which any of them
has any obligation or liability (collectively, the "PLANS").

      (b) None of the Plans is a Defined  Benefit Plan,  and neither the Company
nor  Member  of the  Controlled  Group  or has  ever  sponsored,  maintained  or
contributed to, or ever been obligated to contribute to, a Defined Benefit Plan.

      (c) None of the Plans is a Multiemployer  Plan, and neither the Company, a
Member of the Controlled  Group or the  Stockholders has ever contributed to, or
ever been obligated to contribute to, a Multiemployer Plan.

      (d) The Company does not maintain or  contribute to any plan that provides
health benefits to an employee after the employee's termination of employment or
retirement  except as required  under Section 4980B of the Code and Sections 601
through 608 of ERISA.

                                       16
<PAGE>

      (e) Each Plan which is an "employee  benefit  plan," as defined in Section
3(3) of ERISA,  complies in all material  respects by its terms and in operation
with the requirements  provided by any and all statutes,  orders or governmental
rules and regulations  currently in effect and applicable to the Plan, including
but not limited to ERISA and the Code.

      (f) All reports,  forms and other documents  required to be filed with any
government  entity or furnished to employees,  former employees or beneficiaries
with  respect  to  any  Plan  (including   without   limitation,   summary  plan
descriptions,  Forms 5500 and summary annual reports) have been timely filed and
furnished  and  are  accurate,   except  for  those  instances   which,   either
individually  or in the  aggregate,  would not have a Company  Material  Adverse
Effect.

      (g) Each of the Plans that are intended to qualify under Section 401(a) of
the Code has been determined by the Internal Revenue Service to so qualify after
January 1, 1989, and each trust maintained  pursuant thereto has been determined
by the Internal  Revenue Service to be exempt from taxation under Section 501 of
the Code.  Nothing has occurred since the date of the Internal Revenue Service's
favorable  determination letter that could adversely affect the qualification of
the Plan and its related  trust.  The Company and each Member of the  Controlled
Group or have timely amended and operated each of these Plans to comply with the
Small Business and Job Protection Act of 1996 and subsequent legislation enacted
through the date hereof, and Section 501 of the Code.

      (h) All  contributions  for all periods  ending  prior to the Closing Date
(including  periods  from the first day of the current  plan year to the Closing
Date)  have been made  prior to the  Closing  Date by the  Company  or have been
reserved against on the Company Financial Statements.

      (i) All insurance  premiums have been paid in full, subject only to normal
retrospective  adjustments in the ordinary course,  with regard to the Plans for
plan years  ending on or before the  Closing  Date,  except for those  instances
which,  either  individually  or in the  aggregate,  would  not  have a  Company
Material Adverse Effect.

      (j)  With  respect  to  each  Plan:  (i) to the  Company's  knowledge,  no
"prohibited  transactions" (as defined in Section 406 or 407 of ERISA or Section
4975  of the  Code)  have  occurred  for  which  a  statutory  exemption  is not
available; (ii) no action or claims (other than routine claims for benefits made
in the  ordinary  course of Plan  administration  for which Plan  administrative
review  procedures have not been exhausted) are pending,  or to the knowledge of
the Company,  threatened  or imminent  against or with respect to the Plan,  any
employer  who is  participating  (or who has  participated)  in any  Plan or any
fiduciary (as defined in Section 3(21) of ERISA), of the Plan; (iii) neither the
Company,  nor any  fiduciary has any knowledge of any facts that could give rise
to any such  action or claim;  and (iv) it  provides  that it may be  amended or
terminated at any time and,  except for benefits  protected under Section 411(d)
of the Code,  all  benefits  payable to  current,  terminated  employees  or any
beneficiary  may be amended or  terminated  by the  Company at any time  without
liability other than ordinary administrative expenses.

                                       17
<PAGE>

      (k) Neither the Company nor, to the  knowledge of the Company,  any of its
Affiliates  has any material  liability or is, to the  knowledge of the Company,
threatened with any material liability  (whether joint or several):  (i) for any
excise tax imposed by Sections 4971,  4975,  4976,  4977 or 4979 of the Code, or
(ii) to a fine under Section 502 of ERISA.

      (l) All of the Plans, to the extent applicable, are in material compliance
with the continuation of group health coverage  provisions  contained in Section
4980B of the Code and Sections 601 through 608 of ERISA.

      (m) True,  correct  and  complete  copies  of all  documents  creating  or
evidencing any Plan have been  delivered or made available to Parent,  and true,
correct and complete copies of all reports,  forms and other documents  required
to be filed with any  Governmental  Entity or  furnished  to  employees,  former
employees  or  beneficiaries  (including,   without  limitation,   summary  plan
descriptions,  Forms 5500 and summary  annual  reports for all plans  subject to
ERISA,  but excluding  individual  account  statements  and tax forms) have been
delivered to Parent.  There are no negotiations,  demands or proposals which are
pending or have been made which  concern  matters now covered,  or that would be
covered, by the type of agreements required to be listed in Schedule 3.15(a) and
that are reasonably likely to have a Company Material Adverse Effect.

      (n) All expenses and  liabilities  relating to all of the Plans have been,
and will on the  Closing  Date be fully and  properly  accrued  on the Books and
Records.

      Section  3.16  Certain  Agreements  Affected by the Merger.  Except as set
forth  on  Schedule  3.16 to the  Company's  Disclosure  Schedule,  neither  the
execution  and  delivery  of  this  Agreement  nor  the   consummation   of  the
transactions  contemplated  hereby  will:  (i)  result in any  material  payment
(including, without limitation, any severance, unemployment compensation, golden
parachute or bonus  payment)  becoming due to any  director,  officer,  agent or
employee of the Company or any other third party,  (ii) materially  increase any
benefits  otherwise  payable by the Company to its respective  employees,  (iii)
result  in the  acceleration  of the  time of  payment  or  vesting  of any such
benefits or (iv)  breach,  cause an event of default or give any third party any
rights  against  the  Company or the  Company  Intellectual  Property  under any
Company IP Agreement.

      Section 3.17 Employee Matters.

      (a) The  Company  is in  compliance  in all  material  respects  with  all
currently applicable Laws respecting  employment,  discrimination in employment,
terms and conditions of employment,  wages,  hours and  occupational  safety and
health  and  employment  practices,  and are not  engaged  in any  unfair  labor
practice,  except where the failure to be in  compliance  or the  engagement  in
unfair labor practices has not had and would not be reasonably  expected to have
a Company  Material  Adverse  Effect.  The Company is in all  material  respects
withheld all amounts  required by Law or by  agreement  to be withheld  from the
wages, salaries,  and other payments to their respective employees;  and are not
liable  for any  arrears  of wages or any taxes or any  penalty  for  failure to
comply with any of the foregoing.

                                       18
<PAGE>

      (b) The  Company is not liable for any  payment to any trust or other fund
or to  any  Governmental  Entity,  with  respect  to  unemployment  compensation
benefits,  social security or other benefits or obligations for employees (other
than routine payments to be made in the normal course of business and consistent
with past  practice).  There are no pending claims against the Company under any
workers'  compensation  plan or policy or for long term  disability that are not
covered by insurance. The Company has no obligations under COBRA with respect to
any former employees or qualifying beneficiaries thereunder,  except obligations
that would not have a Material Adverse Effect on the Company.

      (c)  There  are no  controversies  pending  or,  to the  knowledge  of the
Company, threatened,  between the Company and its employees (including,  without
limitation,  controversies  relating  to  sexual or age  discrimination,  sexual
harassment  or  similar  controversies),   which  controversies  have  or  could
reasonably be expected to result in a Proceeding  against the Company before any
Governmental  Entity  except for such  Proceeding  that would not have a Company
Material Adverse Effect.

      (d) The Company is not a party to any collective  bargaining  agreement or
other  labor union  contract,  nor does the Company  know of any  activities  or
proceedings of any labor union or organization of any such employees.

      (e) No  employees  of the  Company  are in  violation  of any  term of any
employment contract,  patent disclosure agreement,  enforceable  non-competition
agreement, or any enforceable restrictive covenant to a former employer relating
to the right of any such  employee to be employed by the Company  because of the
nature of the business  conducted  or presently  proposed to be conducted by the
Company or to the use of trade  secrets  or  proprietary  information  of others
where such  violation  would or would  reasonably  be expected to have a Company
Material  Adverse  Effect or,  following the Effective  Time, a Parent  Material
Adverse  Effect.  No  employees or  consultants  who are  considered  key to the
operations or the business of the Company have given notice to the Company,  nor
is the Company  otherwise aware that any such employee  intends to terminate his
or her employment or consultancy with the Company.

      Section  3.18  Insurance.  The  Company has made  available  to Parent all
material  policies of insurance of the Company as set forth on Schedule  3.18 to
the Company  Disclosure  Schedule,  and such  Schedule is complete and accurate.
There is no material  claim  pending  under any of such  policies or bonds as to
which coverage has been  questioned,  denied or disputed by the  underwriters of
such policies or bonds. All premiums due and payable under all such policies and
bonds have been paid and the Company is otherwise in  compliance  with the terms
of such  policies  and bonds.  The Company has no  knowledge  of any  threatened
termination  of, or  material  premium  increase  with  respect  to, any of such
policies.  The Company has not been  refused any  insurance  coverage  sought or
applied  for,  and the Company has no reason to believe that it will not be able
to renew its existing insurance coverage as and when such coverage expires or to
obtain  similar  coverage from similar  insurers as may be necessary to continue
its business at a cost that would not materially  adversely affect the business,
business prospects, properties, condition (financial or otherwise) or results of
operations of the Company.

                                       19
<PAGE>

      Section  3.19  Customers  and  Suppliers.  Schedule  3.19  to the  Company
Disclosure Schedule lists the top five suppliers and customers of the Company in
terms of gross purchases and gross revenues,  respectively,  since the inception
of the  Company.  No such  customer  and no such  supplier  of the  Company  has
cancelled or otherwise  terminated or made any written  threat to the Company or
the  Stockholders  to cancel or otherwise  terminate its  relationship  with the
Company  or, at any time on or after  the  Reference  Balance  Sheet  Date,  has
materially  decreased  its  purchases  or supplies  to the  Company  and, to the
Company's knowledge, no such supplier or customer intends to cancel or otherwise
terminate  its  relationship  with the  Company or to  decrease  materially  its
services or supplies to the Company or its usage of the  services or products of
the Company, as the case may be. The Company has not knowingly  breached,  so as
to provide a benefit to the  Company or any of it's  Affiliates  (including  the
Stockholders)  not were intended by the parties,  any agreement with, or engaged
in any  fraudulent  conduct  with  respect  to, any  customer or supplier of the
Company.

      Section  3.20  Material   Contracts.   Except:  (i)  for  the  Company  IP
Agreements,  (ii)  as set  forth  on  Schedule  3.20 to the  Company  Disclosure
Schedule (the contracts  listed on such  Schedule,  together with the Company IP
Agreements,  being collectively  referred to herein as the "MATERIAL CONTRACTS")
and  (iii)  for  this  Agreement,  and  other  contracts  and  agreements  which
individually or in the aggregate are not material to the Company's business, the
Company is not a party to or bound by:

      (a) any agreement,  contract,  instrument or understanding relating to any
Intellectual Property (including the Company Intellectual Property);

      (b) any  distributor,  sales,  agency  or  manufacturer's  representative,
consulting,   joint-venture,   or  partnership  contract,   joint  research  and
development contract or technology sharing arrangements;

      (c) any  continuing  contract  for the  purchase of  materials,  supplies,
equipment  or  services  involving  in the case of any such  contact  more  than
$10,000 over the life of the contract;

      (d) any trust  indenture,  mortgage,  promissory  note,  loan agreement or
other contract for the borrowing of money, any currency exchange, commodities or
other hedging  arrangement or any leasing transaction of the type required to be
capitalized in accordance with GAAP;

      (e) any  contract  for  capital  expenditures  in excess of $10,000 in the
aggregate;

      (f) any contract limiting the freedom of the Company to engage in any line
of business,  to acquire any product or asset from any other Person, to sell any
product or asset to, or to perform any service  for,  any Person,  or to compete
with any other Person;

      (g)  any  confidentiality,   secrecy  or  non-disclosure  contract,  which
individually  or in the  aggregate,  materially  affects or could be  reasonably
anticipated to materially affect the business or operations of the Company;

      (h) any  contract  pursuant  to which  the  Company  is a  lessor  of real
property or any machinery, equipment, motor vehicles, office furniture, fixtures
or other personal  property  involving in the case of any such personal property
contact more than $10,000 over the life of the contract;

                                       20
<PAGE>

      (i) any  contract  with any Person with whom the Company  does not deal at
arm's length or any agreement with either or both Stockholders;

      (j) any contract  which provides for the  indemnification  of any officer,
director, employee or agent; or

      (k) any agreement of guarantee,  support,  indemnification,  assumption or
endorsement  of, or any similar  commitment  with  respect to, the  obligations,
liabilities (whether accrued, absolute, contingent or otherwise) or indebtedness
of any other Person.

      Section 3.21 No Breach of Material  Contracts.  All Material Contracts are
in the written form previously provided or made available to Parent. The Company
has performed all of the material  obligations required to be performed by it as
of the date hereof and is entitled to all benefits under,  and is not alleged to
be in material  breach or default in respect of any Material  Contract.  Each of
the Material Contracts is in full force and effect, unamended except as provided
or made available to Parent,  and there exists no default or event of default or
event,  occurrence,  condition  or act,  with  respect to the Company or, to the
Company's  knowledge,  with respect to the other contracting party,  which, with
the giving of notice or the lapse of the time,  would  become a default or event
of default  under any  Material  Contract  or would give any Person the right to
exercise any remedy, or the right to any rebate,  chargeback,  penalty or change
in delivery schedule, except to the extent such defaults, remedies, penalties or
changes  have not had and would  not be  reasonably  expected  to have a Company
Material Adverse Effect.

      Section 3.22 Real Property and Real Property Leases.

      (a)  Schedule  3.22(a) to the Company  Disclosure  Schedule  sets forth an
accurate, correct and complete list of each parcel of real property owned by the
Company (the "REAL  PROPERTY"),  including a street  address,  and a list of all
leases,  contracts  or other  agreements  to which  the  Company  is a party and
affecting the Real Property or any interest  therein.  The Company has delivered
to Parent accurate,  correct and complete copies of all such leases,  contracts,
and agreements.  The Company is the sole and exclusive legal and record owner of
and  has  good  and  marketable  title  in fee  simple  absolute  to,  and is in
possession of, all Real Property, including the buildings,  structures, fixtures
and improvements  situated  thereon and  appurtenances  thereto,  including such
right of ways and easements running toward the benefit of such Real Property, in
each case  free and  clear of all  tenancies  and  other  possessory  interests,
security interests, conditional sale or other title retention agreements, Liens,
assessments,  easements, rights of way, covenants,  restrictions,  reservations,
options,  rights of first  refusal,  defects in title,  encroachments  and other
burdens, except the leases, contracts, agreements and other matters set forth on
Schedule 3.22(a) to the Company Disclosure  Schedule or except those that do not
materially  and  adversely   affect  the  current  use  and  operation  of  such
properties. All leases, contracts and agreements to which the Company is a party
and affecting the Real Property are set forth on Schedule 3.22(a) to the Company
Disclosure  Schedule  and are  legally  valid and  binding and in full force and
effect,  and  there  are  no  defaults,   offsets,   counterclaims  or  defenses
thereunder,  and  the  Company  has  received  no  notice  of  default,  offset,
counterclaim or defense under any such contracts.

                                       21
<PAGE>

      (b) No Real  Property is located  within a  designated  erosion,  flood or
seismic  safety  hazard  area.  Neither  the whole nor any  portion  of any Real
Property  owned,  leased,  occupied or used by the  Company has been  condemned,
requisitioned or otherwise taken by any public  authority,  and no notice of any
such condemnation,  requisition or taking has been received. To the knowledge of
the  Company,  no such  condemnation,  requisition  or taking is  threatened  or
contemplated.  The Company has no knowledge of any public improvements which may
result in special assessments against or otherwise affect the Real Property

      (c)  To  the  Company's  knowledge,  the  Real  Property  is  in  material
compliance with all applicable  Environmental Laws, planning,  zoning, building,
health,  fire,  water,  use or similar  legal  requirements.  The zoning of each
parcel of Real Property  permits the existing  improvements and the continuation
following consummation of the transaction  contemplated hereby of the businesses
of the Company and its Affiliates as presently  conducted  thereon.  The Company
has all licenses, certificates of occupancy, permits and authorizations required
to utilize the Real Property for the business presently  conducted thereon.  The
Company  has all  easements  and rights  necessary  to conduct  its  businesses,
including  easements for all  utilities,  services,  roadway,  railway and other
means of ingress and  egress.  The Real  Property  as conveyed  pursuant to this
Agreement  shall  include all rights to any  off-site  facilities  necessary  to
ensure compliance in all material respects with all applicable planning, zoning,
building,  health,  fire,  water,  use or  similar  legal  requirements.  To the
knowledge of the Company,  no fact or condition exists which would result in the
termination   or  impairment  of  existing   access  to  the  Real  Property  or
discontinuation  of existing sewer,  water,  electric,  gas,  telephone or other
communications facilities, waste disposal or other utilities or services serving
the Real Property. To the knowledge of the Company, the facilities servicing the
Real Property are in material compliance with all applicable legal requirements.

      (d) The Company has  delivered  to Parent  accurate,  correct and complete
copies  of all  existing  title  insurance  policies,  title  reports,  surveys,
environmental reports, if any, with respect to each parcel of Real Property.

      (e) With respect to the Real Property:

            (i) to  the  knowledge  of the  Company,  there  are no  outstanding
options or rights of first refusal or similar rights to purchase any such parcel
or any  portion  thereof or interest  therein,  except as  disclosed  in written
agreements  relating  thereto as set forth on  Schedule  3.22(a) to the  Company
Disclosure Schedule, and

            (ii) to the knowledge of the Company,  each such parcel abuts on and
has adequate  direct  vehicular  access to a public road and there is no pending
or, to the knowledge of the Company, threatened termination of such access.

                                       22
<PAGE>

      (f) Schedule 3.22(f) to the Company Disclosure  Schedule sets forth a list
of all leases,  licenses or other occupancy agreements to which the Company is a
party,  that are for the use or  occupancy of real estate owned by a third party
("LEASES")  (copies of which have previously been furnished to Parent),  in each
case,  setting  forth:  (i) the lessor and lessee  thereof and the  commencement
date,  term and renewal  rights  under each of the  Leases,  and (ii) the street
address or legal  description  of each  property  covered  thereby  (the "LEASED
PREMISES").  The Leases are in full force and effect in all  material  respects,
and to the knowledge of the Company,  have not been amended,  and the Company is
not and, to the knowledge of the Company,  no other party thereto, is in default
or breach  under any such Lease and no event has  occurred by the Company  that,
with the  passage of time or the giving of notice or both,  would cause a breach
of or default of the Company under any of such Leases, except to the extent such
default would not have a Company Material Adverse Effect. Except as set forth on
Schedule  3.22(f) to the  Company  Disclosure  Schedule,  the  Company has valid
leasehold interests in each of the Leased Premises,  which leasehold interest is
free and clear of any Liens,  covenants  and  easements or title  defects of any
nature whatsoever.

      (g) With  respect  to the  Leased  Premises,  and  except  as set forth on
Schedule 3.22(g) to the Company Disclosure Schedule:

            (i)  there  are no  pending  or, to the  knowledge  of the  Company,
threatened condemnation proceedings, suits or administrative actions relating to
any such parcel or other matters affecting  materially and adversely the current
use, occupancy or value thereof,

            (ii) to the knowledge of the Company,  all  improvements,  buildings
and  systems on any such  parcel are in good  repair and safe for their  current
occupancy and use,

            (iii) to the  knowledge  of the  Company,  there are no contracts or
agreements  (whether oral or written) granting to any party or parties the right
of use or occupancy of any such parcel, and there are no parties (other than the
Company) in possession of any such parcel,

            (iv) to the  knowledge  of the  Company,  there  are no  outstanding
options or rights of first refusal or similar rights to purchase any such parcel
or any portion thereof or interest therein,

            (v) to the knowledge of the Company,  all Facilities located on each
such parcel are supplied with utilities and other  services  necessary for their
ownership,  operation or use, currently or as currently proposed by the Company,
all of which services are adequate in accordance with all applicable Laws, and

            (vi) to the knowledge of the Company,  each such parcel abuts on and
has adequate  direct  vehicular  access to a public road and there is no pending
or, to the knowledge of the Company, threatened termination of such access.

      Section  3.23  Certain  Business  Practices.   Neither  the  Company,  the
Stockholders  nor any of their  respective  employees or agents has at any time:
(i) used any Company funds for unlawful contributions,  gifts,  entertainment or
other  unlawful  expenses  relating  to  political  activity  in  respect of the
Company's or such subsidiary's  business,  (ii) directly or indirectly,  paid or
delivered any fee, commission or other sum of money or item of property, however
characterized, to any finder, agent, or other party acting on behalf of or under
the auspices of a governmental  official or Governmental  Entity,  in the United
States or any other country, which is in any manner illegal under any applicable
Law or (iii) to the  knowledge of the Company,  made any payment to any customer
or supplier of the Company or such Subsidiary,  or given any other consideration
to  any  such  customer  or  supplier  in  respect  of  the  Company's  or  such
subsidiary's business that violates applicable Law in any material respect.

                                       23
<PAGE>

      Section  3.24  Interested-Party  Transactions.  Except  as  set  forth  on
Schedule  3.24 to the  Company  Disclosure  Schedule,  no  officer,  director or
stockholder  of the Company,  no relative or spouse (or relative of such spouse)
who resides with, or is a dependent of any of the foregoing, and no Affiliate of
any of the foregoing  has or has had,  directly or  indirectly:  (i) an economic
interest  in any Person  that has  furnished  or sold,  or  furnishes  or sells,
services or products that the Company furnishes or sells, or proposes to furnish
or sell, (ii) an economic interest in any Person that purchases from or sells or
furnishes to, the Company, any goods or services, (iii) a beneficial interest in
any Material Contract or (iv) holds any indebtedness to the Company.

      Section 3.25 Information Supplied. None of: (i) the information, documents
or other due  diligence  matters  supplied  or to be supplied by or on behalf of
Company to Parent in connection  with this Agreement or any of the  transactions
contemplated  hereby, (ii) the representations and warranties of the Company and
the Stockholders contained in this Agreement or any Other Agreement or (iii) the
Company  Disclosure  Schedule contain any untrue statement of a material fact or
omit to state any material  fact  required to be stated  therein or necessary in
order to make the statements  therein, in light of the circumstances under which
they are made, not misleading.

      Section 3.26 Brokers' and Finders' Fees. The Company has not incurred, nor
will it incur,  directly or indirectly,  any liability for brokerage or finders'
fees or agents'  commissions or investment  bankers' fees or any similar charges
in  connection  with  this  Agreement,  the  Merger  or  any  other  transaction
contemplated hereby or pursuant to any Other Document.

      Section  3.27 Vote  Required.  The  affirmative  vote of the  holders of a
majority of the shares of the Company Common Stock  outstanding is the only vote
of the holders of any of the Company's  Capital Stock or any other  agreement to
which the Company or the  Stockholders  are a party  necessary  to approve  this
Agreement,  any Other  Agreement and the  transactions  contemplated  hereby and
thereby.

      Section  3.28 Board  Approval.  The Board of Directors of the Company has:
(i)  reviewed,  deliberated  and approved this  Agreement  and the Merger,  (ii)
determined that there are no other proposed extraordinary  transactions with the
Company on terms more  advantageous to the  stockholders  of the Company,  (iii)
that the Merger is in the best interests of the  stockholders of the Company and
is on terms that are fair to such  stockholders,  and (iv)  recommended that the
stockholders of the Company approve this Agreement and the Merger.

                                       24
<PAGE>

      Section 3.29  Reorganization  Matters.  To the Company's knowledge neither
the  Company nor any of its  Affiliates  has taken or agreed to take any action,
nor does the Company  have  knowledge  of any fact or  circumstance,  that would
prevent the Merger from  qualifying  as a  reorganization  within the meaning of
Section 368 of the Code.

      Section 3.30 No Opinion of Financial Advisor. The Company has not and will
not engage the services of a financial advisor for a fairness opinion.

      Section  3.31  Investigation  by the  Company  and the  Stockholders.  The
Company and the Stockholders have conducted their own independent investigation,
review and analysis of the business, operations, assets, liabilities, results of
operations,  financial  condition,  Intellectual  Property and  prospects of the
Parent, which investigation, review and analysis was done by the Company and its
Affiliates and, to the extent the Company deemed  appropriate,  by the Company's
representatives.  The Company and the Stockholders have received, read, reviewed
and  investigated  all  material  information  contained  within  the Parent SEC
Documents (as defined below)  including,  without  limitation,  all risk factors
contained in the  registration  statements  and annual reports of Parent and its
subsidiary,  Bioral  Nutrient  Delivery,  LLC. The Company and the  Stockholders
acknowledge that it and its  representatives  have been provided adequate access
to the  personnel,  properties,  premises  and  records  of the  Parent  and its
subsidiaries  as they have  requested  for such  purpose.  In entering into this
Agreement,  the  Company  acknowledges  that  it  has  relied  solely  upon  the
aforementioned  investigation,  review  and  analysis  and  not on  any  factual
representations   or   opinions  of  the   Parent's  or  any  of  the   Parent's
representatives  (except the  specific  representations  and  warranties  of the
Parent set forth in this  Agreement  and the Parent  Disclosure  Schedule).  The
Company and the Stockholders haves formed an independent judgment concerning the
Parent.

      Section 3.32 Company Disclosure Schedule. It is understood and agreed that
any disclosure in the Company  Disclosure  Schedule shall qualify the disclosure
under the specific section number referred to in the Company Disclosure Schedule
as well as all other sections in this  Agreement when it is reasonably  apparent
from a reading  of such  disclosure  that it also  qualifies  or applies to such
other  sections.  The Company shall make all reasonable  efforts to specifically
cross  reference  in the  Company  Disclosure  Schedule  all  sections  where  a
particular disclosure qualifies or applies.

                                   ARTICLE IV
             REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB

      Except as disclosed in the Parent  Disclosure  Schedule or as specifically
provided for in this Article IV,  Parent hereby  represents  and warrants to the
Company and the Stockholders as follows:

      Section  4.1  Organization,  Standing  and  Power.  Parent and each of its
subsidiaries,  including  Merger Sub, are corporations  duly organized,  validly
existing and in good standing under the Laws of their  respective  jurisdictions
of organization. Each of Parent and its subsidiaries, including Merger Sub, have
the corporate  power to own their  respective  properties  and to carry on their
respective businesses as now being conducted and as proposed to be conducted and
are  each  duly  qualified  to do  business  and  are in good  standing  in each
jurisdiction  in which the failure to be so qualified and in good standing would
have  a  Parent  Material  Adverse  Effect.   Neither  Parent  nor  any  of  its
subsidiaries,  including Merger Sub, is in violation of any of the provisions of
its   respective   Certificate   of   Incorporation   or  Bylaws  or  equivalent
organizational  documents.  Parent  is the  owner of all  outstanding  shares of
capital  stock  of each  of its  subsidiaries  and  all  such  shares  are  duly
authorized,  validly issued, fully paid and non-assessable.  Except as disclosed
in the Parent SEC  Documents,  Parent does not  directly or  indirectly  own any
equity or similar  interest in, or any interest  convertible or  exchangeable or
exercisable   for,  any  equity  or  similar   interest  in,  any   corporation,
partnership,  joint venture or other business  association or entity,  excluding
securities in any publicly  traded  company held for investment by Parent or any
of it  subsidiaries  in  accordance  with and  pursuant to the  Parent's  formal
investment  policy and comprising less than 5% of the outstanding  stock of such
company.

                                       25
<PAGE>

      Section 4.2 Capital Structure.

      (a) The  authorized  capital stock of Parent  consists of: (i)  45,000,000
shares of Parent Common Stock,  of which there were 7,085,863  shares issued and
6,985,763 shares outstanding as of the Execution Date, and (ii) 5,000,000 shares
of preferred  stock,  par value $.001, of which 1,647,059 shall be designated as
Parent  Preferred  Stock on or prior to the Closing Date, and of which no shares
are issued and  outstanding as of the Closing Date. No other shares of preferred
stock of  Parent  have  been  designated  as of the  Execution  Date.  As of the
Execution Date, there are no other outstanding shares of capital stock or voting
securities and no  outstanding  commitments to issue any shares of capital stock
or voting  securities,  other  than:  (i)  publicly-traded  warrants to purchase
2,085,000  shares of Parent Common Stock at an exercise price of $6.30 per share
as of the  Execution  Date  (the  "PARENT  WARRANTS")  or (ii)  pursuant  to the
exercise of options  outstanding under the 2001 Stock Option Plan of the Company
(as  amended,  the "PARENT  STOCK  OPTION  PLAN" and such  options,  the "PARENT
OPTIONS").  The  authorized  capital  stock of Merger Sub consists of 45,000,000
shares of common  stock,  par value $.001 per share,  of which 1,000  shares are
issued and  outstanding  and held by Parent,  and 5,000,000  shares of preferred
stock, par value $.001 per share, of which no shares are issued and outstanding.
The  shares of Parent  Preferred  Stock to be issued in the  Merger  will,  upon
issuance, be duly authorized, validly issued, fully paid and non-assessable.

      (b) All  outstanding  shares of Parent  Common Stock are duly  authorized,
validly issued,  fully paid and  non-assessable and are free of any Liens, other
than any Liens  created  by or imposed  upon the  holders  thereof,  and are not
subject to preemptive rights or rights of first refusal created by Delaware Law,
the Certificate of  Incorporation  or Bylaws of Parent or any agreement to which
Parent is a party or by which it is bound.  As of the close of  business  on the
Execution Date, Parent has reserved  2,100,000 shares of Parent Common Stock for
issuance to directors,  employees and  consultants  pursuant to the Parent Stock
Option Plan. As of the Execution Date,  1,333,416  shares of Parent Common Stock
are issuable upon the exercise of vested Parent Options and 2,085,000  shares of
Parent Common Stock are issuable upon  exercise of the Parent  Warrants.  On the
Execution Date,  except as set forth on Schedule 4.2(b) to the Parent Disclosure
Schedule and in the Parent SEC Documents and except for: (i) the rights  created
pursuant to this Agreement, the Parent Stock Option Plan, the Parent Options and
the Parent  Warrants and (ii) Parent's right to repurchase  any unvested  shares
under the Parent Stock Option Plan, there are no other options, warrants, calls,
rights, commitments or agreements of any character to which Parent is a party or
by which it is bound obligating Parent to issue,  deliver,  sell,  repurchase or
redeem, or cause to be issued,  delivered,  sold,  repurchased or redeemed,  any
shares of Parent Capital Stock or obligating Parent to grant, extend, accelerate
the vesting of,  change the price of, or otherwise  amend or enter into any such
option,  warrant, call, right,  commitment or agreement.  Except as set forth on
Schedule  4.2(b) to the Parent  Disclosure  Schedule,  the  consummation  of the
merger  transaction  and  other  transactions   contemplated  hereby  shall  not
increase, decrease, nor otherwise affect: (i) the number of shares for which any
Parent Warrants or Parent Options are exercisable or (ii) the exercise price for
any shares issuable pursuant to the Parent Warrants or Parent Options.

                                       26
<PAGE>

      (c)  Except  as set forth on  Schedule  4.2(c)  to the  Parent  Disclosure
Schedule,  there are no voting trusts or agreements,  stockholders'  agreements,
pledge  agreements,  buy-sell  agreements,  rights of first refusal,  preemptive
rights,  registration  rights or proxies relating to any securities of Parent to
which  Parent is a party or, to  Parent's  knowledge,  to which  Parent is not a
party.  All of the  outstanding  securities  of Parent were issued in compliance
with all applicable Federal and state securities laws.

      Section 4.3 Authority.

      (a)  Parent and Merger  Sub each have all  requisite  corporate  power and
authority to enter into this Agreement,  each Other Document to which they are a
party and to consummate the transactions  contemplated  hereby and thereby.  The
execution  and  delivery  of  this  Agreement,   each  Other  Document  and  the
consummation of the transactions  contemplated hereby and thereby have been duly
authorized by all necessary  corporate  action on the part of each of Parent and
Merger Sub, as applicable,  other than action by the Company's  stockholders  to
approve the conversion of shares of Parent Preferred Stock which are convertible
into 20% or more of  Parent's  outstanding  Parent  Common  Stock as of the date
hereof.

      (b) This  Agreement and each Other Document to which they are a party have
been  duly  executed  and  delivered  by each  of  Parent  and  Merger  Sub,  as
applicable, and each constitutes the valid and binding obligations of Parent and
Merger Sub enforceable against each by the Company in accordance with its terms,
except as may be limited by bankruptcy, insolvency,  reorganization,  moratorium
and  other  similar  Laws  and  equitable  principles  relating  to or  limiting
creditors' rights generally and by general  principles of equity.  The execution
and delivery of this Agreement and each Other Document to which they are a party
do not, and the consummation of the transactions contemplated hereby and thereby
will not,  conflict  with, or result in any violation of, or default under (with
or  without  notice  or lapse  of time,  or  both),  or give  rise to a right of
termination, cancellation or acceleration of any obligation or loss of a benefit
under: (i) any provision of the Certificate of Incorporation or Bylaws of Parent
or the  Certificate  of  Incorporation  or  Bylaws of  Merger  Sub,  or (ii) any
material mortgage,  indenture, lease, contract or other agreement or instrument,
permit, concession,  franchise,  license, judgment, order, decree, statute, Law,
ordinance,  rule  or  regulation  applicable  to  Parent,  Merger  Sub or  their
respective properties or assets, except where such conflict, violation, default,
termination,   cancellation  or  acceleration  with  respect  to  the  foregoing
provisions  in  subsection  (ii) would not have had and would not be  reasonably
expected to have a Parent Material Adverse Effect.

                                       27
<PAGE>

      (c) Except as would not have a Parent Material Adverse Effect, no consent,
approval,  order or  authorization  of, or  registration,  declaration or filing
with, any  Governmental  Entity is required with respect to Parent or Merger Sub
in connection  with the  execution and delivery of this  Agreement by Parent and
Merger Sub or the  consummation  by Parent  and  Merger Sub of the  transactions
contemplated hereby and thereby, except for (i) the filing of the Certificate of
Merger,  together  with the  required  officers'  certificates,  as  provided in
Section 2.2, (ii) any filings as may be required under applicable federal, state
and local securities laws and the securities laws of any foreign country,  (iii)
such  filings  as  may  be  required  under  the   Hart-Scott-Rodino   Antitrust
Improvements  Act of 1976,  (iv) the  filing  with the  NASDAQ  Small Cap Market
("NASDAQ")  for the  listing  of shares of Parent  Common  Stock  issuable  upon
conversion  of the  Parent  Preferred  Stock in the  Merger;  and (v) such other
consents,  authorizations,  filings,  approvals and registrations  which, if not
obtained  or made,  would  not  prevent,  materially  alter or delay  any of the
transactions contemplated by this Agreement.

      Section 4.4 SEC Documents; Financial Statements. Parent has made available
to the Company (via the SEC's EDGAR system or otherwise) each statement, report,
registration  statement  (with the prospectus in the form filed pursuant to Rule
424(b) of the Securities  Act,  including the risk factors  contained  therein),
definitive  proxy  statement,  and other filing  filed with the SEC  (including,
without limitation, all filings made under and pursuant to the Exchange Act) by:
(i) Parent  since  January 1, 2000 and (ii)  Bioral  Nutrient  Delivery,  LLC, a
subsidiary of Parent  (collectively,  the "PARENT SEC DOCUMENTS").  In addition,
Parent  has made  available  to the  Company  (via the  SEC's  EDGAR  system  or
otherwise)  all  exhibits  to the Parent SEC  Documents  filed prior to the date
hereof,  and will  promptly  make  available  to the Company all exhibits to any
additional Parent SEC Documents filed prior to the Effective Time. Except as set
forth on Schedule 4.4 to the Parent Disclosure Schedule,  as of their respective
filing dates,  the Parent SEC Documents  complied in all material  respects with
the  requirements  of the Exchange  Act and the  Securities  Act. The  financial
statements of Parent,  including the notes  thereto,  included in the Parent SEC
Documents (the "PARENT  FINANCIAL  STATEMENTS") were complete and correct in all
material  respects  as of their  respective  dates,  complied  as to form in all
material respects with applicable accounting requirements and with the published
rules and  regulations  of the SEC with respect  thereto as of their  respective
dates,  and have  been  prepared  in  accordance  with GAAP  applied  on a basis
consistent  throughout  the periods  indicated  and  consistent  with each other
(except as may be  indicated  in the notes  thereto or, in the case of unaudited
statements,  included in Quarterly  Reports on Form 10-Qs,  as permitted by Form
10-Q of the SEC). The Parent Financial Statements fairly present in all material
respects the consolidated financial condition and operating results of Parent as
of the dates and for the  periods  indicated  therein  (subject,  in the case of
unaudited statements, to normal, recurring year-end adjustments). For the period
from inception  through December 31, 2003,  Parent,  on a cumulative basis, does
not  have  any  earnings  or  profits.   Parent  has  fully  complied  with  all
certification requirements,  and will comply with all certification requirements
prior to the Effective Time, under the  Sarbanes-Oxley Act of 2002 and the rules
and regulations promulgated thereunder.

      Section 4.5  Absence of  Undisclosed  Liabilities.  Parent has no material
obligations  or  liabilities  of any  nature  (matured  or  unmatured,  fixed or
contingent)  other than:  (i) those set forth or adequately  provided for in the
balance sheet or in the notes to the Parent Financial Statements included in the
Parent Financial  Statements in Parent's Quarterly Report on Form 10-QSB for the
period ended on March 31, 2004 (the "PARENT  BALANCE  SHEET  DATE"),  (ii) those
incurred in the ordinary  course of business since the Parent Balance Sheet Date
and consistent  with past practice,  (iii) those incurred in connection with the
execution  of this  Agreement,  and (iv) those  disclosed on Schedule 4.5 to the
Parent Disclosure Schedule.

                                       28
<PAGE>

      Section 4.6  Litigation.  Except as set forth in the Parent SEC Documents,
as of the date of this Agreement,  there is no material  private or governmental
action, suit, proceeding, claim, arbitration,  governmental investigation, or to
the knowledge of Parent private investigation,  pending before any agency, court
or tribunal,  foreign or domestic,  or, to the knowledge of Parent or any of its
subsidiaries, threatened against Parent, any of its subsidiaries or any of their
respective properties or any of their respective officers or directors (in their
capacities as such). There is no judgment, decree or order against Parent or any
of its subsidiaries, or, to the knowledge of Parent, or any of its subsidiaries,
or any of their respective  directors or officers (in their capacities as such),
that could prevent, enjoin, or materially alter or delay any of the transactions
contemplated by this Agreement,  or that could  reasonably be expected to have a
Parent Material Adverse Effect.  Schedule 4.6 to the Parent Disclosure  Schedule
also lists all  material  litigation  that  Parent has pending as of the date of
this  Agreement  against  other parties which is not disclosed in the Parent SEC
Documents.

      Section 4.7 Reorganization Matters. To Parent's knowledge,  neither Parent
nor any of its  Affiliates  has  taken or agreed  to take any  action,  nor does
Parent have knowledge of any fact or circumstance, that would prevent the Merger
from qualifying as a tax-deferred  reorganization  within the meaning of Section
368 of the Code.

      Section 4.8 Brokers' and Finders' Fees.  Neither Parent nor Merger Sub has
incurred, nor will it incur, directly or indirectly, any liability for brokerage
or finders'  fees or agents'  commissions  or  investment  bankers'  fees or any
similar  charges  in  connection  with this  Agreement,  the Merger or any other
transaction contemplated hereby or pursuant to any Other Document.

      Section 4.9 Board  Approval.  The Board of  Directors  of Parent has:  (i)
approved this Agreement and the Merger and (ii) determined that the Merger is in
the best interests of the  stockholders  of Parent and is on terms that are fair
to such  stockholders.  Except to  approve  the  conversion  of shares of Parent
Preferred Stock which are convertible  into 20% or more of Parent's  outstanding
Parent Common Stock as of the date hereof, no approval of Parent's  stockholders
is required in connection with the Merger.

      Section  4.10  Investigation  by  Parent.  Parent  has  conducted  its own
independent  investigation,  review and  analysis of the  business,  operations,
assets, liabilities,  results of operations,  financial condition,  Intellectual
Property and prospects of the Company, which investigation,  review and analysis
was  done  by  Parent  and its  Affiliates  and,  to the  extent  Parent  deemed
appropriate,  by Parent's  representatives.  Parent acknowledges that it and its
representatives have been provided adequate access to the personnel, properties,
premises and records of the Company and the Company  Subsidiaries  as Parent has
requested for such purpose. In entering into this Agreement, Parent acknowledges
that it has relied  solely  upon the  aforementioned  investigation,  review and
analysis and not on any factual  representations or opinions of the Company's or
any of the Company's  representatives  (except the specific  representations and
warranties of the Company set forth in this Agreement and the Company Disclosure
Schedule). Parent has formed an independent judgment concerning the Company.

                                       29
<PAGE>

      Section 4.11 Absence of Certain Changes. Except as set forth in the Parent
SEC  Documents  prior to the date hereof or as  expressly  contemplated  by this
Agreement or as disclosed on Schedule  4.11 to the Parent  Disclosure  Schedule,
since the Parent Balance Sheet Date there has not occurred any change,  event or
condition  (whether  or not  covered by  insurance  or  similar  indemnification
agreement) that has resulted in, or would reasonably be expected to result in, a
Parent Material Adverse Effect.

      Section 4.12 Information Supplied. None of: (i) the information, documents
or other due  diligence  matters  supplied  or to be supplied by or on behalf of
Parent  to  the  Company  in  connection  with  this  Agreement  or  any  of the
transactions  contemplated  hereby,  (ii) the  representations and warranties of
Parent  contained in this  Agreement or any Other  Agreement or (iii) the Parent
Disclosure  Schedule  contain any untrue statement of a material fact or omit to
state any material fact  required to be stated  therein or necessary in order to
make the statements  therein, in light of the circumstances under which they are
made, not misleading.

      Section 4.13 Parent Disclosure Schedule.  It is understood and agreed that
any  disclosure in the Parent  Disclosure  Schedule shall qualify the disclosure
under the specific section number referred to in the Parent Disclosure  Schedule
as well as all other sections in this  Agreement when it is reasonably  apparent
from a reading  of such  disclosure  that it also  qualifies  or applies to such
other sections.  Parent shall make all reasonable  efforts to specifically cross
reference in the Parent  Disclosure  Schedule  all  sections  where a particular
disclosure  qualifies or applies. In addition,  the Company and the Stockholders
specifically  agree  that they  have had  access  to and have  knowledge  of the
contents of all of the Parent SEC Documents as well as all press releases issued
by Parent since inception.

                                   ARTICLE V .
                       CONDUCT PRIOR TO THE EFFECTIVE TIME

      Section 5.1 Conduct of Business. During the period from the Execution Date
and  continuing  until the earlier of the  termination  of this Agreement or the
Effective  Time,  the Parent and the  Company  each agree  (except to the extent
expressly  contemplated by this Agreement or for those matters  disclosed on the
Company Disclosure Schedule or Parent Disclosure  Schedule,  as the case may be)
to  carry  on  its  business  in the  usual,  regular  and  ordinary  course  in
substantially the same manner as heretofore  conducted.  The Parent and, subject
to Section 5.2 hereof,  the Company further agree to use all reasonable  efforts
consistent  with past  practice  and  policies  to  preserve  intact its present
business  organizations,  to keep available the services of its present officers
and key  employees  and to use its best efforts and all  available  resources to
preserve its relationships with customers, suppliers,  distributors,  licensors,
licensees  and  others  having  business  dealings  with it, to the end that its
goodwill and ongoing businesses shall be unimpaired at the Effective Time, other
than what would not have a Parent or a Company  Material  Adverse  Effect.  Each
party agrees,  during the period from the date of this  Agreement and continuing
until the earlier of the termination of this Agreement or the Effective Time, to
promptly notify the other party in writing of any event or occurrence not in the
ordinary  course of its  business,  and of any event which could  reasonably  be
expected  to have a  material  effect on the  business,  assets,  properties  or
prospects of, respectively, Parent or the Company.

                                       30
<PAGE>

      Section 5.2 Restriction on Conduct of Business of the Company.  During the
period from the date of this Agreement and  continuing  until the earlier of the
termination of this Agreement or the Effective Time,  except as set forth in the
Company Disclosure Schedule or as expressly contemplated by this Agreement,  the
Company and the Stockholders shall not do, cause or permit any of the following,
without the prior written consent of Parent, which consent shall be given within
three (3) days business days of written notification from the Company requesting
such consent:

      (a) Charter  Documents.  Cause or permit any amendments to its Certificate
of Incorporation or Bylaws (including the adoption of a "poison pill").

      (b) Dividends;  Changes in Capital Stock.  Declare or pay any dividends on
or make any other distributions  (whether in cash, stock or property) in respect
of any of its capital stock; or split,  combine or reclassify any of its capital
stock or issue or authorize the issuance of any other  securities in respect of,
in lieu of or in substitution  for shares of its capital stock, or repurchase or
otherwise  acquire,  directly or  indirectly,  any shares of its  capital  stock
except from former  employees,  directors and  consultants  in  accordance  with
agreements  providing  for the  repurchase  of  shares  in  connection  with any
termination of service to it.

      (c) Material Contracts.  Violate,  breach,  cause a default,  comprise (or
take  any  action  which  would  reasonably  lead  to any of the  foregoing)  or
terminate,  amend or otherwise  modify or waive any of the terms of any Material
Contracts (including, without limitation, any Company IP Contracts or contracts,
agreements or understandings with employees,  officers, directors,  stockholders
or consultants).

      (d)  Issuance of  Securities.  Except for: (i) the transfer of the Company
Common Stock  contemplated  by this Agreement and (ii) the issuance of shares of
the Company Common Stock pursuant to the exercise of the Company  Options issued
and outstanding on the Execution Date (all which shall be exercised prior to the
Closing  Date),  issue,  deliver or sell or authorize  or propose the  issuance,
delivery  or sale of, or  purchase  or propose  the  purchase  of, any shares of
Company Capital Stock, Company Options or Company Convertible  Securities or any
other securities of the Company, or subscriptions or other rights to acquire, or
other agreements or commitments of any character obligating it to issue any such
securities.

      (e)  Intellectual  Property.  Sell,  transfer or assign to any Person,  or
create any Lien encumbering,  any Company Intellectual Property or any rights to
any Company Intellectual Property.

      (f)  Indebtedness.  Incur any indebtedness for borrowed money or guarantee
any such indebtedness or issue or sell any debt securities or guarantee any debt
securities of others.

                                       31
<PAGE>

      (g) Payment of  Obligations.  Except any payments due to Atrix or pursuant
to any Company IP  Agreement,  pay,  discharge  or satisfy or commit or agree to
pay, discharge or satisfy,  in an amount in excess of $20,000 in any one case or
$50,000 in the aggregate, any claim, liability or obligation (absolute, accrued,
asserted  or  unasserted,  contingent  or  otherwise),  other than the  payment,
discharge or  satisfaction of liabilities  reflected or reserved  against in the
Company Financial Statements

      (h) Capital Expenditures. Make any capital expenditures, capital additions
or capital  improvements  in excess of $25,000 in any one case or $75,000 in the
aggregate.

      (i)  Insurance.  Materially  reduce the amount of any  insurance  coverage
provided by existing insurance policies.

      (j) Employee Benefit Plans; Pay Increases. (i) Adopt or amend any employee
benefit or stock purchase or option plan,  except for amendments  required under
ERISA or except as necessary to maintain the qualified status of such plan under
the Code or (ii) increase the annual level of compensation  of any employee,  or
grant any unusual or extraordinary bonuses, benefits or other forms of direct or
indirect compensation to any employee,  officer, director or consultant,  except
as required by a Material Contract.

      (k)  Lawsuits.  Commence  a  lawsuit  other  than:  (i)  for  the  routine
collection of bills,  (ii) in such cases where it in good faith  determines that
failure to commence  suit would result in the material  impairment of a valuable
aspect of its  business,  provided  that it consults  with  Parent  prior to the
filing of such a suit,  or (iii) for a breach of this  Agreement or any Exhibits
hereto.

      (l) Taxes and  Accounting.  (i) Other than as  required  by GAAP,  make or
change any  material  election  in  respect  of Taxes,  (ii) adopt or change any
accounting method in respect of Taxes or otherwise or (iii) write up, write down
or write off the value of any assets or revalue  any assets  including,  without
limitation, any Company Intellectual Property.

      Section 5.3 No Solicitation. During the period from the Execution Date and
continuing  until  the  earlier  of the  termination  of this  Agreement  or the
Effective  Time,  the  Stockholders,  the  Company and the  Company's  officers,
directors,  employees or other agents will not, directly or indirectly: (i) take
any action to solicit, initiate or intentionally encourage any Takeover Proposal
(as defined below) or (ii) take any action to solicit, intentionally facilitate,
intentionally  encourage  or engage in  negotiations  or  discussions  with,  or
disclose any nonpublic  information relating to the Company to, or afford access
to the  properties,  Books or Records  of the  Company  to, any Person  that has
advised  the  Company in writing  that it intends to make,  or that has made,  a
Takeover Proposal. For purposes of this Agreement,  the term "TAKEOVER PROPOSAL"
shall mean any offer or proposal for, or any  indication of interest in (whether
written or oral), a merger or other business  combination  involving the Company
or the  acquisition of any equity interest in, or any of material assets of, the
Company, other than the transactions contemplated by this Agreement.

                                       32
<PAGE>

                                   ARTICLE VI

                              ADDITIONAL AGREEMENTS

      Section 6.1 Access to Information; Disclosure Schedule Updates.

      (a) Upon reasonable notice, each party hereto shall afford the other party
and its accountants, legal counsel and other representatives,  reasonable access
during normal business hours during the period from the Execution Date until the
Effective Time or the earlier  termination of this Agreement in accordance  with
its terms,  provided that Parent or the Company contacts the other party's Chief
Executive  Officer  prior to  contacting  any other  employee of the other party
hereto, to: (i) review all of the properties, books, contracts,  commitments and
records, and (ii) all other information concerning the business,  properties and
personnel of the other party as may be  requested.  Each party agrees to provide
to the  other  party  hereto  and  its  accountants,  legal  counsel  and  other
representatives  copies of  internal  financial  statements  and other  business
analysis and documentation promptly upon request.

      (b) Subject to compliance  with applicable Law, from the date hereof until
the Effective  Time or the earlier  termination  of this Agreement in accordance
with its terms,  the Company and Parent  shall  confer on a regular and frequent
basis to report operational matters and the general status of ongoing operations
of, respectively, the Company and Parent.

      (c) No information or knowledge  obtained in any  investigation  after the
Execution  Date pursuant to this Section 6.1 shall affect or be deemed to modify
any  representation  or  warranty  contained  herein  or the  conditions  to the
obligations of the parties to consummate  the Merger;  provided,  however,  that
each party  hereto  shall  promptly  inform the other  party  hereto of any such
information or knowledge obtained in its investigation which would reasonably be
likely to have a Parent  or a Company  Material  Adverse  Effect.  Additionally,
during the period  from the date hereof and prior to the  Effective  Time or the
earlier  termination of this Agreement in accordance with its terms,  each party
shall promptly notify the other party hereto in writing of:

            (i) the  discovery  of any event,  condition,  fact or  circumstance
which causes, caused,  constitutes or constituted a breach of any representation
or  warranty  made by  Parent  or the  Company  in this  Agreement  or any other
agreement contemplated hereby;

            (ii) any material  breach of any covenant or obligation by Parent or
the Company; and

            (iii) any event,  condition,  fact or circumstance that may make the
timely  satisfaction  of any of the  covenants or  conditions  set forth in this
Article VI or Article VII impossible or unlikely.

      (d) If any event, condition,  fact or circumstances that is required to be
disclosed   pursuant  to  Section  6.1(c)   requires  any  material  change  in,
respectively, the Company Disclosure Schedule or the Parent Disclosure Schedule,
or if any such event,  condition,  fact or  circumstance  would  require  such a
change  assuming  the  Company  Disclosure  Schedule  or the  Parent  Disclosure
Schedule,  as the case  may be,  were  dated  as of the date of the  occurrence,
existence or discovery of such event, condition, fact or circumstances, then the
Company or Parent,  as applicable  shall promptly  deliver to the other party an
update to its Disclosure Schedule specifying such change (a "DISCLOSURE SCHEDULE
UPDATE").

                                       33
<PAGE>

      (e) The Company shall provide  Parent and its  accountants,  legal counsel
and other representatives reasonable access, during normal business hours during
the period prior to the Effective  Time,  to: (i) all Company Books and Records,
including  for the  purpose  of  auditing  or  preparing  for the  audit  of the
Company's  financial   statements  as  required  by  applicable  SEC  rules  and
regulations and (ii) all of the Company's Tax Returns and other records and work
papers  relating to Taxes,  provided that Parent  contacts the  Company's  Chief
Financial  Officer prior to contacting  any other  employee of the Company,  and
shall  provide  to Parent  and its  representatives  the  following  information
promptly upon the request of Parent: (A) the types of Tax Returns being filed by
the Company in each taxing jurisdiction, (B) the year of the commencement of the
filing of each such type of Tax  Return,  (C) all closed  years with  respect to
each such type of Tax Return  filed in each  jurisdiction,  (D) all material Tax
elections  filed  in  each  jurisdiction  by  the  Company,   (E)  any  deferred
inter-company  gain with respect to transactions to which the Company has been a
party, and (F) receipts for any Taxes.

      Section 6.2 No Dissenters' Rights.  Each of the Stockholders  covenant and
agree that: (a) they shall use their good faith best efforts to take all actions
to vote for or  otherwise  approve of the Merger  prior to the Closing  (both as
stockholders  and directors of the Company) and (b) neither of the  Stockholders
will exercise any dissenter's rights under Delaware Law.

      Section  6.3  Confidentiality.   Each  of  the  Company,  Parent  and  the
Stockholders  acknowledges  that they:  (i) have  received  material,  nonpublic
information of the other parties ("CONFIDENTIAL INFORMATION"), (ii) shall retain
and hold the  Confidential  Information of the other parties in confidence  and,
except as required by Law or judicial or other process of a Governmental Entity,
not disclose or reveal any such Confidential Information to others or permit the
disclosure thereof,  and (iii) shall return all Confidential  Information of the
other parties in the event that this  Agreement is  terminated.  The Company and
the  Stockholders  acknowledge  and agree that a purpose of the  confidentiality
provisions  of this  Section  6.3 is so that  Parent may be in  compliance  with
Regulation FD promulgated by the SEC.

      Section 6.4 Public  Disclosure.  The Company and Parent shall consult with
each other  before  issuing  any press  releases  or  otherwise  make any public
statements or make any other public (or  non-confidential)  disclosures (whether
or not in response to an inquiry)  regarding the terms of this Agreement and the
transactions  contemplated  hereby,  and neither  shall issue a press release or
make any  statements or  disclosures  without the prior written  approval of the
other  (which  consent  shall not be  unreasonably  withheld),  except as may be
required by Law.

      Section 6.5 Consents; Cooperation.

      (a) Each of Parent and the Company shall  promptly  apply for or otherwise
seek,  and use  commercially  reasonable  efforts to obtain,  all  consents  and
approvals  required to be obtained by it for the consummation of the Merger. The
Company and Parent shall each use their  respective  reasonable  best efforts to
obtain  all  necessary  consents,  waivers  and  approvals  under  any of  their
respective material contracts in connection with the Merger (including,  without
limitation,  under the Company IP Agreements) to the extent  required under such
contracts.

                                       34
<PAGE>

      (b) The Company  shall  furnish  Parent,  on or prior to the Closing Date,
with  evidence  satisfactory  to it of the consent or approval of those  Persons
whose consent or approval shall be required in connection  with the Merger under
the applicable  contracts of the Company set forth, or required to be set forth,
on the Company Disclosure Schedule.

      Section 6.6 Legal Requirements.  Each of the Company, the Stockholders and
Parent shall take all reasonable  actions  necessary to comply promptly with all
legal requirements which may be imposed on them with respect to the consummation
of the transactions  contemplated by this Agreement and will promptly  cooperate
with and furnish  information to any party hereto  necessary in connection  with
any such  requirements  imposed  upon such other  party in  connection  with the
consummation  of the  transactions  contemplated by this Agreement and will take
all  reasonable  actions  necessary to obtain (and will cooperate with the other
parties hereto in obtaining) any consent,  approval,  order or authorization of,
or any  registration,  declaration  or filing with, any  Governmental  Entity or
other Person,  required to be obtained or made in connection  with the taking of
any action contemplated by this Agreement.

      Section 6.7  Treatment as  Reorganization.  Neither the Company nor Parent
shall take any action  prior to or  following  the Closing  that would cause the
merger to fail to qualify as a tax-deferred  "reorganization" within the meaning
of Section 368 of the Code.

      Section 6.8 Listing of Additional Shares. To the extent required and prior
to the public  registration  thereof,  Parent  shall  cause all shares of Parent
Common Stock  underlying the Parent Preferred to be issued pursuant to the terms
of this Agreement to be approved for listing on NASDAQ.

      Section 6.9  Location  of Arius.  The parties  agree that,  following  the
Effective Time, the Surviving  Corporation  shall remain located in the Research
Triangle Park area of Raleigh, North Carolina.

      Section  6.10  Financing  of  the  Surviving  Corporation.  Following  the
Closing,  Parent  shall use not less than  $2,000,000  of funds  raised from the
Parent  Financing  to  finance  the  operations  of  the  Surviving  Corporation
(including, without limitation, all Development Activities) in accordance with a
business plan reasonably  agreed to by the Stockholders and Parent and delivered
by the  Company to Parent as of the  Execution  Date (the  "BUSINESS  PLAN") (it
being understood that such Business Plan may be amended or modified prior to, as
of or following the Closing Date with the approval of Parent and Sirgo).

      Section 6.11 Atrix License Payment.  By no later than as required pursuant
to the Atrix  License  (as  defined  in  Section  7.3(d)  below),  Parent  shall
contribute  to the  Surviving  Corporation  cash in the  amount of not less than
$1,000,000  to be  used  by the  Surviving  Corporation  to  make  that  certain
$1,000,000 payment required under the Atrix License.

                                       35
<PAGE>

      Section 6.12 Board Observation and Nomination Rights.  After the Effective
Time:  (i) until  the  conditions  precedent  set  forth in the  Certificate  of
Designations  for conversion of all shares of Parent Preferred Stock into shares
of Parent Common Stock have been satisfied,  Sirgo shall be granted the right to
observe and participate  (but not vote) in all meetings of the Parent's Board of
Directors as a board  observer and (ii)  following the time when the  conditions
precedent set forth in the  Certificate  of  Designations  for conversion of all
shares of Parent  Preferred  Stock into shares of Parent  Common Stock have been
satisfied, the Stockholders, acting jointly and severally, shall have the right,
in connection  with each annual meeting of Parent's  stockholders,  to nominate,
and the Company shall  include such  nomination  in its proxy  materials  with a
recommendation that the Company's stockholders vote for the election of, one (1)
individual  (who shall be Sirgo) to serve on  Parent's  Board of  Directors,  it
being  understood and agreed that that such nomination shall in all instances be
subject to the affirmative vote of the holder's of the then  outstanding  shares
of Parent Common Stock.

      Section 6.13 Non-Competition.

      (a) In  consideration  of the benefits to inure to them as a result of the
Merger  (including,  without  limitation,  their receipt of the Parent Preferred
Stock),  and  for  other  good  and  valuable  consideration,  the  receipt  and
sufficiency of which is hereby acknowledged, each of Sirgo and Finn respectively
(and not jointly) agree that, during the Non-Competition Period, they each shall
not, anywhere in the world, own, manage,  operate,  control,  consult for, be an
officer or director of, work for, or be employed in any capacity by any company,
eleemosynary  institution or any other business,  entity, agency or organization
(or a discrete  business  unit within any such entity)  whose  primary  business
purpose is to engage in a Competitive Activity;  provided,  however, that during
Non-Competition  Period,  Sirgo and Finn may serve as a director,  consultant or
scientific advisor of such an entity that is either a Company licensee,  or, for
non-licensees,  in such capacity as the Company's Board of Directors has granted
them written permission, such permission not to be unreasonably withheld.

      (b) For  purposes of this  Agreement,  the term  "NON-COMPETITION  PERIOD"
shall mean, with respect to each of Sirgo and Finn, respectively,  from the date
hereof until the date on which they are no longer employed by the Company or any
subsidiary  thereof or serve as a  director  of the  Company  or any  Subsidiary
thereof  plus two (2)  years  after  such  date.  In the  event  that a court of
competant  jurisdiction  determines  that  Sirgo  or  Finn,  as the case may be,
improperly  competes  with  Parent,  the period  during which he engages in such
competition shall not be counted in determining the duration of the two (2) year
non-compete restriction

      (c) For purposes of this Agreement,  the term "COMPETITIVE ACTIVITY" shall
mean the development,  manufacture, sale, license, packaging or marketing of the
following  technologies (or products  incorporating such technologies):  (i) (A)
anionic phospholipid  delivery technology or (B) buccal delivery technology,  in
each  case for the  delivery  of  drugs  or  nutrients  for  human or  non-human
applications   and  (ii)  any   technology  or  product  which  Sirgo  or  Finn,
respectively and as the case may be, were actively and directly participating in
on behalf of Parent or any subsidiary of Parent or joint venture in which Parent
is  participating  at the time of  termination  (it  being  understood,  for the
avoidance of doubt,  that the words  "actively and  directly"  shall not include
Sirgo or Finn's actions in a merely supervisory capacity).  Section

                                       36
<PAGE>

      6.14  Certain  Stockholder  Approval.  Parent  shall use best  efforts  to
obtain,  at the next  annual  meeting of  Parent's  stockholders  following  the
Closing  (and at each  special  or annual  meeting  of Parent  thereafter  until
approval is gained) the  approval of Parent's  stockholders  necessary to permit
the issuance by Parent of shares of Parent  Common Stock upon  conversion of the
Parent Preferred Stock that would result in the total aggregate number of shares
of Parent  Common  Stock issued or deemed to be issued at any time to any holder
or all  holders of Parent  Preferred  Stock  exceeding  19.99% of the issued and
outstanding shares of Common Stock immediately prior to the Effective Time.

      Section 6.15 Further Assurances.  Parent,  Merger Sub, the Company and the
Stockholders  shall use  commercially  reasonable best efforts to effectuate the
transactions  contemplated  hereby and to fulfill and cause to be fulfilled  the
conditions to closing under this Agreement. Each party hereto, at the reasonable
request  of  another  party  hereto,   shall  execute  and  deliver  such  other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting  completely the  consummation  of this Agreement and the
transactions  contemplated  hereby.  Without  limiting  the  generality  of  the
foregoing,  following the Effective Time, the  Stockholders  shall file with the
SEC all appropriate forms required under Section 16 of the Exchange Act.

                                   ARTICLE VII
                            CONDITIONS TO THE MERGER

      Section 7.1  Conditions to Obligations of Each Party to Effect the Merger.
The  respective  obligations  of each party to this  Agreement to consummate and
effect  this  Agreement,  each Other  Document to which such party is a party or
signatory, the Merger and the transactions contemplated hereby and thereby shall
be subject to the  satisfaction at or prior to the Effective Time of each of the
following  conditions,  any of which may be waived, in writing,  by agreement of
all the parties hereto:

      (a) No  Injunctions or Restraints;  Illegality.  No temporary  restraining
order, preliminary or permanent injunction or other order issued by any court of
competent  jurisdiction  or other legal or regulatory  restraint or  prohibition
preventing  the  consummation  of the Merger  shall be in effect,  nor shall any
proceeding   brought  by  an  administrative   agency  or  commission  or  other
governmental  authority  or  instrumentality,  domestic  or  foreign  (which has
jurisdiction  over the  Company or  Parent),  seeking  any of the  foregoing  be
pending; nor shall there be any action taken, or any statute,  rule,  regulation
or order enacted,  entered,  enforced or deemed applicable to the Merger,  which
makes the  consummation  of the Merger  illegal.  In the event an  injunction or
other  order shall have been  issued,  each party  agrees to use its  reasonable
efforts to have such injunction or other order lifted.

      (b) Governmental  Approval.  Parent, Merger Sub and the Company shall have
timely  obtained  from each  Governmental  Entity  all  approvals,  waivers  and
consents, if any, necessary for consummation of or in connection with the Merger
and the several transactions  contemplated hereby,  including but not limited to
such  approvals,  waivers and consents as may be required  under the  Securities
Act, under state blue sky Laws.

                                       37
<PAGE>

      (c) Parent  Financing.  Prior to the Closing,  Parent shall have  obtained
financing (by either license, debt or equity financing or other financing) in an
amount  equal  no less  than  $6,000,000  in one or more  related  or  unrelated
transactions and on terms reasonably satisfactory to Parent (such financing, the
"PARENT FINANCING").

      (d) Atrix  License.  (i) The Company  shall have executed and delivered to
Parent a waiver agreement relating to certain terms and conditions  contained in
that  certain  license  agreement  between the Company and Atrix  regarding  the
BioErodible  MucoAdhesive (BEMA) technology (the "ATRIX LICENSE"),  which waiver
agreement  shall be in the form  agreed to by Parent  and the  Company  and (ii)
except  as  modified  by such  waiver  agreement,  the  Atrix  License  shall be
unterminated and unmodified by the parties thereto and in full force and effect.

      (e) Reorganization.  The Company and Parent shall be reasonably satisfied,
in their respective  discretions,  that the Merger  constitutions a tax-deferred
reorganization under Section 368(a) of the Code.

      Section 7.2  Additional  Conditions to  Obligations of the Company and the
Stockholders.  The obligations of the Company and the Stockholders to consummate
and effect  this  Agreement,  each Other  Document  to which they are a party or
signatory, the Merger and the transactions contemplated hereby and thereby shall
be subject to the  satisfaction at or prior to the Effective Time of each of the
following conditions, any of which may be waived, in writing, by the Company:

      (a) Representations,  Warranties and Covenants. Except: (i) for the impact
on Parent of the Parent Financing and (ii) as disclosed in the Parent Disclosure
Schedule dated as of the Execution  Date (as amended by any Disclosure  Schedule
Update):  (i) the  representations  and  warranties of Parent in this  Agreement
shall be true and correct in all  material  respects on and as of the  Effective
Time as though such  representations  and warranties were made on and as of such
time or, in the case of  representations  and  warranties  of Parent which speak
specifically as of an earlier date, shall be true and correct as of such earlier
date, except in each case, (A) for changes contemplated by the Agreement, or (B)
where the failure to be true and correct has not had,  and would not  reasonably
be expected to result in, a Parent Material Adverse Effect and (ii) Parent shall
have  performed  and  complied  in all  material  respects  with all  covenants,
obligations  and  conditions  of this  Agreement  required to be  performed  and
complied with by Parent as of the Effective Time.

      (b) Parent  Officer's  Certificate.  At the  Closing,  the Company and the
Stockholders shall have received a duly executed certificate on behalf of Parent
by an authorized officer to the effect set forth in Section 7.2(a).

      (c) Parent  Secretary  Certificate.  At the  Closing,  the Company and the
Stockholders shall have received a duly executed  certificate from the Secretary
of Parent and Merger Sub with respect to: (i) the certificate of  incorporation,
as  certified by the  Secretary  of State of Delaware as of a recent  date,  and
bylaws of such  entities,  (ii)  resolutions  of the board of  directors of such
entities  with respect to the  authorizations  of this  Agreement  and the other
agreements  contemplated  hereby,  (iii) a  certificate  of  existence  and good
standing  as of a recent  date  from  the  Secretary  of  State of the  State of
Delaware and (iv) the incumbency of the executing officers of such entities.

                                       38
<PAGE>

      (d) Payment on Company Notes. At or prior to the Closing, Parent shall pay
to each of Sirgo and Finn an amount in cash equal to $25,552.87 and  $28,638.73,
respectively,  representing  one  hundred  percent  (100%)  of  the  outstanding
principal and interest due under the Company Notes.

      (e)  Certificate  of  Designations.  At  or  prior  to  the  Closing,  the
Certificate of Designations of the Parent  Preferred Stock, in the form attached
hereto as Exhibit B (the  "CERTIFICATE OF  DESIGNATIONS"),  shall have been duly
filed with and accepted by the Secretary of State of Delaware.

      (f) Preferred Stock Certificates.  At the Closing, the stockholders of the
Company  listed on Schedule  3.2(a) to the Company  Disclosure  Schedule and the
Stockholders shall have received share certificates for an appropriate amount of
shares of Parent Preferred Stock.

      (g)  Registration  Right  Agreement.  At the  Closing,  Parent  shall have
executed and delivered to the  Stockholders a registration  rights  agreement in
the form attached hereto as Exhibit C (the "REGISTRATION RIGHTS AGREEMENT").

      (h) Employment  Agreements.  Parent shall have duly executed and delivered
to each of Sirgo  and  Finn an  employment  agreement  between  Parent  and such
individuals, in each case substantially in the form attached hereto as Exhibit D
(the "EMPLOYMENT AGREEMENTS").

      (i) Parent  Counsel Legal  Opinion.  The Company shall have been furnished
with the favorable opinion of Ellenoff Grossman & Schole LLP, counsel to Parent,
dated as of the  Closing  Date,  substantially  in the form  attached  hereto as
Exhibit E.

      (j) Voting Agreement. At the Closing, certain stockholders of Parent shall
have duly executed and delivered to the Stockholders a Voting  Agreement,  to be
executed by such Parent stockholders,  which agreement shall be substantially in
the  form  attached  hereto  as  Exhibit  G  (the  "PARENT   STOCKHOLDER  VOTING
AGREEMENT").

      (k) BSP Waiver. At the Closing, Parent shall have delivered to the Company
a written waiver, in the form mutually  acceptable to the Company and Parent, of
Biotech Specialty  Partners,  LLC ("BSP"),  wherein BSP shall have waived all of
its rights under that certain agreement dated November 30, 2000, between BSP and
Parent with respect to any and all current or future products of the Company.

      Section  7.3  Additional  Conditions  to the  Obligations  of Parent.  The
obligations of Parent to consummate and effect Agreement, each Other Document to
which it is a part or signatory,  the Merger and the  transactions  contemplated
hereby  and  thereby  shall be subject  to the  satisfaction  at or prior to the
Effective Time of each of the following conditions,  any of which may be waived,
in writing, by Parent:

                                       39
<PAGE>

      (a) Representations,  Warranties and Covenants. Except as disclosed in the
Company  Disclosure  Schedule  dated as of the Execution Date (as amended by any
Disclosure  Schedule  Update):  (i) the  representations  and  warranties of the
Company in this Agreement shall be true and correct in all material  respects on
and as of the Effective Time as though such  representations and warranties were
made on and as of such time or, in the case of representations and warranties of
the Company which speak  specifically  as of an earlier date,  shall be true and
correct  as of  such  earlier  date,  except  in  each  case,  (A)  for  changes
contemplated  by the Agreement,  or (B) where the failure to be true and correct
has not had,  and would  not  reasonably  be  expected  to result  in, a Company
Material  Adverse  Effect and (ii) the Company shall have performed and complied
in all material respects with all covenants,  obligations and conditions of this
Agreement  required to be performed  and complied  with by the Company as of the
Effective Time.

      (b) Company Officer's Certificate.  Parent shall have been provided with a
certificate  executed on behalf of the Company by an  authorized  officer to the
effect set forth in Section 7.3(a).

      (c)  Company  Secretary  Certificate.  Parent  shall have  received a duly
executed  certificate from the Secretary of the Company with respect to: (i) the
certificate of incorporation, as certified by the Secretary of State of Delaware
as of a recent date, and bylaws of the Company, (ii) resolutions of the board of
directors of the Company with respect to the  authorizations  of this  Agreement
and the other agreements  contemplated  hereby, (iii) a certificate of existence
and good  standing as of a recent date from the  Secretary of State of the State
of Delaware and (iv) the incumbency of the executing officers of the Company.

      (d) Legal  Opinion.  Parent shall have been  furnished  with the favorable
opinion of Wyrick  Robbins  Yates & Ponton LLP,  dated as of the  Closing  Date,
counsel to the Company, substantially in the form attached hereto as Exhibit F.

      (e)  Acceleration  and Exercise of Options.  At the Closing,  Parent shall
have  received  satisfactory  written  evidence  that  the all  Company  Options
outstanding  as of the  Execution  Date  have been  exercised  and are no longer
outstanding as of the Closing Date.

      (f) Stockholder Voting Agreement.  At the Closing,  the Stockholders shall
have duly executed and delivered to Parent a Voting Agreement, to be executed by
the  Stockholders,  which agreement shall be  substantially in the form attached
hereto as Exhibit H (the "STOCKHOLDER VOTING AGREEMENT").

      (g)  Certificate  of  Designations.  As of or  prior to the  Closing,  the
Certificate  of  Designations  shall have been duly accepted by the Secretary of
State of Delaware.

      (h) Employment  Agreements.  At the Closing,  each of Sirgo and Finn shall
have  duly  executed  and  delivered  to  Parent  their  respective   Employment
Agreements.

      (i) Registration Rights Agreement.  At the Closing, the Stockholders shall
have duly executed and delivered to Parent the Registration Rights Agreement.

                                       40
<PAGE>

      (j)  Resignations and  Terminations.  Effective  immediately  prior to the
Effective Time: (i) all current officers and directors of the Company shall have
resigned in writing and delivered such written  resignations  to Parent and (ii)
Sirgo and Finn, respectively,  and the Company shall have effectively terminated
the  respective  Company  employment  agreements  of Sirgo and Finn set forth on
Schedule 3.15(a).

      (k) Company  Common  Stock.  The  holders of all shares of Company  Common
Stock shall have delivered original stock certificates  representing such shares
to Parent.

      (l) FIRPTA.  The Company  shall,  on or prior to the  Closing  Date,  have
provided Parent with a properly executed FIRPTA Notification Letter, in the form
reasonably  agreed to by the  parties,  which  states that shares of the Company
Capital Stock do not constitute  "United States real property  interests"  under
Section  897(c) of the Code,  for purposes of  satisfying  Parent's  obligations
under Treasury Regulation Section  2.1445-2(c)(3).  In addition,  simultaneously
with delivery of such  Notification  Letter,  the Company shall have provided to
Parent,  as agent for the  Company,  a form of notice  to the  Internal  Revenue
Service in  accordance  with the  requirements  of Treasury  Regulation  Section
2.897-2(h)(2),  along with  written  authorization  for  Parent to deliver  such
notice form to the  Internal  Revenue  Service on behalf of the Company upon the
Closing of the Merger.

      (m) Company  Material  Adverse Effect.  No Company Material Adverse Effect
shall have occurred since July 31, 2004.

      (n) Third Party  Consents.  The Company  shall have obtained all necessary
consents  from third  parties,  including,  without  limitation,  a consent from
Reckitt Benckiser Healthcare (UK) Limited.

      (o)  Instruments  and  Possessions.  In order to effect  the  Merger,  the
Company and the Stockholders shall have executed and/or delivered to Parent: (i)
such changes relating to the bank accounts and safe deposit boxes of the Company
as are being  transferred  to the  Surviving  Corporation  and (ii)  such  other
certificates,  documents,  instruments  and  agreements  as  Parent  shall  deem
necessary in its reasonable discretion in order to effectuate the Merger and the
other  transactions  contemplated  herein,  in  form  and  substance  reasonably
satisfactory to Parent.

                                  ARTICLE VIII.
                                   TERMINATION

      Section 8.1  Termination.  At any time prior to the  Effective  Time,  and
subject to Section 8.3 below, this Agreement may be terminated:

      (a) by mutual  written  consent duly  authorized  by each party's Board of
Directors;

      (b) After August 24, 2004, by either Parent or the Company, if the Closing
shall not have  occurred on or before such date  (provided,  a later date may be
agreed upon in writing by the parties  hereto,  and  provided  further  that the
right to terminate this  Agreement  under this Section  8.1(a)(ii)  shall not be
available  to any party whose action or failure to act has been the cause of the
failure of the Merger to occur on or before such date and such action or failure
to act constitutes a breach of this Agreement);

                                       41
<PAGE>

      (c)  by  Parent,   if:  (A)  the  Company  shall  materially   breach  any
representation, warranty, obligation or agreement hereunder (other than a breach
which has not had, and would not  reasonably be expected to result in, a Company
Material  Adverse  Effect and such breach  shall not have been cured within five
(5)  business  days of receipt by the  Company of written  notice of such breach
(describing the details of such breach);  provided,  however,  that the right to
terminate this Agreement by Parent under this Section  8.1(a)(iii)(A)  shall not
be available to Parent where Parent is at that time in breach of this Agreement,
which  breach has had,  or would  reasonably  be expected to result in, a Parent
Material  Adverse  Effect;  or (B) if one or more of the  conditions to Parent's
obligation to  consummate  the  transactions  contemplated  hereby  specified in
Sections 7.1 or 7.3 hereof is not satisfied or fails to occur;

      (d)  by  the  Company,   if:  (A)  Parent  shall  materially   breach  any
representation, warranty, obligation or agreement hereunder (other than a breach
which has not had, and would not  reasonably  be expected to result in, a Parent
Material  Adverse  Effect and such breach  shall not have been cured within five
(5)  business  days of  receipt  by Parent  of  written  notice  of such  breach
(describing the details of such breach);  provided,  however,  that the right to
terminate this Agreement by Parent under this Section 8.1(a)(iv)(A) shall not be
available  to the  Company  where  Parent  is at  that  time in  breach  of this
Agreement, which breach has had, or would reasonably be expected to result in, a
Company Material Adverse Effect,  or (B) if one or more of the conditions to the
Company's   obligation  to  consummate  the  transactions   contemplated  hereby
specified in Sections 7.1 or 7.2 hereof is not satisfied or fails to occur; or

      (e) by either  Parent or the Company if: (A) any  permanent  injunction or
other order of a court or other competent authority  preventing the consummation
of the Merger shall have become final and nonappealable,  or (B) if any required
approval  of the  stockholders  of the Company  shall not have been  obtained by
reason of the  failure  to obtain the  required  vote upon a vote held at a duly
held meeting of stockholders or at any adjournment thereof.

      Section 8.2 Effect of  Termination.  In the event of  termination  of this
Agreement as provided in Section 8.1, this Agreement shall forthwith become null
and void and there shall be no  liability or  obligation  on the part of Parent,
Merger  Sub,  the  Company or the  Stockholders  or their  respective  officers,
directors,   stockholders  or  Affiliates,   except  to  the  extent  that  such
termination  results  from the  willful  breach by a party  hereto of any of its
representations, warranties or covenants set forth in this Agreement.

      Section 8.3 Expenses. Whether or not the Merger is consummated,  all costs
and expenses  incurred in connection  with this  Agreement and the  transactions
contemplated hereby (including, without limitation, the fees and expenses of its
advisers,  accountants  and legal counsel) shall be paid by the party  incurring
such expense.

                                       42
<PAGE>

                                   ARTICLE IX.

                            SURVIVAL; INDEMNIFICATION

      Section  9.1  Survival.  Unless  satisfied  or  terminated  prior  to  the
Effective  Time in  accordance  with  Article XIII hereof,  the  agreements  and
covenants  contained in this  Agreement  shall  survive the Closing Date without
limitation. The representations and warranties contained in this Agreement shall
survive the Closing Date for a period of  twenty-four  (24) months,  except that
any representation or warranty of the Company and the Stockholders  contained in
Section 3.12 (Taxes) shall  survive  until the  expiration of one (1) year after
the expiration of the applicable statute of limitations.

      Section 9.2 Obligation of the Company and the Stockholders to Indemnify.

      (a) Prior to the Effective Time, the Company and the  Stockholders  agree,
jointly and severally, and after the Effective Time, the Stockholders, severally
and pro rata for each of them in  proportion  the  percentage  of the  aggregate
shares of Parent Preferred Stock received by them in connection with the Merger,
agree  to  indemnify,   defend  and  hold  harmless  Parent  and  the  Surviving
Corporation (and their respective directors,  officers,  employees,  affiliates,
stockholders,  agents,  attorneys,  successors and assigns) from and against all
losses,  liabilities,   damages,  deficiencies,  costs  or  expenses  (including
interest,   penalties  and  reasonable  attorneys'  and  consultants'  fees  and
disbursements) (collectively,  "LOSSES") based upon, arising out of or otherwise
in respect of any:  (i)  inaccuracy  in any  representation  or  warranty of the
Company and the Stockholders contained in this Agreement, the Exhibits hereto or
in the  Company  Disclosure  Schedules  or (ii)  breach  by the  Company  or the
Stockholders of any covenant or agreement contained in this Agreement.

      (b) Parent  hereby  agrees that in  pursuing  any claim for Losses for any
breach by the Company or the  Stockholders  under Section 9.2(a) hereof,  Parent
shall only be entitled to seek  satisfaction  for such claim for Losses from the
Stockholders  in the  amounts set forth in Section  9.4(b)  below and solely and
exclusively from the following sources and in the following priority:

                  (i) First,  from the shares of Parent Preferred Stock received
in the Merger or shares of Parent Common Stock received upon conversion  thereof
(it being  understood,  for the avoidance of doubt,  that if, at the time of the
applicable  Loss,  no shares of Parent  Preferred  Stock have been  converted or
sold,  Parent's  only  recourse for Losses shall be against the shares of Parent
Preferred Stock held by the Stockholders and any distributions  received thereon
or proceeds received therfrom); and

                  (ii) Second,  from the cash or other proceeds  received by the
Stockholders  from  distributions  received  on, or any future sales by them of,
shares of Parent  Preferred  Stock  received  in the  Merger or shares of Parent
Common Stock underlying such shares of Parent Preferred Stock.

      Section 9.3  Obligation  of Parent to  Indemnify.  Prior to the  Effective
Time, Parent agrees to indemnify,  defend and hold harmless the Stockholders and
the Company (and its directors, officers, employees,  affiliates,  stockholders,
agents,  attorneys,  successors and assigns),  and after the Effective Time, the
Stockholders  only,  from and against any Losses  based upon,  arising out of or
otherwise in respect of any: (i) inaccuracy in any representation or warranty of
Parent  contained in this  Agreement or (ii) breach by Parent of any covenant or
agreement contained in this Agreement.

                                       43
<PAGE>

      Section 9.4  Limitations  on Liability.  Notwithstanding  anything in this
Agreement to the contrary:

      (a) In no  event  shall  any  party  hereto,  or any  direct  or  indirect
stockholder,  beneficiary, owner or Affiliate thereof, or any officer, director,
employee,  trustee,  or  agent  of any  of the  foregoing  or any  Affiliate  or
controlling  person  thereof,  be liable to any  Person,  in  contract,  tort or
otherwise for any punitive or exemplary  Losses arising from or relating to this
Agreement.

      (b) In no event  shall the  Stockholders  or Parent be entitled to recover
any  Losses  from one  another  under this  Agreement  in an amount in excess of
$3,500,000  in the  aggregate;  provided,  however,  that to the extent that the
shares of Parent  Preferred  Stock or Parent Common Stock  underlying the Parent
Preferred Stock are sold by the Stockholders  for, or the  Stockholders  receive
proceeds by way of dividend or  distributions  on the shares of Parent Preferred
Stock or Parent Common Stock underlying the Parent Preferred Stock, in excess of
$3,500,000 in the aggregate,  Parent and the  Stockholders  shall be entitled to
recover from one another for Losses of $3,500,000  plus such excess  amount,  in
each case up to no more than a maximum amount of $7,000,000.

      (c) The indemnification  provisions  contained in this Article IX shall be
the sole and  exclusive  remedies of the  Stockholders  and Parent  against each
other with  respect to any and all causes of action  related to this  Agreement;
provided,  however,  that it is expressly  understood  and agreed the  foregoing
limitations  shall not be  applicable  with  respect  to  non-monetary  remedies
available to the parties  relating to breaches of any  agreement or covenant of,
respectively, the Stockholders and Parent contained in this Agreement, for which
any and all non-monetary remedies shall be available to the parties.

      Section 9.5 Notice and Opportunity to Defend.

      (a) Promptly after receipt by any Person  entitled to indemnity under this
Agreement  (an  "INDEMNITEE")  of notice of any demand,  claim or  circumstances
which,  with  the  lapse of time,  would  or might  give  rise to a claim or the
commencement  (or  threatened   commencement)  of  any  action,   proceeding  or
investigation  (an  "ASSERTED  LIABILITY")  that  may  result  in  a  Loss,  the
Indemnitee  shall give written notice  thereof (a "CLAIMS  NOTICE") to any other
party  (or  parties)  who is or  may be  obligated  to  provide  indemnification
pursuant to Section 9.2 or 9.3 (the  "INDEMNIFYING  PARTY").  The Claims  Notice
shall  describe the Asserted  Liability in reasonable  detail and shall indicate
the amount (estimated, if necessary and to the extent feasible) of the Loss that
has been or may be suffered by the Indemnitee.

                                       44
<PAGE>

      (b) The Indemnifying  Party may elect to compromise or defend,  at its own
expense and by its own counsel,  any  Asserted  Liability.  If the  Indemnifying
Party elects to compromise or defend such  Asserted  Liability,  it shall within
thirty (30) days after the date the Claims  Notice is given (or  sooner,  if the
nature of the  Asserted  Liability  so requires)  notify the  Indemnitee  of its
intent to do so,  and the  Indemnitee  shall  cooperate,  at the  expense of the
Indemnifying  Party,  in the  compromise of, or defense  against,  such Asserted
Liability,  provided,  however,  that  the  Indemnifying  Party  may  settle  or
compromise any Asserted  Liability without the consent of the Indemnitee so long
as such  settlement or compromise  releases the  Indemnitee and does not include
any admission or statement of fault against the Indemnitee.  If the Indemnifying
Party elects not to compromise or defend the Asserted Liability, fails to notify
the Indemnitee of its election as herein  provided or contests its obligation to
indemnify  under this  Agreement,  the Indemnitee may pay,  compromise or defend
such Asserted  Liability and all reasonable  expenses incurred by the Indemnitee
in defending or compromising such Asserted Liability, all amounts required to be
paid  in  connection   with  any  such  Asserted   Liability   pursuant  to  the
determination of any court,  governmental or regulatory body or arbitrator,  and
amounts  required to be paid in  connection  with any  compromise  or settlement
consented to by the Indemnitee, shall be borne by the Indemnifying Party. Except
as otherwise provided in the immediately preceding sentence,  the Indemnitee may
not settle or compromise any claim over the objection of the Indemnifying Party.
In any event,  the Indemnitee and the  Indemnifying  Party may  participate,  at
their own expense,  in (but the  Indemnitee may not control) the defense of such
Asserted  Liability.  If the Indemnifying Party chooses to defend any claim, the
Indemnitee shall make available to the Indemnifying Party any books,  records or
other  documents  within its control that are necessary or appropriate  for such
defense.

                                   ARTICLE X.
                               GENERAL PROVISIONS

      Section  10.1  Amendment.  This  Agreement  may be  amended at any time by
execution of an  instrument  in writing  signed on behalf of each of the parties
hereto.

      Section 10.2  Extension;  Waiver.  At any time prior to the Effective Time
any party hereto may, to the extent legally allowed: (i) extend the time for the
performance of any of the obligations or acts of the other parties hereto,  (ii)
waive any inaccuracies in the  representations and warranties made to such party
contained  herein or in any document  delivered  pursuant hereto and (iii) waive
compliance with any of the agreements or conditions for the benefit of the other
parties  contained  herein.  Any  agreement on the part of a party hereto to any
such  extension or waiver shall be valid only if set forth in an  instrument  in
writing  signed on behalf of such party  granting  such waiver or extension  and
only for the specific instance for which such waiver or extension was granted.

      Section 10.3 Notices. All notices,  requests,  demands, consents and other
communications  required or permitted to be given or made hereunder  shall be in
writing  and shall be deemed to have been duly given and  received  to or by the
party to whom the same is so given or made: (a) if delivered by hand, on the day
it is so delivered  against  receipt,  (b) if mailed via the United States mail,
certified first class mail, postage prepaid,  return receipt  requested,  on the
fifth  (5th)  business  days  after it is  mailed,  (c) if sent by a  nationally
recognized  overnight  courier,  on the  business day after it is sent or (d) if
sent by facsimile transmission, on the day it is so delivered (with confirmation
of  receipt),  at the  address or fax  number of such party as set forth  below,
which  address and fax number may be changed by notice to the other party hereto
duly given as set forth herein):

                                       45
<PAGE>

      if to Parent or Merger Sub, to:

      BioDelivery Sciences International, Inc.
      UMDNJ-New Jersey Medical School
      185 South Orange Avenue, Administrative Building 4
      Newark, New Jersey 07103
      Telephone: (973) 972-0015
      Fax No.: (973) 972-0323
      Attention: Francis E.  O'Donnell, Jr.

      with a copy to:

      Ellenoff Grossman & Schole LLP
      370 Lexington Avenue, 19th Floor
      New York, New York 10017
      Telephone: (212) 370-1300
      Fax No.: (212) 370-7889
      Attention: Barry I. Grossman, Esq.

      if to the Company or the Stockholders, to:

      Arius Pharmaceuticals, Inc.
      3100 Stone Gap Court
      Raleigh, North Carolina 27612
      Telephone: (919) 510-8542
      Fax No.: (919) 789-0643
      Attention: Mark Sirgo

      with a copy to:

      Wyrick Robbins Yates & Ponton LLP
      4101 Lake Boone Trail, Suite 300
      Raleigh, North Carolina 27607-7506
      Telephone: (919) 781-4000
      Fax No.: (919) 781-4865
      Attention:  Larry E. Robbins, Esq.

      Section 10.4 Certain Interpretive Conventions.

      (a) In this Agreement,  any reference to any event,  change,  condition or
effect being  "MATERIAL"  with respect to any entity or group of entities  means
any  material  event,  change,  condition  or effect  related  to the  condition
(financial or otherwise),  properties,  assets  (including  intangible  assets),
liabilities,  business,  operations  or results of operations of such entity and
its subsidiaries taken as a whole.

                                       46
<PAGE>

      (b) In this Agreement,  any reference to a party's  "KNOWLEDGE"  means the
actual  knowledge of each of such  party's  executive  officers  and  directors,
provided it shall be assumed that such  executive  officers and directors  shall
have made reasonable and customary inquiry of the matters presented.

      (c) In this Agreement, any reference to a party conducting its business or
other  affairs or taking any action in the "ORDINARY  COURSE OF BUSINESS"  means
that such an action  taken by or on behalf of such party  shall not be deemed to
have been taken in the "ordinary course of business" unless such action is taken
in the  ordinary  course of such  party's  normal day to day  operations  and is
similar in nature  and  magnitude  to actions  customarily  taken,  without  any
separate or special authorization.

      (d) The words  "INCLUDE,"  "INCLUDES"  and  "INCLUDING"  when used in this
Agreement  shall be  deemed in each case to be  followed  by the words  "without
limitation."

      (e) The phrase  "MADE  AVAILABLE"  in this  Agreement  shall mean that the
information  referred to has been made  available  if  requested by the party to
whom such information is to be made available.

      (f) The phrases "THE DATE OF THIS AGREEMENT",  "THE DATE HEREOF" and terms
of similar import,  unless the context  otherwise  requires,  shall be deemed to
refer to the Execution Date.

      (g) When a reference is made in this Agreement to Exhibits, such reference
shall be to an Exhibit to this Agreement unless otherwise indicated.

      (h) The table of contents and headings contained in this Agreement are for
reference  purposes  only  and  shall  not  affect  in any  way the  meaning  or
interpretation of this Agreement.

      Section 10.5 Entire Agreement. This Agreement, together with the documents
and  instruments  and  other  agreements  specifically  referred  to  herein  or
delivered  pursuant  hereto,  including  the  Exhibits,  the Company  Disclosure
Schedule and the Parent  Disclosure  Schedule,  constitutes the entire agreement
among the parties with respect to the subject  matter  hereof and  supersede all
prior  agreements and  understandings,  both written and oral, among the parties
with respect to the subject matter hereof and is not intended to confer upon any
other Person any rights or remedies hereunder.

      Section  10.6  Severability.  In the  event  that  any  provision  of this
Agreement,  or the  application  thereof,  becomes or is  declared by a court of
competent  jurisdiction to be illegal,  void or unenforceable,  the remainder of
this  Agreement  will continue in full force and effect and the  application  of
such  provision to other  persons or  circumstances  will be  interpreted  so as
reasonably to effect the intent of the parties hereto. The parties further agree
to replace such void or  unenforceable  provision of this Agreement with a valid
and  enforceable  provision  that will  achieve,  to the  extent  possible,  the
economic, business and other purposes of such void or unenforceable provision.

                                       47
<PAGE>

      Section 10.7 Remedies Cumulative. Except as otherwise provided herein, any
and  all  remedies  herein  expressly  conferred  upon a party  will  be  deemed
cumulative with and not exclusive of any other remedy  conferred  hereby,  or by
law or equity  upon such  party,  and the  exercise by a party of any one remedy
will not preclude the exercise of any other remedy.

      Section 10.8 Governing Law; Waiver of Jury Trial.  This Agreement shall be
governed by and construed in  accordance  with the laws of the State of Delaware
without  reference to such state's  principles  of conflicts of law. Each of the
parties hereto irrevocably  consents to the jurisdiction of any federal or state
court located within the State of Delaware,  in connection with any matter based
upon or arising out of this Agreement or the matters contemplated herein, agrees
that process may be served upon them in any manner authorized by the laws of the
State of Delaware  for such  persons and waives and  covenants  not to assert or
plead any objection  which they might  otherwise have to such  jurisdiction  and
such process.  THE PARTIES HERETO IRREVOCABLY WAIVE THE RIGHT TO A JURY TRIAL IN
CONNECTION WITH ANY ACTIONS,  SUITS OR PROCEEDINGS ARISING OUT OF OR RELATING TO
THIS AGREEMENT, THE MERGER OR THE TRANSACTIONS CONTEMPLATED HEREBY.

      Section 10.9  Attorneys'  Fees.  In any action at law or suit in equity to
enforce  this  Agreement  or the  rights of any of the  parties  hereunder,  the
prevailing  party in such  action or suit shall be entitled to receive a sum for
its attorneys' fees and all other costs and expenses  incurred in such action or
suit.

      Section 10.10 Rules of  Construction.  The parties  hereto agree that they
have been  represented  by  counsel  during  the  negotiation,  preparation  and
execution of this Agreement and, therefore,  waive the application of any Law of
construction  providing that  ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.

      Section 10.11  Assignment.  Neither this  Agreement nor any of the rights,
interests  or  obligations  hereunder  shall be  assigned  by any of the parties
hereto, in whole or in part (whether by operation of Law or otherwise),  without
the prior written  consent of the other party,  and any attempt to make any such
assignment without such consent shall be null and void.

      Section 10.12 Successors and Assigns. This Agreement will be binding upon,
inure to the benefit of and be enforceable  by the parties and their  respective
successors and permitted assigns.

      Section 10.13  Counterparts;  Facsimile  Delivery.  This  Agreement may be
executed in one or more  counterparts  and delivered by facsimile,  all of which
shall be considered one and the same  agreement and shall become  effective when
one or more  counterparts  have been signed by each of the parties and delivered
to the other  parties,  it being  understood  that all parties need not sign the
same counterpart.

                                       48
<PAGE>

                      [This Page Intentionally Left Blank]

                            [Signature Page Follows]

                                       49
<PAGE>

      IN WITNESS WHEREOF,  Parent, Merger Sub, the Company and the Stockholders,
have each caused this Agreement to be executed and delivered by their respective
officers thereunto duly authorized, all as of the date first written above.

                                   BIODELIVERY SCIENCES INTERNATIONAL, INC.

                                   By:  /s/ Francis E. O'Donnell, Jr.
                                        ----------------------------------------
                                   Name: Francis E. O'Donnell, Jr.
                                   Title:  Chief Executive Officer and President

                                   ARIUS ACQUISITION CORP.

                                   By:  /s/ Francis E. O'Donnell, Jr.
                                        ----------------------------------------
                                   Name: Francis E. O'Donnell, Jr.
                                   Title:  Chief Executive Officer and President

                                   ARIUS PHARMACEUTICALS, INC.

                                   By:  /s/ Mark A. Sirgo
                                        ----------------------------------------
                                   Name: Mark A. Sirgo
                                   Title:  President and Chief Executive Officer

                                   STOCKHOLDERS:

                                   /s/ Mark A. Sirgo
                                        ----------------------------------------
                                   Mark A. Sirgo

                                   /s/ Andrew L.  Finn
                                        ----------------------------------------
                                   Andrew L.  Finn

                 [SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER
                               AND REORGANIZATION]

                                      S-1
<PAGE>

                                   SCHEDULE A

                                  DEFINED TERMS

      When used in this Agreement,  the following  capitalized words and phrases
shall have the meanings set forth below.

      "AFFILIATE" or "AFFILIATES"  of a specified  Person is a Person or Persons
that: (i) directly or indirectly, through one or more intermediaries,  Controls,
is Controlled by or is under common Control with the Person specified or (ii) in
the case of a natural person, is a spouse,  linear ancestor or linear descendant
of any such  specified  person  or (iii) in the case of a natural  person,  is a
legal  representative  or  trustee of any such  specified  persons or (iv) is an
officer, director, trustee, employee, stockholder, member, partner, principal or
trust for the  benefit  of any  entity or Person  referred  to in the  preceding
clauses (i), (ii) or (iii).

      "ATRIX" shall mean Atrix Laboratories, Inc.

      "BOOKS AND RECORDS" shall mean all books and records produced by or in the
possession of the Company or its accountants,  attorneys or advisors  pertaining
to  the  Company,  including,   without  limitation,  those  Books  and  Records
pertaining to: (i) the Company Intellectual  Property,  (ii) the business of the
Company,  (iii)  Persons in  privity  of  contract  with the  Company,  (iv) the
products, products in development,  proposed products,  customers,  distributors
and suppliers of the Company, (v) minutes of stockholder and directors meetings,
(vi) the Company  Capital  Stock and (vii) all  financial  statements,  ledgers,
spreadsheets,  work papers,  tax returns and other  information  relevant to the
financial condition of the Company or such returns.

      "COMPANY CAPITAL STOCK" shall mean all outstanding shares of the Company's
Common Stock,  all outstanding  shares of Company  Convertible  Securities,  all
Company  Options and all  outstanding  shares of any other  capital stock of the
Company immediately prior to the Effective Time.

      "COMPANY  COMMON STOCK" shall mean shares of the common  stock,  par value
$0.01 per share, of the Company.

      "COMPANY  CONVERTIBLE  SECURITIES"  shall  mean  any and  all  convertible
securities  of any type or any other  rights to  purchase or  otherwise  acquire
shares of the Company  Capital  Stock,  whether or not presently  exercisable or
subject to additional conditions prior to exercise.

      "COMPANY DISCLOSURE SCHEDULE" shall mean a separate disclosure schedule of
the  Company,  dated as of the  Execution  Date and  delivered by the Company to
Parent prior to the  execution  and delivery of this  Agreement and referring by
section number to the representations  and warranties in this Agreement,  as the
same may be amended by any Disclosure Schedule Update.

                                      A-1
<PAGE>

      "COMPANY  MATERIAL ADVERSE EFFECT" shall mean any change,  event or effect
that  is  materially   adverse  to  the  condition   (financial  or  otherwise),
properties,  assets  (including  intangible  assets),   liabilities,   business,
operations or results of operations of the Company; provided,  however, that any
adverse  change,  effect,  event,  occurrence,  state of  facts  or  development
attributable  to  conditions  affecting  the  industries as a whole in which the
Company participates,  the U.S. economy as a whole or the foreign economies as a
whole in any locations where the Company has material  operations or sales shall
not be taken into  account in  determining  whether  there has been or will be a
Company Material Adverse Effect.

      "COMPANY NOTES" shall mean those certain loans previously and equally made
by the  Stockholders to the Company in the aggregate  amount as of the Effective
Date of approximately $60,000.

      "COMPANY OPTIONS" shall mean any and all warrants, options or other rights
to purchase or otherwise acquire shares of the Company Capital Stock, whether or
not presently exercisable or subject to additional conditions prior to exercise,
under and pursuant to the Company's 2003 Stock Plan or any other  incentive plan
or agreement adopted or entered into by the Company on or prior to the Effective
Date (the "COMPANY STOCK OPTION PLAN").

      "CONTROL" shall mean the possession,  direct or indirect,  of the power to
direct  or cause the  direction  of the  management  and  policies  of a Person,
whether through:  (i) the ownership of voting shares (ii) general partnership or
managing member interests (iii) common directors or trustees or (iv) by contract
or otherwise.

      "DEFINED BENEFIT PLAN" shall mean either a plan described in Section 3(35)
of ERISA or a plan subject to the minimum funding standards set forth in Section
302 of ERISA and Section 412 of the Code.

      "ENVIRONMENTAL APPROVALS" shall mean all permits, licenses, authorizations
and approvals required under  Environmental Law with respect to the operation or
conduct of its  business or the  ownership  or  operation  of the  Property  and
Facilities.

      "ENVIRONMENTAL CLAIM" shall mean all claims or causes of actions,  whether
or  not  asserted,  including  but  not  limited  to  claims  by any  person  or
Governmental  Entity or other  third  party,  alleging  potential  liability  or
responsibility  for  violation  of any  Environmental  Law or any  Environmental
Approval or for threat or injury to the environment,  health or safety, personal
injury  (including  sickness,  disease or death) or property or natural resource
damage, or otherwise  alleging liability or responsibility for damages (punitive
or otherwise),  investigation,  cleanup, removal, remedial or response action or
costs,  contribution,  restitution,  administrative civil or criminal penalties,
injunctive  relief,  or other  type of  relief,  resulting  from or based upon a
Pre-Existing Environmental Condition.

      "ENVIRONMENTAL  LAW" shall mean any statute,  law (including  common law),
treaty,  ordinance,  rule, regulation,  code, policy, license,  permit, consent,
approval,   judgment,  order,   administrative  order  or  decision,  decree  or
injunction of any Governmental Entity relating to the protection of human health
or the environment  (including air, water, soil and natural  resources),  or the
generation,   treatment,   manufacturing,  use,  storage,  handling,  recycling,
presence,  release,  disposal,  transportation  or  shipment  of  any  Hazardous
Material.

                                      A-2
<PAGE>

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

      "EXCHANGE  ACT" shall mean the  Securities  Exchange Act of 1934,  and all
rules and regulations promulgated thereunder, each as amended from time to time.

      "FACILITIES" shall mean all buildings and improvements on the Property.

      "HAZARDOUS MATERIAL" shall mean any material,  substance, waste, pollutant
or contaminant listed,  defined,  designated or classified as hazardous,  toxic,
flammable, explosive, reactive, corrosive, infectious,  carcinogenic,  mutagenic
or radioactive or otherwise  regulated by any  Governmental  Entity or under any
Environmental  Law, including  petroleum or petroleum products  (including crude
oil) and any derivative or by-products  thereof,  natural gas, synthetic gas and
any  mixtures  thereof,  or any  substance  that is or contains  polychlorinated
biphenyls (PCB's), radon gas, urea formaldehyde,  asbestos-containing  materials
(ACM) or lead.

      "INTELLECTUAL PROPERTY" shall mean:

            (i)   patents,   applications   for  patents   (including,   without
limitation,  divisions,  continuations,   continuations-in-part,   reissues  and
renewal applications),  and any renewals,  extensions,  supplementary protection
certificates  or  reissues  thereof,  in any  such  jurisdiction;  research  and
development data (including  without limitation the results of research into and
development  of drug or  biologic-based  products  and drug  delivery  systems),
formulae, know-how, proprietary processes, algorithms, models and methodologies,
technical information,  designs, procedures, laboratory notebooks, trade secrets
and confidential  information and rights in any domestic or foreign jurisdiction
to limit the use or disclosure thereof by any Person;

            (ii)  inventions,  discoveries  and  biological  materials,  whether
patentable  or not and whether or not reduced to  practice,  in any  domestic or
foreign jurisdiction;

            (iii)  trademarks,   service  marks,   trade  names,   brand  names,
certification  marks,  designs,  logos and  slogans,  domain  names,  commercial
symbols,  business  name  registrations,  domain  names,  trade  dress and other
indications  of origin and general  intangibles  of like  nature,  the  goodwill
associated  with the  foregoing  and  registrations  in any  domestic or foreign
jurisdiction  of, and  applications in any such  jurisdiction  to register,  the
foregoing,  including  any  extension,  modification  or  renewal  of  any  such
registration or application;

            (iv) registrations or applications for registration of copyrights in
any domestic or foreign jurisdiction, and any renewals or extensions thereof;

            (v) writings and other works of  authorship  of any type  (including
the content  contained on any web site),  whether  copyrightable  or not, in any
such  jurisdiction;  computer  software  (whether  in source code or object code
form), databases, compilations and data; and

            (vi) any other technology or intellectual property or proprietary or
other rights therein of any type or nature.

                                      A-3
<PAGE>

      "LAW" or "LAWS"  shall  mean any  foreign,  federal,  state or local  law,
statute,  order, rule, regulation,  policy or guideline enacted,  promulgated or
administered,  or  judgments,  holdings,  decisions  or orders  entered  by, any
Governmental Entity.

      "LIABILITIES" shall mean any direct or indirect  liability,  indebtedness,
obligation,  expense, claim, loss, damage, deficiency,  guaranty, endorsement or
cause  of  action  of or by any  Person,  absolute  or  contingent,  accrued  or
unaccrued,  reserved  or  unreserved,  due  or  to  become  due,  liquidated  or
unliquidated.

      "LIENS"   shall   mean   mortgages,    pledges,   claims,    restrictions,
infringements, liens, charges, encumbrances and security interests and claims of
any kind or nature whatsoever.

      "MEMBER  OF THE  CONTROLLED  GROUP"  shall  mean each  trade or  business,
whether or not incorporated, that would be treated as a single employer with the
Company  under Section 4001 of ERISA or Section  414(b),  (c), (m) or (o) of the
Code.

      "MULTIEMPLOYER  PLAN"  shall mean a plan  described  in  Section  3(37) of
ERISA.

      "PARENT COMMON STOCK" shall mean shares of the common stock of Parent, par
value $.001 per share.

      "PARENT DISCLOSURE  SCHEDULE" shall mean a separate disclosure schedule of
the  Parent,  dated as of the  Execution  Date and  delivered  by  Parent to the
Company  and the  Stockholders  prior  to the  execution  and  delivery  of this
Agreement and referring by section number to the  representations and warranties
in this Agreement, as the same may be amended by any Disclosure Schedule Update.

      "PARENT  MATERIAL  ADVERSE EFFECT" shall mean any change,  event or effect
that  is  materially   adverse  to  the  condition   (financial  or  otherwise),
properties,  assets  (including  intangible  assets),   liabilities,   business,
operations or results of operations of Parent and its  subsidiaries,  taken as a
whole; provided,  however, that any adverse change,  effect, event,  occurrence,
state  of  facts  or  development   attributable  to  conditions  affecting  the
industries  as a whole in which Parent and its  subsidiaries  participates,  the
U.S.  economy as a whole or the foreign  economies  as a whole in any  locations
where the Parent or any of its  subsidiaries  has material  operations  or sales
shall not be taken into account in determining whether there has been or will be
a Parent Material Adverse Effect.

      "PARENT  PREFERRED  STOCK"  shall mean  shares of the Series A  Non-Voting
Convertible Preferred Stock of Parent, par value $.001 per share.

      "PERSON" shall mean any individual or any foreign or domestic corporation,
general or limited  partnership,  limited liability  company,  limited liability
partnership,  joint venture,  any other business association or any trust or any
other entity.

                                      A-4
<PAGE>

      "PRE-EXISTING  ENVIRONMENTAL  CONDITION"  shall mean:  (i) any presence or
Release of any  Hazardous  Material  at, on,  under,  from or to the Property or
Facilities before or at Closing (and any migration therefrom,  whether before or
after  Closing);  (ii)  any  presence,  Release  or  threatened  Release  of any
Hazardous  Material at, on, under,  from or to any other  location  before or at
Closing (and any migration  therefrom,  whether  before or after  Closing);  and
(iii) any other  circumstances  occurring before or at Closing forming the basis
of any actual or alleged violation of, or liability under, any Environmental Law
or any Environmental Approval.

      "PROPERTY"  shall mean all real property leased or owned by the Company or
its Affiliates or the Stockholders in connection with the Company,  in each case
either currently or in the past.

      "RELEASE" shall mean any releasing,  spilling,  leaking, pumping, pouring,
placing,  emitting,  emptying,   discharging,   injecting,  escaping,  leaching,
disposing,   or  dumping   into  the   environment,   whether   intentional   or
unintentional,  negligent or non-negligent,  sudden or non-sudden, accidental or
non-accidental.

      "SECURITIES  ACT" shall mean the Securities Act of 1933, and all rules and
regulations promulgated thereunder, each as amended from time to time.

      "TAX" (and, with correlative  meaning,  "TAXES" and "TAXABLE")  means: (i)
any net income, alternative or add-on minimum tax, gross income, gross receipts,
sales, use, ad valorem,  transfer,  franchise,  profits,  license,  withholding,
payroll,  employment,  excise, severance, stamp, occupation,  premium, property,
environmental  or windfall profit tax, custom,  duty or other tax,  governmental
fee or other like assessment or charge of any kind whatsoever, together with any
interest or any penalty,  addition to tax or  additional  amount  imposed by any
Governmental  Entity responsible for the imposition of any such tax (domestic or
foreign),  (ii)  any  liability  for the  payment  of any  amounts  of the  type
described in (i) as a result of being a member of an  affiliated,  consolidated,
combined or unitary  group for any Taxable  period,  and (iii) any liability for
the payment of any amounts of the type  described  in (i) or (ii) as a result of
being a transferee of or successor to any Person,  or as a result of any express
or implied obligation to indemnify any other Person.

      "TAX RETURN" shall mean any return, statement,  report or form (including,
without limitation,  estimated tax returns and reports,  withholding tax returns
and  reports and  information  reports  and  returns)  required to be filed with
respect to Taxes.

                                      A-5
<PAGE>

                              CROSS-REFERENCE TABLE

      The  following  capitalized  terms are  defined  in the  sections  of this
Agreement indicated below:

---------------------------------------- ---------------------------------------
TERM                                     SECTION
---------------------------------------- ---------------------------------------
Agreement                                Preamble
---------------------------------------- ---------------------------------------
Asserted Liability                       9.4(a)
---------------------------------------- ---------------------------------------
Atrix License                            7.1(d)
---------------------------------------- ---------------------------------------
BSP                                      7.2(k)
---------------------------------------- ---------------------------------------
Business Plan                            6.10
---------------------------------------- ---------------------------------------
CERCLA                                   3.13(d)
---------------------------------------- ---------------------------------------
Certificate Designations                 7.2(f)
---------------------------------------- ---------------------------------------
Certificate of Merger                    2.2
---------------------------------------- ---------------------------------------
Claims Notice                            9.4(a)
---------------------------------------- ---------------------------------------
Closing                                  2.2
---------------------------------------- ---------------------------------------
Closing Date                             2.2
---------------------------------------- ---------------------------------------
Company                                  Preamble
---------------------------------------- ---------------------------------------
Company Authorizations                   3.8
---------------------------------------- ---------------------------------------
Company Financial Statement              3.4(a)
---------------------------------------- ---------------------------------------
Company Intellectual Property            3.10(a)
---------------------------------------- ---------------------------------------
Company IP Agreements                    3.11(a)
---------------------------------------- ---------------------------------------
Company Products                         3.11(a)
---------------------------------------- ---------------------------------------
Competitive Activity                     6.13(c)
---------------------------------------- ---------------------------------------
Confidential Information                 6.3
---------------------------------------- ---------------------------------------
Delaware Law                             2.1
---------------------------------------- ---------------------------------------
Development Activities                   3.11(a)
---------------------------------------- ---------------------------------------
Disclosure Schedule Update               6.1(d)
---------------------------------------- ---------------------------------------
Effective Time                           2.2
---------------------------------------- ---------------------------------------
Employment Agreements                    7.2(i)
---------------------------------------- ---------------------------------------
Execution Date                           Preamble
---------------------------------------- ---------------------------------------

                                      A-6
<PAGE>

---------------------------------------- ---------------------------------------
FDA                                      3.11(b)
---------------------------------------- ---------------------------------------
Finn                                     Preamble
---------------------------------------- ---------------------------------------
Governmental Entity                      3.3(c)
---------------------------------------- ---------------------------------------
Idemnifying Party                        9.4(a)
---------------------------------------- ---------------------------------------
Idemnitee                                9.4(a)
---------------------------------------- ---------------------------------------
"include; includes; including"           10.4(c)
---------------------------------------- ---------------------------------------
"knowledge"                              10.4(b)
---------------------------------------- ---------------------------------------
Leased Premises                          3.22(f)
---------------------------------------- ---------------------------------------
Leases                                   3.22(f)
---------------------------------------- ---------------------------------------
"made available"                         10.4(e)
---------------------------------------- ---------------------------------------
Material Contracts                       3.20
---------------------------------------- ---------------------------------------
"material"                               10.4(a)
---------------------------------------- ---------------------------------------
Merger Sub                               Preamble
---------------------------------------- ---------------------------------------
Merger                                   Recitals
---------------------------------------- ---------------------------------------
NASDAQ                                   4.3(a)
---------------------------------------- ---------------------------------------
Non-Competition Period                   6.13(b)
---------------------------------------- ---------------------------------------
"ordinary course of business"            10.4(c)
---------------------------------------- ---------------------------------------
Other Document                           3.3(d)
---------------------------------------- ---------------------------------------
Parent                                   Preamble
---------------------------------------- ---------------------------------------
Parent Balance Sheet Date                4.5
---------------------------------------- ---------------------------------------
Parent Financial Documents               4.4
---------------------------------------- ---------------------------------------
Parent Financing                         7.1(c)
---------------------------------------- ---------------------------------------
Parent Options                           4.2(a)
---------------------------------------- ---------------------------------------
Parent SEC Documents                     4.4
---------------------------------------- ---------------------------------------
Parent Stock Option Plan                 4.2(a)
---------------------------------------- ---------------------------------------
Parent Warrants                          4.2(a)
---------------------------------------- ---------------------------------------
Plans                                    3.15(a)
---------------------------------------- ---------------------------------------
Proceeding                               3.7
---------------------------------------- ---------------------------------------

                                      A-7
<PAGE>

---------------------------------------- ---------------------------------------
Real Property                            3.22(a)
---------------------------------------- ---------------------------------------
Recourse Amounts                         9.2(b)(ii)
---------------------------------------- ---------------------------------------
Reference Balance Sheet Date             3.4(a)
---------------------------------------- ---------------------------------------
Reference Balance Sheet                  3.4(a)
---------------------------------------- ---------------------------------------
Reference Income Statement               3.4(a)
---------------------------------------- ---------------------------------------
Registration Rights Agreement            7.2(h)
---------------------------------------- ---------------------------------------
SEC                                      2.11
---------------------------------------- ---------------------------------------
Sirgo                                    Preamble
---------------------------------------- ---------------------------------------
Stockholders                             Preamble
---------------------------------------- ---------------------------------------
Termination Exemption                    8.3(b)
---------------------------------------- ---------------------------------------
Termination Fee                          8.3(b)
---------------------------------------- ---------------------------------------
"the date hereof"                        10.4(f)
---------------------------------------- ---------------------------------------
"the date of this Agreement"             10.4(f)
---------------------------------------- ---------------------------------------
Voting Agreement                         7.2(j)
---------------------------------------- ---------------------------------------

                                      A-8
<PAGE>

                                   EXHIBIT "B"

                                     FORM OF

               CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
                                       OF
                 SERIES A NON-VOTING CONVERTIBLE PREFERRED STOCK
                                       OF
                    BIODELIVERY SCIENCES INTERNATIONAL, INC.

      Acting  pursuant  to  Sections  151(a)  and  (g) of the  Delaware  General
Corporation  Law, the undersigned,  Francis E. O'Donnell,  Jr., the duly elected
and acting  Chairman,  President  and Chief  Executive  Officer  of  BioDelivery
Sciences International,  Inc., a Delaware corporation, hereby certifies that the
Board of Directors of the Company duly  approved the  following  Certificate  of
Designation of Series A Non-Voting Convertible Preferred Stock of the Company on
July  29,  2004,  and that  the  Certificate  of  Incorporation  of the  Company
expressly  authorizes  the Board to so designate and issue one or more series of
preferred  stock, par value $.001 per share, of the Company.  The  designations,
powers,  preferences  and  relative,  participating,  optional or other  special
rights, and the qualifications,  limitations and restrictions thereof in respect
of the  shares  said  Series A  Non-Voting  Convertible  Preferred  Stock of the
Company are as described in the following resolution,  duly adopted by the Board
of Directors of the Company:

      "WHEREAS,   the  Certificate  of  Incorporation  of  BioDelivery  Sciences
International,  Inc., a Delaware corporation (the "COMPANY")  authorizes a class
(or classes) of up to five million  (5,000,000)  shares of preferred  stock, par
value $.001 per share (the "PREFERRED STOCK"),  and provides that such Preferred
Stock may be issued from time to time in one or more series and vests  authority
in the Board of  Directors  of the  Company  (the  "Board")  to fix or alter the
rights,  preferences,  privileges,  restrictions and other matters granted to or
imposed upon any wholly unissued series of the Preferred Stock;

      WHEREAS, the Company has not heretofore issued any Preferred Stock; and

      WHEREAS,  it is the desire of the Board to fix and  determine  the rights,
preferences,  privileges, restrictions and other matters relating to one million
six hundred  forty-seven  thousand and fifty nine (1,647,059) shares of Series A
Non-Voting Convertible Preferred Stock of the Company (the "SERIES A STOCK").

      NOW,  THEREFORE,  BE IT RESOLVED,  that  pursuant to  authority  expressly
granted to and vested in the Board by the  Certificate of  Incorporation  of the
Company,  there is hereby created, out of the five million (5,000,000) shares of
Preferred Stock authorized in Article FOURTH of the Certificate of Incorporation
a series of Preferred Stock,  consisting of one million six hundred  forty-seven
thousand and fifty nine (1,647,059) shares and having the designations,  powers,
number,  preferences  and  relative,  participating,  optional or other  special
rights, and the  qualifications,  limitations or restrictions  thereof set forth
below:

<PAGE>

      A. Authorized  Number.  One million six hundred  forty-seven  thousand and
fifty nine  (1,647,059) of the authorized  shares of Preferred  Stock are hereby
designated "Series A Non-Voting Convertible Preferred Stock."

      B.  Designation.  The rights,  preferences,  privileges,  restrictions and
other matters relating to Series A Stock are as follows:

            1. Dividend  Rights.  Holders of Series A Stock shall be entitled to
receive,  pari passu with holders of common stock, par value $.001 per share, of
the Company (the "COMMON STOCK"), all cash or in-kind dividends or distributions
(including,  without  limitation,  in the case of a distribution  by the Company
spin-off of limited  liability  company  interests in the Company's  subsidiary,
Bioral Nutrient Delivery, LLC) on an as converted basis from time to time at any
time  declared,  set aside,  or paid by the Company in an amount that would have
been  received by the holders of Series A Stock  (assuming,  for purposes of the
calculation,  that the  holders of Series A Stock had  lawfully  converted  such
Series A Stock into shares of Common Stock  immediately prior to the record date
for   determining   the  holders  of  Common  Stock  entitled  to  receive  such
distribution at the  then-applicable  Series A Stock  Conversion  Rate), in each
case only  when,  as and if  declared  by the  Board,  and,  in the case of cash
dividends, only out of funds that are legally available therefor. Such dividends
shall be non-cumulative.

            2. Voting Rights.  The holders of shares of Series A Stock shall not
have any voting or approval  rights  whatsoever  except as  expressly  set forth
herein.  Notwithstanding  the  foregoing,  the Company shall not amend or modify
this  Certificate  of  Designations  without  the prior  written  consent of the
holders of a majority of the then outstanding shares of Series A Stock.

            3. Liquidation Rights.

                  (a) Upon any Liquidation Event (as defined below),  subject to
the rights and preferences of any shares of the Company's preferred stock having
liquidation  rights senior to those of the Series A Stock,  the assets and funds
of the Company legally  available for distribution to its stockholders  shall be
distributed ratably (the "LIQUIDATION EVENT  DISTRIBUTION") among the holders of
the Common Stock and Series A Stock as if such shares of Series A Stock had been
converted  into Common Stock at the  then-applicable  Series A Stock  Conversion
Rate immediately prior to such  distribution,  without any further action by the
holders  of such  shares;  provided,  however,  that  all  declared  and  unpaid
dividends,  if any,  shall be paid in accordance  with the provisions of Section
5(g) below;  provided  further,  however,  that the Company's  obligations  with
respect to the  Liquidation  Event  Distribution  shall be  contingent  upon the
delivery  of the  certificates  evidencing  such shares of Series A Stock to the
Company or its transfer  agent as provided  below,  or the  notification  by the
holder to the Company or its  transfer  agent that such  certificates  have been
lost, stolen or destroyed and executes an agreement  satisfactory to the Company
to indemnify the Company from any loss  incurred by it in  connection  with such
certificates;

                                       2
<PAGE>

                  (b) For purposes hereof,  the term  "LIQUIDATION  EVENT" shall
mean (i) any  liquidation,  dissolution  or  winding up of the  Company,  either
voluntary  or   involuntary,   or  (ii)  a  transaction  or  series  of  related
transactions resulting in any of the following:

                        (A)  a  sale,   lease,   transfer,   exchange  or  other
disposition of all or substantially all the assets of the Company;

                              (B) a  merger  (with or into  any  other  entity),
consolidation, sale or reorganization.

                              (C) the  transfer by one or more  stockholders  of
the  Company  of  securities  of the  Company  representing  50% or  more of the
combined voting power of the then outstanding securities of the Company.

                  (c) Upon the  occurrence of any  Liquidation  Event that would
involve  the  distribution  of  assets  other  than  cash  with  respect  to the
outstanding  shares of Series A Stock, the amount of such distribution  shall be
the fair market value thereof at the time of such  distribution as determined in
good faith by the Board of Directors of the Company,  and any  securities  to be
distributed in such event shall be valued as follows:

                              (i) Securities not subject to investment letter or
other similar  restrictions  on free  marketability  covered by subsection  (ii)
hereof:

                                    (A)     if traded on a  securities  exchange
                                            or  through   the  Nasdaq   National
                                            Market  or Nasdaq  SmallCap  Market,
                                            the value  shall be deemed to be the
                                            average of the closing  sales prices
                                            of the  securities  on such exchange
                                            over the 30-day  period ending three
                                            (3)  business   days  prior  to  the
                                            closing;

                                    (B)     if actively traded over-the-counter,
                                            the value  shall be deemed to be the
                                            average of the  closing  sale prices
                                            (whichever is  applicable)  over the
                                            30-day   period   ending  three  (3)
                                            business  days prior to the closing;
                                            and

                                    (C)     if there is no active public market,
                                            the value  shall be the fair  market
                                            value    thereof,    as   reasonably
                                            determined by the Board of Directors
                                            of the Company in good faith.

                              (ii) The method of valuation of securities subject
to investment  letter or other  restrictions on free  marketability  (other than
restrictions  arising solely by virtue of a stockholder's status as an affiliate
or former  affiliate)  shall be to make an appropriate  discount from the market
value  determined  as provided in clauses (A), (B) or (C) of  subsection  (i) of
this  subsection  (c), to reflect the  adjusted  fair market value  thereof,  as
reasonably determined by the Board of Directors of the Company in good faith.

                                       3
<PAGE>

            4.  Redemption.  There  shall  be no  obligation  on the part of the
Company  to redeem  any  shares of Series A Stock nor on the part of any  holder
thereof to submit any such shares for redemption.

            5. Conversion  Rights.  The holders of Series A Stock shall have the
following rights with respect to the conversion of Series A Stock into shares of
Common Stock:

                  (a) Optional Conversion. Subject to and in compliance with the
provisions  of this  Section  5, all (but not less than all;  provided,  however
that, in the event a holder of Series A Stock is prevented  from  converting all
of its shares of Series A Stock into Common Stock as a result of the  limitation
referred to in Section 5(p) below,  such holder (i) may immediately  convert the
maximum number of shares of Series A Stock permitted to be converted  thereunder
(all but not less than all) and (ii) shall be entitled to convert the balance of
such shares of Series A Stock into Common Stock upon the Company's obtaining the
requisite  stockholder  approval)  of the  shares of Series A Stock  held by the
holders thereof may be converted,  at the individual option of each such holder,
into fully-paid and non-assessable  shares of Common Stock at any time following
(but not prior to) the earliest to occur of:

                        (i) on thirty (30) days written notice by such holder to
the Company following the occurrence of the Conversion Event;

                        (ii)  the  first  approval  by the  U.S  Food  and  Drug
Administration  for  the  marketing  and  sale  by  the  Company  or  any of its
subsidiaries  of  any  of  the  following  products:   Emezine,   BEMA-Fentanyl,
BEMA-Sumitriptan or any product which primarily incorporates  technology similar
to the foregoing for the buccal delivery of pharmaceuticals ("FDA APPROVAL"); or

                        (iii) August [ ], 2009,

            The  number of shares of Common  Stock to which a holder of Series A
Stock  shall be  entitled  upon  conversion  shall be the  product  obtained  by
multiplying the Series A Stock Conversion Rate (as defined below) then in effect
by the number of shares of Series A Stock being converted.

            As used herein,  the term "CONVERSION  EVENT" shall mean the failure
of the Company to provide at least $3,000,000 (which amount shall not be subject
to surrender or repayment) to the surviving  entity (the "SURVIVING  ENTITY") in
that certain merger of Arius Pharmaceuticals, Inc. ("ARIUS") with and into Arius
Acquisition  Corp., a wholly-owned  subsidiary of the Company  ("MERGER SUB") as
required to: (i) pay Atrix Laboratories, Inc. ("ATRIX") $1,000,000 by August 24,
2004 pursuant to the terms of that certain license  agreement  between Arius and
Atrix  and  (ii)  fund,  in a total  amount  of no  less  than  $2,000,000,  the
operations  of the  Surviving  Entity in  accordance  with the Business Plan (as
defined in that certain Agreement and Plan of Merger and  Reorganization,  dated
August 10, 2004, among the Company,  Arius, Merger Sub, Mark A. Sirgo ("SIRGO"),
and Andrew L. Finn  ("FINN"),  subject  to any  changes  to such  Business  Plan
mutually agreed upon by the Company and Sirgo.

                                       4
<PAGE>

                  (b) Termination Conversion.

                        (i)  Upon   termination   by  the   Company  of  Sirgo's
employment  with the Company without Good Cause (as that term is defined in, and
otherwise in accordance with, that certain  Employment  Agreement  between Sirgo
and the  Company,  dated  August  [ ],  2004  (the  "SIRGO  AGREEMENT"))  or the
termination of such employment by Sirgo for Good Reason (as defined in the Sirgo
Agreement), in either case prior to an FDA Approval, all (but not less than all,
subject to any limitations on the extent of such  conversion  under Section 5(p)
below) of the  shares of Series A Stock held by Sirgo may be  converted,  at the
option of Sirgo,  into fully-paid and  non-assessable  shares of Common Stock at
any time thereafter.

                        (ii)  Upon   termination   by  the   Company  of  Finn's
employment  with the Company without Good Cause (as that term is defined in, and
otherwise in accordance with, that certain Employment Agreement,  dated August [
], 2004 between Finn and the Company (the "FINN  AGREEMENT"))  or termination of
such  employment  by Finn for Good  Reason (as  defined in the Finn  Agreement),
prior to an FDA Approval in either case, all (but not less than all,  subject to
any  limitations on the extent of such  conversion  under Section 5(p) below) of
the  shares of Series A Stock  held by Finn may be  converted,  at the option of
Finn,  into  fully-paid  and  non-assessable  shares of Common Stock at any time
thereafter.

            The  number of shares of Common  Stock to which a holder of Series A
Stock  shall be  entitled  upon  conversion  shall be the  product  obtained  by
multiplying the Series A Stock Conversion Rate (as defined below) then in effect
by the number of shares of Series A Stock being converted.

                  (c) Conversion Rate. The conversion rate in effect at any time
for  conversion  of the Series A Stock (the  "SERIES A STOCK  CONVERSION  RATE")
shall be the  quotient  obtained by dividing the Series A Stock  Original  Issue
Price by the Series A Stock Conversion  Price (as defined below).  The "SERIES A
ORIGINAL  ISSUE PRICE" shall be Four Dollars and  Twenty-Five  Cents ($4.25) per
share.

                  (d) Conversion  Price. The conversion price for Series A Stock
(the  "SERIES A STOCK  CONVERSION  PRICE")  shall  initially be Four Dollars and
Twenty-Five Cents ($4.25) per share,  which is equal to one hundred percent 100%
of the Series A Original  Issue Price.  Such initial  Series A Stock  Conversion
Price shall be adjusted from time to time in accordance with this Section 5. All
references  to Series A Stock  Conversion  Price  herein shall mean the Series A
Stock Conversion Price as so adjusted.

                  (e) Fractional  Shares.  No fractional  shares of Common Stock
shall be issued upon  conversion  of Series A Stock.  All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one share of
Series  A Stock  by a  holder  thereof  shall  be  aggregated  for  purposes  of
determining  whether  the  conversion  would  result  in  the  issuance  of  any
fractional share. If, after the aforementioned aggregation, the conversion would
result in the issuance of any fractional  share,  the Company shall,  in lieu of
issuing any  fractional  share,  pay cash equal to the product of such  fraction
multiplied by the Common  Stock's fair market value (as determined by the Board)
on the date of conversion.

                                       5
<PAGE>

                  (f) Reservation of Stock Issuable Upon Conversion. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock,  solely for the purpose of effecting  the  conversion of
the shares of Series A Stock, such number of its shares of Common Stock as shall
from time to time be  sufficient  to effect the  conversion  of all  outstanding
shares of Series A Stock.  If at any time the number of authorized  but unissued
shares of Common Stock shall not be sufficient  to effect the  conversion of all
then outstanding  shares of Series A Stock, the Company will take such corporate
action as may, in the  opinion of its  counsel,  be  necessary  to increase  its
authorized but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose.

                  (g) Notices.  Any notice  required by the  provisions  of this
Section 5 shall be in writing and shall be deemed  effectively  given:  (i) upon
personal  delivery  to the party to be  notified,  (ii)  when sent by  confirmed
facsimile if sent during normal business hours of the recipient; if not, then on
the next business day,  (iii) five (5) days after having been sent by registered
or certified mail, return receipt  requested,  postage prepaid,  or (iv) one (1)
day after deposit with a nationally  recognized  overnight  courier,  specifying
next day delivery,  with written  verification of receipt.  All notices shall be
addressed  to each holder of record at the address of such holder  appearing  on
the books of the Company.

                  (h) Mechanics of Conversion. Each holder of Series A Stock who
converts the same into shares of Common  Stock  pursuant to this Section 5 shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the Company or any transfer agent for Series A Stock,  and shall give written
notice to the  Company at such  office  that such  holder  elects to convert the
same.  Such  notice  shall  state the  number of shares of Series A Stock  being
converted,  which shall be no less than all of the shares of Series A Stock held
by the holder. Thereupon, or, with respect to any voluntary conversion of Series
A Stock following a Conversion  Event,  but prior to the occurrence of any other
condition  permitting  voluntary  conversion of a holder's  Series A Stock under
Section 5(a) or Section 5(b), no sooner than thirty (30) days  following  notice
from such holder regarding such conversion, the Company shall promptly issue and
deliver at such  office to such holder a  certificate  or  certificates  for the
number of shares of Common  Stock to which  such  holder is  entitled  and shall
promptly  pay in cash or, to the extent  sufficient  funds are not then  legally
available  therefor,  in Common  Stock (at the Common  Stock's fair market value
determined  by the Board as of the date of such  conversion),  any  declared and
unpaid  dividends  on the  shares  of  Series  A  Stock  being  converted.  Such
conversion  shall be deemed to have  been made at the close of  business  on the
date of such surrender of the  certificates  representing the shares of Series A
Stock to be converted,  or, with respect to any voluntary conversion of Series A
Stock  following a Conversion  Event,  but prior to the  occurrence of any other
condition  permitting  voluntary  conversion of a holder's  Series A Stock under
Section 5(a) or Section 5(b), on the date thirty (30) days following notice from
such holder  regarding such  conversion,  and the person entitled to receive the
shares of Common Stock  issuable upon such  conversion  shall be treated for all
purposes as the record holder of such shares of Common Stock on such date.

                  (i)  Adjustment  for Stock  Splits  and  Combinations.  If the
Company  shall at any time or from  time to time  after  the date that the first
share of Series A Stock is issued (the "SERIES A ORIGINAL  ISSUE DATE") effect a
subdivision of the outstanding Common Stock without a corresponding  subdivision
of Series A Stock,  the Series A Stock  Conversion  Price in effect  immediately
before that subdivision shall be proportionately  decreased.  Conversely, if the
Company shall at any time or from time to time after the Series A Original Issue
Date combine the  outstanding  shares of Common  Stock into a smaller  number of
shares without a corresponding combination of Series A Stock, the Series A Stock
Conversion  Price  in  effect   immediately  before  the  combination  shall  be
proportionately  increased.  Any adjustment under this Section 5(i) shall become
effective at the close of business on the date the  subdivision  or  combination
becomes effective.

                                       6
<PAGE>

                  (j) Adjustment for Common Stock  Dividends and  Distributions.
If the  Company  at any time or from time to time  after the  Series A  Original
Issue Date  makes,  or fixes a record date for the  determination  of holders of
Common Stock entitled to receive,  a dividend or other  distribution  payable in
additional  shares  of Common  Stock,  in each  such  event  the  Series A Stock
Conversion  Price that is then in effect  shall be  decreased  as of the time of
such  issuance  or, in the event such record  date is fixed,  as of the close of
business on such record date, by multiplying the Series A Stock Conversion Price
then in effect by a fraction  (1) the  numerator of which is the total number of
shares of Common Stock issued and outstanding  immediately  prior to the time of
such  issuance  or the  close  of  business  on such  record  date,  and (2) the
denominator  of which is the total  number of shares of Common  Stock issued and
outstanding  immediately  prior to the  time of such  issuance  or the  close of
business on such record date plus the number of shares of Common Stock  issuable
in payment of such dividend or  distribution;  provided,  however,  that if such
record date is fixed and such dividend is not fully paid or if such distribution
is not fully made on the date  fixed  therefor,  the  Series A Stock  Conversion
Price shall be recomputed accordingly as of the close of business on such record
date and  thereafter  the  Series A Stock  Conversion  Price  shall be  adjusted
pursuant to this Section 5(i) to reflect the actual  payment of such dividend or
distribution.

                  (k) Adjustments for Other Dividends and Distributions.  If the
Company at any time or from time to time after the Series A Original  Issue Date
makes, or fixes a record date for the  determination  of holders of Common Stock
entitled to receive, a dividend or other  distribution  payable in securities of
the Company  other than  shares of Common  Stock,  in each such event  provision
shall  be made so that  the  holders  of  Series  A  Stock  shall  receive  upon
conversion  thereof,  in  addition  to the  number of  shares  of  Common  Stock
receivable  thereupon,  the amount of other securities of the Company which they
would have received had their Series A Stock been converted into Common Stock on
the date of such event and had they thereafter,  during the period from the date
of such event to and including the  conversion  date,  retained such  securities
receivable  by them as  aforesaid  during  such  period,  subject  to all  other
adjustments  called for during such period  under this Section 5 with respect to
the  rights of the  holders  of  Series A Stock or with  respect  to such  other
securities by their terms.

                  (l)    Adjustment   for    Reclassification,    Exchange   and
Substitution.  If at any time or from time to time  after the  Series A Original
Issue Date,  the shares of Common Stock issuable upon the conversion of Series A
Stock is changed  into the same or a different  number of shares of any class or
classes of stock,  whether by  recapitalization,  reclassification  or otherwise
(other  than a  subdivision  or  combination  of shares or stock  dividend  or a
reorganization,  merger,  consolidation or sale of assets provided for elsewhere
in this  Section  5), in any such event each holder of Series A Stock shall have
the right thereafter to convert such stock into the kind and amount of stock and
other   securities   and  property   receivable   upon  such   recapitalization,
reclassification  or other change by holders of the maximum  number of shares of
Common Stock into which such shares of Series A Stock could have been  converted
immediately  prior to such  recapitalization,  reclassification  or change,  all
subject to further  adjustment as provided  herein or with respect to such other
securities or property by the terms thereof.

                                       7
<PAGE>

                  (m)  Reorganizations,  Mergers,  Consolidations  or  Sales  of
Assets.  If at any time or from time to time after the  Series A Original  Issue
Date,  there  is  a  capital  reorganization  of  Common  Stock  (other  than  a
recapitalization,   subdivision,  combination,  reclassification,   exchange  or
substitution  of  shares  provided  for  elsewhere  in this  Section 5 or (ii) a
Liquidation  Event,  as defined in Section 3 above),  as a part of such  capital
reorganization,  provision  shall be made so that the  holders of Series A Stock
shall  thereafter  be entitled to receive upon  conversion of Series A Stock the
number of shares of stock or other  securities  or  property  of the  Company to
which a holder  of the  number  of  shares  of  Common  Stock  deliverable  upon
conversion would have been entitled on such capital  reorganization,  subject to
adjustment in respect of such stock or securities by the terms  thereof.  In any
such  case,  appropriate  adjustment  shall  be made in the  application  of the
provisions of this Section 5 with respect to the rights of the holders of Series
A Stock after the capital  reorganization to the end that the provisions of this
Section 5 (including  adjustment of the Series A Stock  Conversion Price then in
effect and the number of shares  issuable upon conversion of the Series A Stock)
shall be applicable after that event and be as nearly equivalent as practicable.

                  (n)  Certificate of Adjustment.  In each case of an adjustment
or readjustment of the Series A Stock  Conversion Price for the number of shares
of Common Stock or other securities  issuable upon conversion of Series A Stock,
if Series A Stock is then  convertible  pursuant to this Section 5, the Company,
at its expense, shall compute such adjustment or readjustment in accordance with
the  provisions  hereof and prepare a  certificate  showing such  adjustment  or
readjustment,  and shall mail such  certificate,  by first class  mail,  postage
prepaid,  to each registered holder of Series A Stock at the holder's address as
shown in the Company's books. The certificate shall set forth such adjustment or
readjustment,  showing  in detail  the  facts  upon  which  such  adjustment  or
readjustment is based,  including a statement of (1) the consideration  received
or deemed to be  received by the  Company  for any  Additional  Shares of Common
Stock  issued or sold or deemed to have been  issued or sold,  (2) the  Series A
Stock  Conversion  Price at the time in  effect,  (3) the  number of  Additional
Shares of Common  Stock and (4) the type and amount,  if any, of other  property
which at the time would be received upon conversion of the Series A Stock.

                  (o)  Notices  of  Record  Date.  Upon:  (i) any  taking by the
Company of a record of the holders of any class of securities for the purpose of
determining  the  holders  thereof who are  entitled to receive any  dividend or
other  distribution,  or (ii) any capital  reorganization  of the  Company,  any
reclassification or  recapitalization  of the capital stock of the Company,  any
merger or  consolidation  of the Company with or into any other  entity,  or any
transfer  of  all or  substantially  all of the  assets  of the  Company  or any
voluntary or involuntary dissolution,  liquidation or winding up of the Company,
the  Company  shall mail to each holder of Series A Stock at least ten (10) days
prior to the record date specified  therein a notice  specifying (1) the date on
which  any such  record  is to be taken  for the  purpose  of such  dividend  or
distribution and a description of such dividend or distribution, (2) the date on
which  any  such  acquisition,   reorganization,   reclassification,   transfer,
consolidation, merger, asset transfer, dissolution, liquidation or winding up is
expected to become  effective,  and (3) the date, if any, that is to be fixed as
to when the  holders of record of Common  Stock (or other  securities)  shall be
entitled to exchange  their  shares of Common  Stock (or other  securities)  for
securities or other property deliverable upon such acquisition,  reorganization,
reclassification,  transfer, consolidation, merger, asset transfer, dissolution,
liquidation or winding up.

                                       8
<PAGE>

                  (p)  19.99%  Limitation.   Notwithstanding  anything  in  this
Certificate of Designations to the contrary,  if, at the time that any shares of
Series A Stock are converted  pursuant to the terms hereof,  the Common Stock is
listed for quotation on The Nasdaq SmallCap Market or The Nasdaq National Market
(collectively,  "NASDAQ"),  then,  without the prior  approval of the  Company's
stockholders  in  accordance  with the rules of  Nasdaq,  in no event  shall the
Company  issue shares of Common Stock upon  conversion  of the Series A Stock to
the extent that the total  aggregate  number of shares of Common Stock issued or
deemed to be issued at any time to any  holder or all  holders of Series A Stock
would  exceed  19.99% of the  issued  and  outstanding  shares  of Common  Stock
immediately prior to the effective time of the merger of Arius  Pharmaceuticals,
Inc., a Delaware corporation,  with and into Arius Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of the Company.

                  6. No  Reissuance  of  Series A Stock.  No share or  shares of
Series A Stock  acquired  by the  Company  by  reason of  redemption,  purchase,
conversion or otherwise  shall be reissued.  In addition,  this  Certificate  of
Designations  shall  be  appropriately   amended  to  effect  the  corresponding
reduction in the Company's authorized stock.

                  7. No  Preemptive  Rights.  No  stockholders  of the  Company,
including,  without  limitation,  the  holders  of  Series A Stock,  shall  have
preemptive rights.

                  [remainder of page intentionally left blank]

                                       9
<PAGE>

      IN WITNESS WHEREOF, the Company has caused this Certificate of Designation
of Series A Non-Voting  Convertible  Preferred  Stock to be duly executed by its
President and Chief  Executive  Officer and attested to by its Secretary on this
____ day of August, 2004.

                                        BIODELIVERY SCIENCES INTERNATIONAL, INC.

                                        By:
                                            ------------------------------------
                                            Name: Francis E. O'Donnell, Jr.
                                            Title:  President and Chief
                                                    Executive Officer

ATTEST:

------------------------------
James A. McNulty, Secretary

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00070-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00070-of-00352.parquet"}]]