Document:

AMENDED AND RESTATED

                          PROCESSING AGREEMENT BETWEEN

                                 OSTEOTECH, INC.

                                       AND

                      MUSCULOSKELETAL TRANSPLANT FOUNDATION

                                       AND

                                  BIOCON, INC.

***Indicates  the omission of  confidential  material  pursuant to a request for
confidential  treatment made in accordance  with Rule 24b-2 under the Securities
Exchange  Act of 1934,  as  amended.  The  confidential  material is being filed
separately with the Secretary to the Securities and Exchange Commission.

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                                TABLE OF CONTENTS

                                                                            Page

1.  DELIVERY AND PROCESSING OF TISSUE..........................................1

    1.1  MTF COMMITMENT TO DELIVER TISSUE FOR PROCESSING.......................1

         1.1.1    ENGAGEMENT OF OSTEOTECH......................................1

         1.1.2    COMMITMENT TO DELIVER TISSUE FOR PROCESSING..................1

         1.1.3    DELIVERY OF TISSUE FOR PROCESSING OF
                  GRAFTON(R) DBM PRODUCTS AND BIOIMPLANTS......................3

         1.1.4    COSTS OF PROCUREMENT AND DELIVERY.  AS BETWEEN THE
                  PARTIES HERETO, MTF SHALL BE RESPONSIBLE FOR THE
                  COSTS OF PROCURING, SCREENING, TESTING, STORING,
                  AND DELIVERY OF TISSUE TO OSTEOTECH FOR PROCESSING...........5

         1.1.5    COMPLIANCE WITH APPLICABLE STANDARDS.........................5

         1.1.6    DONOR RECORDS................................................8

    1.2  PROCESSING RESPONSIBILITIES OF OSTEOTECH..............................9

         1.2.1    GENERAL UNDERTAKING..........................................9

         1.2.2    PROCESSES AND METHODS.......................................10

         1.2.3    PROCESSING CONSIDERATIONS...................................10

2.  STORAGE, SHIPPING, REGULATORY COMPLIANCE AND LABELING.....................12

    2.1  POSSESSION AND STORAGE OF TISSUE.....................................12

    2.2  SHIPPING.............................................................13

    2.3  CERTAIN JOINT COMPLIANCE RESPONSIBILITIES............................14

    2.4  LIABILITY............................................................15

    2.5  RECORDS AND REPORTS..................................................19

    2.6  NEW TISSUE FORM DEVELOPMENT..........................................20

    2.7  NON-PROPRIETARY NEW PRODUCTS.........................................21

    2.8  OTHER SERVICES.......................................................21

    2.9  PUBLICATION AND PUBLIC DISCLOSURE OF SCIENTIFIC INFORMATION..........21

3.  FINANCIAL TERMS...........................................................23

4.  CONFIDENTIALITY AND CERTAIN OTHER COVENANTS...............................23

    4.1  NON-DISCLOSURE OF CONFIDENTIAL INFORMATION...........................23

    4.2  NON-SOLICITATION OF SALES AGENTS.....................................25

    4.3  OSTEOTECH SALES AGENTS...............................................25

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    4.4  SURVIVING PROVISIONS.................................................25

5.  TERM OF AGREEMENT.........................................................25

6.  TERMINATION...............................................................25

7.  INSURANCE.................................................................26

8.  FORCE MAJEURE.............................................................27

9.  BINDING AGREEMENT; ASSIGNMENT.............................................27

10. NAME, EMBLEM, PACKAGING, TECHNOLOGY AND TRADEMARK.........................28

11. NOTICES...................................................................29

12. ENTIRE AGREEMENT..........................................................29

13. MODIFICATION..............................................................29

14. APPLICABLE LAW............................................................30

15. WAIVER....................................................................30

16. INDEPENDENT CONTRACTOR....................................................30

17. SEVERABILITY..............................................................30

18. SUCCESSORS................................................................30

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                    AMENDED AND RESTATED PROCESSING AGREEMENT

     This Amended and Restated  Processing  Agreement (this "Agreement") is made
as of September 11, 2000 by Musculoskeletal  Transplant  Foundation,  ("MTF"), a
nonprofit District of Columbia  corporation,  Biocon, Inc., a nonprofit District
of Columbia corporation and the controlling parent corporation of MTF ("Biocon";
for  purposes  of this  Agreement  the term "MTF" shall  include  Biocon and all
existing and future  affiliates of MTF), and Osteotech,  Inc.  ("Osteotech"),  a
Delaware corporation as follows:

     WHEREAS,   Osteotech  provides   high-quality  tissue  processing  services
("Processing")  and other related  services to entities engaged in procuring and
distributing human bone and related  connective soft tissue for  transplantation
(collectively, "Tissue"); and

     WHEREAS,  MTF, directly, or by or through Biocon and/or other affiliates of
MTF,  procures  and  distributes  Tissue  from  various  sources,  and wishes to
contract with Osteotech to process such Tissue; and

     WHEREAS, MTF wishes to obtain Tissue Processing services from Osteotech and
Osteotech desires to perform such Tissue  Processing  services for MTF under the
following agreed terms and conditions; and

     WHEREAS,  Osteotech and MTF are parties to a Processing  Agreement dated as
of April 1,  1997 (the  "Prior  Processing  Agreement"),  and  desire  that this
Agreement  supersede and replace the Prior Processing  Agreement in its entirety
except as otherwise provided herein.

     NOW, THEREFORE, the parties agree as follows:

     1. DELIVERY AND PROCESSING OF TISSUE

          1.1 MTF Commitment to Deliver Tissue for Processing

               1.1.1 Engagement of Osteotech.  MTF hereby engages Osteotech as a
          provider of Tissue Processing.

               1.1.2 Commitment to Deliver Tissue for Processing.

                    (a)  Upon the effective date of this Agreement, MTF shall be
                         required to deliver to Osteotech a good faith  forecast
                         of the  number of  donors  it  expects  to  deliver  to
                         Osteotech  for  Processing  in  accordance   with  this
                         Agreement in each calendar month during the twelve (12)
                         calendar  month  period   immediately   following  such
                         effective date. Such forecast shall be a rolling twelve
                         (12) calendar  month forecast and MTF shall be required
                         to  update  such  forecast  monthly  so that it  always
                         covers  a  twelve  (12)  month   period  by   providing
                         Osteotech  with a good faith  forecast of the number of
                         donors  MTF  expects  to  deliver  to   Osteotech   for
                         Processing in accordance  with this

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                         Agreement  through and  including  the  twelfth  (12th)
                         calendar month of the twelve (12) calendar month period
                         commencing  with  the  calendar  month  in  which  such
                         updated  forecast  is required  to be  delivered.  Such
                         updated forecast must be received by Osteotech no later
                         than the first (1st)  business day of each month.  (For
                         example,  on September 1, 2000 (the  effective  date of
                         this  Agreement),  MTF  shall  provide  a  forecast  to
                         Osteotech  which  covers each of the twelve (12) months
                         through  and  including  August,  2001.  No later  than
                         October 2, 2000 (the  first  business  day of  October,
                         2000) MTF shall  deliver to  Osteotech a forecast  that
                         covers  September,  2001 so that the  rolling  forecast
                         would then cover the period from  October  2000 through
                         and including  September  2001.) In the event Osteotech
                         fails to receive such updated  forecast from MTF by the
                         first (1st)  business day of each month,  the number of
                         donors  forecast for such twelfth (12th) month shall be
                         deemed to be the same number of donors forecast for the
                         month immediately  preceding such twelfth (12th) month.
                         (For example,  if Osteotech does not receive the twelve
                         (12) month forecast that includes  September 2001 on or
                         before October 2, 2000,  the number of donors  forecast
                         for  September  2001  shall  be  deemed  to be the same
                         number of donors  forecast for August 2001 in the prior
                         twelve (12) month  forecast  provided to  Osteotech  in
                         September 2000.)

                    (b)  MTF shall have the right to increase  or  decrease  the
                         number of donors which are projected to be delivered to
                         Osteotech  in any  month  covered  by  MTF's  forecast,
                         provided  that MTF gives  Osteotech  notice of any such
                         change at least  ninety  (90)  days  prior to the first
                         (1st) business day of the month being changed.***

                    (c)  Osteotech  shall have the right to reduce the number of
                         donors  it  will  process  for  MTF  pursuant  to  this
                         Agreement as projected in MTF's forecast, provided that
                         Osteotech  gives MTF notice of such  reduction at least
                         ninety (90) days prior to the first (1st)  business day
                         of the month being changed.

                    (d)  Osteotech  shall  have the right to  refuse to  process
                         donors  provided to it by MTF to the extent such donors
                         exceed  the

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***  Indicates the omission of confidential material pursuant to the request for
     confidential  treatment  made in  accordance  with  Rule  24b-2  under  the
     Securities Exchange Act of 1934, as amended.  The confidential  material is
     being filed separately with the Securities and Exchange Commission.

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                         forecast  provided by MTF or based upon  regulatory  or
                         safety concerns as reasonably  determined by Osteotech.
                         In the event  Osteotech  decides to refuse to process a
                         donor it must  notify MTF of its  decision to do so and
                         explain  its  reasons  for  doing so no later  than the
                         close of business on the fifth (5th) business day after
                         Osteotech  receives  from  MTF all  required  paperwork
                         relating to such donor.  If Osteotech  fails to provide
                         such  notice of refusal  to process to MTF within  such
                         time period,  Osteotech will be deemed to have accepted
                         such donor and will be required  to process  such donor
                         in accordance with this Agreement.

                    (e)  ***

               1.1.3 Delivery of Tissue for Processing of Grafton(R)DBM Products
          and Bioimplants.

                    (a)  At Osteotech's  request, MTF shall use its Best Efforts
                         to  provide  to  Osteotech  for  Processing  (i) Tissue
                         suitable for Processing into Grafton(R)DBM products and
                         any  products  that are  line  extensions  (as  defined
                         herein) of  Grafton(R)DBM  products  sufficient to meet
                         Osteotech's  good faith forecast of  hospital/end  user
                         demand for such products;  and (ii) Tissue suitable for
                         Processing  into  bioimplants  in the form of  threaded
                         cylinder  dowels  ("Bioimplants"),   including  without
                         limitation the  bio-d(TM)Threaded  Cortical Bone Dowel,
                         and  any  products  that  are  line  extensions  of the
                         bio-d(TM) Threaded Cortical Bone Dowel, in each case in
                         quantities  which are  sufficient  to meet  Osteotech's
                         good faith  forecast  of  hospital/end  user demand for
                         such   products.   For  purposes  of  this   Agreement,
                         Grafton(R)DBM  products  and  Bioimplants  and any line
                         extensions   of  such   products  are  referred  to  as
                         "Proprietary  Products." MTF may request that Osteotech
                         provide  reasonable  supporting   information  for  any
                         Proprietary  Product forecast that MTF disputes in good
                         faith. If such supporting  information is confidential,
                         Osteotech  may require  that it be  revealed  only to a
                         mutually  agreeable  third  party  as  contemplated  in
                         Section 1.1.5(d) hereof. The parties agree to use their
                         respective   Best   Efforts  to  resolve  any  disputes
                         regarding such forecasts.

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***  Indicates the omission of confidential material pursuant to the request for
     confidential  treatment  made in  accordance  with  Rule  24b-2  under  the
     Securities Exchange Act of 1934, as amended.  The confidential  material is
     being filed separately with the Securities and Exchange Commission.

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                    (b)  ***

                    (c)  ***

                    (d)  MTF shall  screen  Donors  using  criteria  provided by
                         Osteotech  to  determine  which  Tissue is suitable for
                         Grafton(R)  DBM  products  and which Tissue is suitable
                         for  Bioimplants.   Notwithstanding   anything  to  the
                         contrary  contained  herein,  if MTF determines in good
                         faith that Tissue which would  satisfy such criteria is
                         necessary  to  meet  the  demand  for  other   products
                         processed  for  MTF  by  Osteotech   pursuant  to  this
                         Agreement,  MTF may direct  Osteotech  to process  such
                         Tissue  for  such  other   products   rather  than  for
                         Grafton(R) DBM products or Bioimplants.***

                    (e)  For purposes of this Agreement,  "line extension" shall
                         mean,  with respect to  Osteotech's  Grafton(R) DBM and
                         bio-d(TM)  products in existence as of the date of this
                         Agreement   ("Current   Proprietary   Products"),   any
                         derivative  or  variation  of  a  Current   Proprietary
                         Product that is processed from  substantially  the same
                         Tissue   components,   is  of  substantially  the  same
                         configuration  and function as the Current  Proprietary
                         Product from which it is derived,  and has a comparable
                         monetary  yield  per donor  (plus or minus  20%) as the
                         Current  Proprietary  Product from which it is derived.
                         In the event  Osteotech  shall develop a line extension
                         of a Current Proprietary  Product, it shall provide MTF
                         with a good faith  estimate  of the  expected  sales of
                         such new  product for the initial six (6) months of its
                         commercialization.***

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***  Indicates the omission of confidential material pursuant to the request for
     confidential  treatment  made in  accordance  with  Rule  24b-2  under  the
     Securities Exchange Act of 1934, as amended.  The confidential  material is
     being filed separately with the Securities and Exchange Commission.

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                    (f)  For purposes of this  Agreement,  "Best  Efforts" shall
                         mean,  as to a party  hereto,  an  undertaking  by such
                         party to perform or  satisfy an  obligation  or duty or
                         otherwise  act in a  manner  reasonably  calculated  to
                         obtain the intended result by action or expenditure not
                         disproportionate    or   unduly   burdensome   in   the
                         circumstances.

                    (g)  Notwithstanding  anything  to  the  contrary  contained
                         herein,  it is the intent of the parties to act in good
                         faith  and  use  their   Best   Efforts  to  not  allow
                         back-orders  or  inventory  shortfalls  to occur and to
                         elimnate back-orders and inventory shortfalls when they
                         do occur as soon as possible.***

                    (h)  For purpose of this Agreement,  inventory shall include
                         inventory maintained at both MTF and Osteotech.***

                    (i)  *** The  parties  agree to use  their  respective  Best
                         Efforts to resolve any dispute as to whether a specific
                         Proprietary  Product  is  anatomically   unfeasible  to
                         produce.

               1.1.4 Costs of Procurement  and Delivery.  As between the parties
          hereto,   MTF  shall  be  responsible  for  the  costs  of  procuring,
          screening,  testing,  storing, and delivery of Tissue to Osteotech for
          Processing.

               1.1.5 Compliance With Applicable Standards.

                    (a)  Compliance   with   Recovery   Standards.   All  Tissue
                         delivered to Osteotech for Processing  pursuant to this
                         Agreement  shall conform to all standards,  guidelines,
                         rules, regulations and laws applicable to the donation,
                         recovery,  and  suitability  of Tissue  (the  "Recovery
                         Standards").   The  Recovery  Standards  shall  include
                         applicable standards and requirements relating to donor

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***  Indicates the omission of confidential material pursuant to the request for
     confidential  treatment  made in  accordance  with  Rule  24b-2  under  the
     Securities Exchange Act of 1934, as amended.  The confidential  material is
     being filed separately with the Securities and Exchange Commission.

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                         referral,    informed    consent,    tissue   recovery,
                         pre-processing  storage,   packaging  and  shipping  of
                         pre-processed  Tissue and all records,  activities  and
                         standards  related to obtaining,  testing,  documenting
                         and  evaluating  serological  test results;  obtaining,
                         documenting   and   evaluating   medical   history  and
                         lifestyle data; and related organizational,  management
                         and quality assurance activities as may be contained in
                         (i) applicable laws, regulations, and guidelines of the
                         United  States  Food and Drug  Administration  ("FDA");
                         (ii) applicable standards and guidelines promulgated by
                         the  American  Association  of Tissue  Banks  ("AATB");
                         (iii)  applicable  laws and  regulations  of other U.S.
                         federal,  state  and  local  government  agencies  with
                         jurisdiction  over the procurement and  distribution of
                         human musculoskeletal  tissue; (iv) applicable laws and
                         regulations of non-U.S. jurisdictions where such Tissue
                         Processed  by  Osteotech  is procured  pursuant to this
                         Agreement  or  distributed  by or on behalf of MTF; (v)
                         MTF's standard operating procedures ("SOPs"), as may be
                         amended from time to time by MTF; and (vi)  Osteotech's
                         standards   for   recovered   Tissue,   to  the  extent
                         applicable  to  MTF-supplied  Tissue,  as  specified in
                         Osteotech's  SOPs,  as may be amended from time to time
                         by Osteotech and as provided to MTF in advance of their
                         effectiveness.   If   interpretation  of  the  Recovery
                         Standards  is  required  or if there is a  disagreement
                         about the interpretation of the Recovery Standards, MTF
                         and Osteotech will attempt to negotiate a resolution in
                         good faith. If such  interpretations  or  disagreements
                         are not  resolved  by the  parties,  the  parties  will
                         mutually  agree to a third  party who will  assist  the
                         parties in arriving at a resolution.

                    (b)  Compliance with Applicable  Processing  Standards.  MTF
                         shall  comply  with  the   Processing   Standards   (as
                         hereinafter  defined) to the extent applicable to MTF's
                         activities as contemplated hereunder.

                    (c)  Standard   Operating   Procedures.   Each  of  MTF  and
                         Osteotech  shall make  available to the other a copy of
                         its SOPs and copies of any material  amendments  to its
                         SOPs  promptly  after  such  material   amendments  are
                         adopted;  provided,  however,  that  doing  so will not
                         require  such  party to  disclose  any  trade  secrets,
                         technical  know how or unpublished  scientific  data or
                         technical art to the other party.

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                    (d)  Reciprocal Audit Rights.

                         (i) Upon reasonable notice and at its own expense, each
                         of  Osteotech,  on the one hand,  and MTF, on the other
                         hand,  shall have the right to conduct an annual  audit
                         of the other party's  facilities and records related to
                         regulatory  compliance  and,  in the  event  there  are
                         repeated  significant  defects  in such  other  party's
                         compliance  with  its SOPs or any  applicable  Recovery
                         Standards or Processing Standards,  as the case may be,
                         each of  Osteotech,  on the one hand,  and MTF,  on the
                         other hand, may conduct such  additional  audits of the
                         other  party's   facilities  and  records   related  to
                         regulatory  compliance as are  reasonably  necessary to
                         ensure   that  such   defects   have  been   rectified.
                         Notwithstanding  the  foregoing,  in any such audit MTF
                         will be entitled to review Osteotech's  records only to
                         the extent such records  relate to donors  delivered to
                         Osteotech for Processing pursuant to this Agreement and
                         Osteotech will be entitled to review MTF's records only
                         to the extent such records  relate to donors  delivered
                         to Osteotech for Processing pursuant to this Agreement.

                         (ii)  Osteotech  will grant  designated  MTF  personnel
                         access  to its  facilities  to  observe  all  steps  of
                         Processing for the purpose of conducting a standard MTF
                         inspection   of   Osteotech's   compliance   with   the
                         Processing Standards conducted pursuant to this Section
                         1.1.5(d).  As part of this  inspection,  all Processing
                         Standards  will be made  available  to the  inspectors;
                         provided,  that such access will not require  Osteotech
                         to reveal any  proprietary  know-how  or trade  secrets
                         unless  it  is  necessary  to  MTF's  understanding  of
                         whether  Osteotech is in compliance with the Processing
                         Standards  and to the extent  applicable  to Osteotech,
                         the Recovery  Standards,  and then, in such case,  such
                         information  and documents  shall be revealed only to a
                         mutually  agreeable third party.  Such third party will
                         have  access  to such  proprietary  know-how  and trade
                         secrets  only if it signs a  confidentiality  agreement
                         satisfactory  to Osteotech.  If such personnel  require
                         access to Osteotech's  clean rooms,  the personnel must
                         have on file with  Osteotech  appropriate  blood  serum
                         test results and such other appropriate test results as
                         Osteotech  may require  prior to such  personnel  being
                         granted  access to Osteotech's  clean rooms.  Osteotech
                         may,  at its sole  discretion,  refuse  any  individual
                         access  to  Osteotech's  clean  rooms for  cause.  Such
                         denial  of  access  will  not be a  violation  of  this
                         Agreement

                         (iii) MTF will  grant  designated  Osteotech  personnel
                         access  to  its  facilities  to  observe  MTF's  Tissue
                         recovery  activities  for the

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                         purpose of conducting a standard  Osteotech  inspection
                         of MTF's compliance with the Recovery  Standards and to
                         the extent applicable to MTF, the Processing  Standards
                         pursuant  to  this  Section  1.1.5(d).  As part of this
                         inspection,   all  Recovery   Standards  will  be  made
                         available to the inspectors; provided, that such access
                         will not require MTF to reveal any proprietary know-how
                         or trade secrets  unless it is necessary to Osteotech's
                         understanding  of whether MTF is in compliance with the
                         Recovery Standards and to the extent applicable to MTF,
                         the Processing Standards,  and then, in such case, such
                         information  and documents shall be revealed only to to
                         a mutually agreeable third party. Such third party will
                         have  access  to such  proprietary  know-how  and trade
                         secrets  only if it signs a  confidentiality  agreement
                         satisfactory to MTF

                    (e)  Meetings.  Osteotech  will  arrange  with  MTF to  hold
                         regular  meetings  to  discuss   Processing  and  other
                         related   issues.   At  these  meetings  the  following
                         information  will be  discussed,  along  with any other
                         relevant   information   related   to  the   Processing
                         Standards  and  Recovery  Standards,  the  approval  of
                         donors  for  Processing  and the  release of donors for
                         Processing:  Donors released month to date,  Grafton(R)
                         DBM product releases, Bioimplant releases, rework list,
                         unprocessed  Donor list at  Osteotech,  Grafton(R)  DBM
                         products  and  Bioimplants  WIP lists,  and list of raw
                         Tissue  at  Osteotech  for   Grafton(R)  DBM  products,
                         Bioimplants and other demineralized Tissues.

                    (f)  Serology  Testing.  MTF  shall be  responsible  for the
                         performance  of all  serology  testing  on  each  donor
                         procured  pursuant  to this  Agreement  which  shall be
                         performed by a laboratory  certified by the  Department
                         of  Health  and  Human   Services  under  the  Clinical
                         Laboratory  Improvement Amendments of 1988. The results
                         of such tests will be forwarded  to Osteotech  promptly
                         in  accordance  with  the  Recovery  Standards  and the
                         Processing Standards. In addition, if MTF becomes aware
                         of adverse test results from tests performed by another
                         party  (e.g.  eye  bank,  etc.)  on  tissue  or  organs
                         obtained  from  a  donor  procured  by  MTF  and  to be
                         processed by Osteotech,  MTF shall notify  Osteotech of
                         such test results  promptly  after MTF becomes aware of
                         such test results.

          1.2 Donor Records

                    (a)  MTF will  obtain and  maintain  complete  and  accurate
                         records as  required of MTF by the  Recovery  Standards
                         (including  without

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                         limitation  Donor  medical  history,  Donor  life style
                         information,  serology and blood culture  testing),  as
                         well as records with respect to (i) inventory of Tissue
                         shipped to Osteotech  pursuant to this Agreement;  (ii)
                         inventory   of  Tissue   processed   pursuant  to  this
                         Agreement and received by MTF from Osteotech; and (iii)
                         the  receipt  and  processing  of all end  user  orders
                         received  from MTF's  customers  who utilize the Tissue
                         processed by Osteotech pursuant to this Agreement.

                    (b)  MTF shall also  obtain and  forward  to  Osteotech,  in
                         English,  such  records,   within  the  requisite  time
                         period,  as may be reasonably  necessary to satisfy all
                         of the Processing Standards, including, but not limited
                         to, Donor medical history, donor life style information
                         and all donor testing information.

                    (c)  In the event any regulatory  agency audits or otherwise
                         inspects  MTF's  facilities  or  records  and  requires
                         information  maintained  by  Osteotech  relating to the
                         Processing of MTF Tissue by Osteotech,  Osteotech  will
                         provide MTF with such  information  as is  necessary to
                         satisfy any such request by any such regulatory agency.

                    (d)  In the event any regulatory  agency audits or otherwise
                         inspects Osteotech's facilities or records and requires
                         information   maintained   by  MTF  relating  to  MTF's
                         recovery, screening and testing of Tissue Processed for
                         MTF by Osteotech,  MTF will provide Osteotech with such
                         information as is necessary to satisfy any such request
                         by any such regulatory agency.

          1.2 Processing Responsibilities of Osteotech

               1.2.1 General Undertaking

                    (a)  Processing   and   packaging  of  Tissue   received  by
                         Osteotech pursuant to Section 1.1.2 into then currently
                         available  finished  units of Tissue shall be conducted
                         by Osteotech  pursuant to the  Processing  Standards in
                         accordance  with Section  1.2.2.  For purposes  hereof,
                         Processing  shall include all  operations  necessary to
                         prepare procured Tissue for transplantation.

                    (b)  Osteotech  shall,  upon reasonable prior written notice
                         from  MTF and  subject  to  MTF's  compliance  with its
                         obligations  under Section 1.1.3 hereof,  permit MTF to
                         change  the  production  plan  for a  donor  determined
                         pursuant to Section 1.2.3(a).

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               1.2.2 Processes and Methods

                    (a)  Processing  of Tissue will be  performed  by  Osteotech
                         under  applicable  Processing  Standards.   "Processing
                         Standards" shall mean all standards, guidelines, rules,
                         regulations  and  laws  applicable  to the  Processing,
                         storage, packaging, labeling, and shipping of Tissue by
                         Osteotech.  The Processing  Standards shall include (i)
                         applicable  laws,  regulations,  and  guidelines of the
                         FDA;   (ii)   applicable   standards   and   guidelines
                         promulgated  by the  AATB;  (iii)  applicable  laws and
                         regulations  of other  U.S.  federal,  state  and local
                         government   agencies   with   jurisdiction   over  the
                         processing and  distribution  of human  musculoskeletal
                         tissue;   (iv)   applicable  laws  and  regulations  of
                         non-U.S.   jurisdiction   where  Tissue   processed  by
                         Osteotech is procured or distributed by or on behalf of
                         MTF;  (v) MTF's  SOPs,  as may be amended  from time to
                         time by MTF and as provided to  Osteotech in advance of
                         their  effectiveness;  and (vi)  Osteotech's  SOPs.  If
                         interpretation of the Processing  Standards is required
                         or if there is a disagreement  about the interpretation
                         of the  Processing  Standards,  MTF and Osteotech  will
                         attempt to  negotiate a  resolution  in good faith.  If
                         such  interpretations or disagreements are not resolved
                         by the parties,  the parties will  mutually  agree to a
                         third  party who will assist the parties in arriving at
                         a resolution.

                    (b)  In the event the FDA, any other  applicable  regulatory
                         agency  or  the  AATB,  implements  new  or  additional
                         regulations  applicable  to Tissue,  Osteotech  and MTF
                         shall each  implement  such  changes to its SOPs as are
                         necessary to comply with such regulations. In the event
                         Osteotech  is unable or  unwilling  to  implement  such
                         changes, MTF shall have the remedy set forth in Section
                         6.3 and in the  event MTF is  unable  or  unwilling  to
                         implement such changes, Osteotech shall have the remedy
                         set forth in Section 6.3.

               1.2.3 Processing Considerations

                    (a)  Subject to MTF's compliance with its obligations  under
                         Section 1.1.3 hereof,  MTF will  pre-plan,  including a
                         written  primary and secondary donor plan, the expected
                         production  from each donor at least  three (3) working
                         days prior to the  scheduled  day of  Processing.  Upon
                         inspection of the Tissue in the  Processing  Rooms,  if
                         the Tissue cannot be processed  according to either the
                         primary or secondary  donor plan Osteotech will use its
                         Best  Efforts to process the donor in  accordance  with
                         prior general guidelines to maximize the yield from the
                         donor.

                                      E-13
<PAGE>

                    (b)  Osteotech  may  present   valid   evidence  to  MTF  if
                         Osteotech determines that FDA, AATB or other applicable
                         government   agency  mandated   changes  in  processing
                         techniques  or the quality and  condition of MTF Tissue
                         prevents the  achievement of the planned yield provided
                         for in subsection (a). The parties agree to discuss the
                         implications  of such  parameters  and to  determine  a
                         reasonable yield based on such new requirements.

                    (c)  MTF  and  Osteotech  shall  each  undertake  reasonable
                         efforts  to  present a  consistent  flow of donors  and
                         Tissue  to  the  other  with  the  goal  of  minimizing
                         second-half-of-month  bunching  of Donors  and  Tissue.
                         Subject to the  foregoing  sentence and to  Osteotech's
                         right to refuse to process  donors  pursuant to Section
                         1.1.2(d)  hereof,  donors  received  at  Osteotech  for
                         Processing pursuant to this Agreement will be processed
                         within a  reasonable  period  of time  (which  shall be
                         reviewed  at  the  meetings  provided  for  in  Section
                         1.1.5(e))  from  the time all  required,  complete  and
                         accurate  donor   documentation  as  specified  by  the
                         Processing Standards is received at Osteotech.  Subject
                         to  the  foregoing,  Osteotech  will  use  commercially
                         reasonable efforts to complete the Processing of Tissue
                         delivered to it pursuant to this  Agreement and deliver
                         such processed Tissue to MTF within a reasonable period
                         of time.  Once  Processing  of the  donor is  complete,
                         subject to the  provisions  of Section  2.1, all Tissue
                         will  be  shipped  to MTF  upon  final  inspection  and
                         release  thereof  by  Osteotech's   Quality   Assurance
                         Department. Osteotech will advise MTF no later than the
                         following  business  day if  there  will be a  material
                         delay in the commencement of Processing of donors which
                         have been released from Osteotech's  Quality  Assurance
                         Department.

                    (d)  If the  release  of  processed  Tissue  back  to MTF is
                         delayed  due  to  (i)  Tissue   histology   of  unknown
                         etiology;  or (ii)  microbial  contamination  of  final
                         product,  Osteotech  will  notify MTF of the reason for
                         the hold and the  approximate  time period expected for
                         the hold (in weeks).

                    (e)  Osteotech  will maintain a quality  assurance  program,
                         the goal of which is to achieve zero defect Processing.
                         To the  extent  there  are  rejects  of  Tissue,  it is
                         Osteotech's goal that such rejects of Tissue be no more
                         than  an  average  of five  per  cent  (5%)  of  Tissue
                         initially  processed per Donor (not taking into account
                         any reworks).  All rejected Tissue that can be reworked
                         will be  reworked  and  returned to MTF within ten (10)
                         weeks from the time of rejection.

                                      E-14
<PAGE>

                    (f)  MTF  shall  use  its  Best  Efforts  to  establish  and
                         maintain  a queue  of  planned  donors  at  Osteotech's
                         facility to insure that there are enough donors to meet
                         each week's donor Processing requirements in accordance
                         with the forecast  provided  pursuant to Section  1.1.2
                         hereof,  provided  however  that MTF will be  deemed to
                         have  satisfied  its  obligation   under  this  Section
                         1.2.3(f) if it fails to maintain such a queue of donors
                         as a result of an event or condition that is not within
                         the control of MTF.

     2. STORAGE, SHIPPING, REGULATORY COMPLIANCE AND LABELING

          2.1 Possession and Storage of Tissue

                    (a)  Tissue  delivered to Osteotech for Processing  pursuant
                         to this  Agreement  and any  finished  units  or  other
                         byproducts  derived  from such Tissue  shall be held by
                         Osteotech on behalf of MTF at all times until  delivery
                         thereof  to  MTF or  pursuant  to  MTF's  instructions,
                         except that MTF may grant Osteotech written  permission
                         to  use  excess  Tissue  for  research   purposes.   In
                         accordance  with the National Organ  Transplant Act and
                         the  Uniform  Anatomical  Gift Act (i)  neither MTF nor
                         Osteotech  shall  buy,  sell,  or  trade  banked  human
                         tissue; and (ii) MTF and Osteotech may market recovery,
                         testing,  processing,  storage,  distribution and other
                         services in  compliance  with state and federal law and
                         in accordance with the terms of this Agreement.

                    (b)  To the extent  Osteotech stores any Tissue delivered to
                         it  pursuant  to  this  Agreement,  including  but  not
                         limited   to  MTF   Grafton(R)   DBM  and   Bioimplants
                         inventory, such storage shall be in compliance with all
                         applicable portions of the Processing Standards. Except
                         as  provided  in  Section  2.1(c)  and  Section  2.2(e)
                         hereof,  MTF shall bear the risk of loss for all Tissue
                         delivered to Osteotech pursuant to this Agreement.

                    (c)  ***

----------
***  Indicates the omission of confidential material pursuant to the request for
     confidential  treatment  made in  accordance  with  Rule  24b-2  under  the
     Securities Exchange Act of 1934, as amended.  The confidential  material is
     being filed separately with the Securities and Exchange Commission.

                                      E-15
<PAGE>

          2.2 Shipping

                    (a)  Except as  otherwise  provided  in a  written  document
                         signed  by  both  Osteotech  and  MTF  and  other  than
                         demineralized  bone,  Tissue  used for  Grafton(R)  DBM
                         products  or  Bioimplants  and  items  being  reworked,
                         Osteotech  shall  ship all  finished  units  of  Tissue
                         derived from a Donor received for  Processing  pursuant
                         to this  Agreement  to MTF in one shipment by a carrier
                         designated by MTF.  Osteotech shall ship finished units
                         of Grafton(R) DBM products and Bioimplants processed by
                         Osteotech  pursuant  to  this  Agreement  to  MTF  upon
                         release from Osteotech's Quality Assurance  Department,
                         except  that  in the  case  of  finished  units  of MTF
                         Grafton(R) DBM products and Bioimplants inventory which
                         have been  released by  Osteotech's  Quality  Assurance
                         Department,  Osteotech will ship such units to MTF upon
                         and in  accordance  with  MTF's  order.  Any item being
                         reworked  will be shipped  back to MTF as soon as it is
                         completed and released by Osteotech's Quality Assurance
                         Department. MTF shall be responsible for payment of all
                         shipping costs.

                    (b)  Osteotech  shall ship all  finished  units of Tissue in
                         shipping   containers   which  meet  the   requirements
                         specified in the  Processing  Standards.  All packaging
                         and  shipping  containers  must  be  validated  and the
                         validation  studies  shall be  available  for review by
                         MTF's   Quality   Assurance  and   Regulatory   Affairs
                         Departments.

                    (c)  Osteotech  shall clearly label each shipping  container
                         as  containing   transplantable  tissue  and  with  the
                         addresses of both the shipping and receiving  facility.
                         Such labeling shall meet the specifications included in
                         the Processing Standards.

                    (d)  Each shipment from Osteotech  shall include a packaging
                         slip listing the contents and  corresponding  donor lot
                         and batch numbers, if applicable. All tissue containers
                         in  each  shipment  shall  be  packed  with  sufficient
                         materials  between  containers so that breakage will be
                         minimized.

                    (e)  MTF will promptly notify Osteotech of any damage to the
                         finished  units  of  Tissue  during  shipment  thereof.
                         Osteotech  will  file  a  claim  against  the  shipping
                         carrier  for the  amount  of  damage  up to the  amount
                         insured. The amount recovered from the shipping carrier
                         for  claims  will be passed on to MTF  within  ten (10)
                         days of receipt by Osteotech.  Osteotech  shall have no
                         liability  for any damage to finished  Tissue  incurred
                         during  shipping,  except to the extent Osteotech fails
                         to   ensure   that  the   shipping   carrier   has  the
                         aforementioned insurance or except where such damage is
                         caused by the  negligence or misconduct of Osteotech or
                         its agents (other than the carrier) or employees.

                                      E-16
<PAGE>

                    (f)  Osteotech  shall pay for  shipping,  and related  costs
                         arising from the return of finished  units of Tissue to
                         Osteotech  due to  complaints  which  are shown to have
                         been caused by defects in  Osteotech's  workmanship  or
                         Osteotech's  failure  to  comply  with  the  Processing
                         Standards,  except for Tissue damaged during  shipment,
                         as specified in (e) above.

          2.3 Certain Joint Compliance Responsibilities

                    (a)  MTF shall comply with applicable laws,  regulations and
                         guidelines as required  under  Section 1.1.5  Osteotech
                         shall comply  with  applicable  laws,  regulations  and
                         guidelines  as  required   under  Section   1.2.2.   In
                         instances where the party's compliance responsibilities
                         overlap,  or where otherwise necessary and appropriate,
                         each party shall use its Best Efforts to cooperate with
                         and  assist  the  other  party  in such  other  party's
                         regulatory  compliance  activities.   If  a  difference
                         arises as to which party is  responsible  for meeting a
                         particular  regulatory compliance  responsibility,  MTF
                         and Osteotech will attempt to negotiate a resolution in
                         good faith.  If the  difference  is not resolved by the
                         parties,  MTF and Osteotech will agree on a third party
                         who  will   assist  the   parties  in   arriving  at  a
                         resolution. Notwithstanding the foregoing, it is agreed
                         that  both  MTF and  Osteotech  shall  have  regulatory
                         compliance  responsibility  with  respect to  labeling,
                         including without  limitation,  product inserts,  label
                         content, sales sheets, advertising and product brochure
                         wording and marketing clearance. If a difference arises
                         with regard to such joint compliance  responsibilities,
                         MTF  and   Osteotech   will   attempt  to  negotiate  a
                         resolution  in good  faith.  If the  difference  is not
                         resolved, MTF and Osteotech will agree on a third party
                         who  will   assist  the   parties  in   arriving  at  a
                         resolution.

                    (b)  Containers  of finished  units of Tissue  processed  by
                         Osteotech for MTF must bear a standard MTF bone product
                         label, approved by Osteotech and MTF, that contains the
                         product  name  and  identity  code,  donor  number  and
                         expiration date.

                    (c)  Osteotech  shall bear the costs of producing  labels in
                         conformance  with  the  Processing  Standards.  If  the
                         labels and/or package inserts are changed by request of
                         MTF,  MTF  will  bear  the  costs  of  these   changes,
                         including label inventory replacements.

                    (d)  All  labeling  will  be  in  accordance  with  Sections
                         2.2(c), 2.2(d) and the Processing Standards.

                    (e)  Specifications  for all Tissue products to be processed
                         from  MTF  donors  will  be   developed   and  approved
                         according  to  MTF  and  Osteotech  SOPs.  Requests  to
                         Osteotech  about  its  ability  to  accomplish  special
                         specifications  and  for  labeling  changes,  including
                         package  inserts,  will be made in  writing

                                      E-17
<PAGE>

                         by  MTF  and  will  receive  a  written  response  from
                         Osteotech within a reasonable period of time.

          2.4 Liability

                    (a)  Indemnification  by  Osteotech.   Osteotech  agrees  to
                         defend, hold harmless, and indemnify MTF and its member
                         organizations  against any damages,  litigation  costs,
                         losses,  obligations,  liabilities,  claims, actions or
                         causes of action sustained or suffered by MTF or any of
                         its member  organizations  arising from (i) a breach or
                         default  by  Osteotech  of any of its  representations,
                         warranties  or covenants  contained in this  Agreement;
                         (ii) a defect in any finished unit of Tissue  processed
                         by  Osteotech  under this  Agreement to the extent such
                         defect  results  from an error or omission by Osteotech
                         (including  any employee or agent of Osteotech or other
                         person to whom  Osteotech has delegated any  Processing
                         activities  or  any   Processing   related   activities
                         hereunder),  or  from  a  failure  of  workmanship,  by
                         Osteotech; (iii) any medical claim made by any employee
                         or  authorized  agent of  Osteotech  regarding  any MTF
                         Tissue  processed by Osteotech (A) which is required by
                         applicable  laws or  regulations  to be  approved  by a
                         relevant regulatory agency and has not been so approved
                         and/or (B) which is not supported by credible objective
                         scientific  evidence;  or (iv) a false  and  misleading
                         representation made by any employee or authorized agent
                         of  Osteotech  regarding  any MTF Tissue  processed  by
                         Osteotech.

                    (b)  Indemnification  by MTF.  MTF  agrees to  defend,  hold
                         harmless,  and indemnify Osteotech against any damages,
                         litigation  costs,  losses,  obligations,  liabilities,
                         claims,  actions  or  causes  of  action  sustained  or
                         suffered  by  Osteotech  arising  from (i) a breach  or
                         default   by  MTF   of  any  of  its   representations,
                         warranties  or covenants  contained in this  Agreement;
                         (ii) a defect in any finished unit of Tissue  processed
                         by  Osteotech  under this  Agreement to the extent such
                         defect  results  from  an  error  or  omission  by  MTF
                         (including any employee or agent of MTF or other person
                         to whom  MTF  has  delegated  any  Tissue  recovery  or
                         distribution  activities  or  any  Tissue  recovery  or
                         distribution   related   activities   hereunder),    in
                         connection  with its Tissue  recovery and  distribution
                         activities,  including  without  limitation any testing
                         performed  by or at the  direction  of MTF;  (iii)  any
                         medical claim made by any employee or authorized  agent
                         of MTF regarding any MTF Tissue  processed by Osteotech
                         (A) which is required by applicable laws or regulations
                         to be approved by a relevant  regulatory agency and has
                         not been so approved  and/or (B) which is not supported
                         by credible objective  scientific  evidence;  or (iv) a
                         false  and  misleading   representation   made  by  any
                         employee or  authorized  agent of MTF regarding any MTF
                         Tissue processed by Osteotech.

                    (c)  Indemnification  Procedures. For purposes of subsection
                         (a) above,  Osteotech shall be the "indemnifying party"
                         and MTF shall be the

                                      E-18
<PAGE>

                         "indemnified  party" and for the purposes of subsection
                         (b) above,  MTF shall be the  "indemnifying  party" and
                         Osteotech  shall  be  the   "indemnified   party."  The
                         obligations and liabilities of the  indemnifying  party
                         hereunder  with  respect to claims  resulting  from the
                         assertion  of  liability  by  third  parties  shall  be
                         subject to the following terms and conditions:

                         (i)  The indemnified party shall give written notice to
                              the   indemnifying   party  of  any  assertion  of
                              liability  by a third  party which might give rise
                              to a claim by the  indemnified  party  against the
                              indemnifying   party   based   on  the   indemnity
                              contained  in Section  2.2(a)  hereof,  or Section
                              2.2(b)  hereof,  as the case may be,  stating  the
                              nature and basis of said  assertion and the amount
                              thereof,  to the  extent  known,  within  five (5)
                              business days after an officer of the  indemnified
                              party  learns  of the  claim  or  receives  notice
                              thereof.  Failure to give such notice  within five
                              (5) business days may, at the indemnifying party's
                              option,  result in a reduction  in any  subsequent
                              indemnification payment by an amount equivalent to
                              the expenses  and/or losses  demonstrated  to have
                              been caused by such delay in notification.

                         (ii) In the event any  action,  suit or  proceeding  is
                              brought  against  the  indemnified   party,   with
                              respect to which the  indemnifying  party may have
                              liability under the indemnity  agreement contained
                              in subsection  (a) or (b) hereof,  as the case may
                              be, the action, suit or proceeding shall, upon the
                              written  agreement of the indemnifying  party that
                              it is obligated to indemnify  under the  indemnity
                              agreement  contained  in  subsection  (a)  or  (b)
                              hereof, as the case may be, be defended (including
                              all  proceedings  on  appeal or for  review  which
                              counsel for the defendant shall deem  appropriate)
                              by the indemnifying  party. The indemnified  party
                              shall have the right to be represented by advisory
                              counsel and accountants,  at its own expense,  and
                              shall be kept fully informed of such action,  suit
                              or  proceeding at all stages  thereof,  whether or
                              not it is so represented.  The indemnifying  party
                              shall make available to the indemnified  party and
                              its  attorneys  and   accountants  all  books  and
                              records of the indemnifying party relating to such
                              proceedings or litigation. The parties will render
                              to  each  other  such   assistance   as  they  may
                              reasonably  require  in order to ensure the proper
                              and adequate  defense of any such action,  suit or
                              proceeding.

                        (iii) The   indemnifying   party   shall  not  make  any
                              settlement  of  any  claims  without  the  written
                              consent of the  indemnified  party,  which consent
                              shall not be unreasonably withheld or delayed.

                         (iv) The   indemnified   party   shall   not  make  any
                              settlement  of  any  claims  without  the  written
                              consent of the indemnifying party.

                                      E-19
<PAGE>

                    (d)  Release  of Claims  by MTF.  Except  for:  (1) sums and
                         monies which are due or owing to MTF from  Osteotech in
                         the  ordinary  course of its  business  relations  with
                         Osteotech; (2) any claims based upon Osteotech's misuse
                         or infringement of any  intellectual  propoerty of MTF;
                         (3)   Osteotech's   obligations   under   Section   2.2
                         (Liability and Indemnification) of the Prior Processing
                         Agreement (it being understood that notwithstanding any
                         other provision herein to the contrary,  the provisions
                         of Section 2.2 of the Prior Processing  Agreement shall
                         survive in accordance  with their terms with respect to
                         any facts, events,  actions or omissions which occurred
                         or  arose  during  the  term  of the  Prior  Processing
                         Agreement);  (4) Osteotech's  obligations under Section
                         4.1 (Confidentiality) of the Prior Processing Agreement
                         (it being  understood  that  notwithstanding  any other
                         provision  herein to the  contrary,  the  provisions of
                         Section  4.1 of the Prior  Processing  Agreement  shall
                         survive in accordance  with their terms with respect to
                         any facts, events,  actions or omissions which occurred
                         or  arose  during  the  term  of the  Prior  Processing
                         Agreement, including without limitation any such facts,
                         events,  actions  or  omissions  which  relate  to  any
                         Confidential  Information of MTF disclosed to Osteotech
                         during the term of the Prior Processing Agreement); and
                         (5) Osteotech's  obligations  under this Agreement that
                         arise on and after the date of this  Agreement;  MTF on
                         behalf  of  and  for  itself   and  its   subsidiaries,
                         affiliates,  parents, employees,  officers,  directors,
                         employees, shareholders,  successors and assigns hereby
                         freely  and  unconditionally   releases,   acquits  and
                         forever   discharges   Osteotech   and   its   parents,
                         subsidiaries,    affiliates,    employees,   directors,
                         officers, shareholders, successors and assigns from any
                         and all manner of  actions,  causes of action,  claims,
                         obligations,   demands,   damages,   costs,   expenses,
                         compensation or other relief, whether known or unknown,
                         whether  in law or  equity,  based  upon any  breach or
                         default  by  Osteotech  of  any  provision,   covenant,
                         representation  or  obligation  of or under  the  Prior
                         Processing  Agreement.  MTF  represents and warrants to
                         Osteotech that neither  Biocon nor MTF have  heretofore
                         assigned  or  transferred,  or  purported  to assign or
                         transfer,   any  claim,   obligation,   demand,   debt,
                         liability or cause of action herein released.

                                      E-20
<PAGE>

                    (e)  Release of Claims by  Osteotech.  Except for:  (1) sums
                         and monies which are due or owing to Osteotech from MTF
                         in the ordinary  course of its business  relations with
                         MTF,   including   without   limitation  any  fees  for
                         Processing  owed by MTF to  Osteotech  under  the Prior
                         Processing  Agreement;  (2) any  claims  based  upon or
                         arising  out of MTF's  misuse  or  infringement  of any
                         intellectual   property   of   Osteotech;   (3)   MTF's
                         obligations    under   Section   2.2   (Liability   and
                         Indemnification) of the Prior Processing  Agreement (it
                         being   understood  that   notwithstanding   any  other
                         provision  herein to the  contrary,  the  provisions of
                         Section  2.2 of the Prior  Processing  Agreement  shall
                         survive in accordance  with their terms with respect to
                         any facts, events,  actions or omissions which occurred
                         or  arose  during  the  term  of the  Prior  Processing
                         Agreement);  (4) MTF's  obligations  under  Section 4.1
                         (Confidentiality) of the Prior Processing Agreement (it
                         being   understood  that   notwithstanding   any  other
                         provision  herein to the  contrary,  the  provisions of
                         Section  4.1 of the Prior  Processing  Agreement  shall
                         survive in accordance  with their terms with respect to
                         any facts, events,  actions or omissions which occurred
                         or  arose  during  the  term  of the  Prior  Processing
                         Agreement, including without limitation any such facts,
                         events,  actions  or  omissions  which  relate  to  any
                         Confidential  Information of Osteotech disclosed to MTF
                         during the term of the Prior Processing Agreement); and
                         (5) MTF's  obligations  under this Agreement that arise
                         on and after the date of this  Agreement;  Osteotech on
                         behalf  of  and  for  itself   and  its   subsidiaries,
                         affiliates,    parents,    employees,     shareholders,
                         successors    and    assigns    hereby    freely    and
                         unconditionally    releases,    acquits   and   forever
                         discharges   MTF   and   its   parents,   subsidiaries,
                         affiliates,     employees,     directors,     officers,
                         shareholders,  successors  and assigns from any and all
                         manner   of   actions,   causes  of   action,   claims,
                         obligations,   demands,   damages,   costs,   expenses,
                         compensation or other relief, whether known or unknown,
                         whether  in law or  equity,  based  upon any  breach or
                         default   by   MTF   of   any   provision,    covenant,
                         representation  or  obligation  of or under  the  Prior
                         Processing Agreement. Ostoetech represents and warrants
                         to MTF that  Ostoetech has not  heretofore  assigned or
                         transferred,  or purported  to assign or transfer,  any
                         claim, obligation,  demand, debt, liability or cause of
                         action herein released.

                    (f)  Covenant Not to Sue. MTF and  Osteotech  each agree and
                         covenant to the other that with regard to those matters
                         which it has  released  as  described  herein,  it will
                         never institute a lawsuit or administrative proceeding,
                         nor will it assert any claim of any nature  against any
                         person or entity  hereby  released  with  regard to any
                         such matters which have been released.

                                      E-21
<PAGE>

                    (g)  Settlement.  This  Agreement  effects the settlement of
                         potential   claims  which  are  denied  and  contested.
                         Nothing  contained  herein  shall  be  construed  as an
                         admission by any party  hereto of any  liability of any
                         kind to any other  party.  Each of the  parties  hereto
                         denies any liability in  connection  with any claim and
                         intends hereby solely to avoid litigation and establish
                         the basis for a mutually beneficial continuation of the
                         business relationship between the parties.

                    (h)  Settlement   Negotiations.   All   actions   taken  and
                         statements   made  by  the  parties   hereto  or  their
                         representatives  relating  to  their  participation  in
                         drafting this Agreement,  including its development and
                         implementation,  were taken and made in the  context of
                         privileged  settlement   negotiations,   and  shall  be
                         without prejudice or value as precedent,  and shall not
                         be taken as a standard  by which  other  matters may be
                         judged or against  which other matters may be compared.
                         Neither  this   Agreement   nor   statements   made  in
                         negotiations  of it shall be used by any party  hereto,
                         or any  third-party  in any court or tribunal or formal
                         or informal dispute resolution proceedings,  mediation,
                         or otherwise, to create or interpret any obligations by
                         any party under this Agreement.

                    (i)  The  provisions  of  this  Section  2.4  shall  survive
                         termination of this Agreement.

          2.5 Records and Reports

                    (a)  Osteotech shall maintain  complete and accurate records
                         concerning  Tissue  received by  Osteotech  pursuant to
                         this  Agreement,  Tissue  processed  pursuant  to  this
                         Agreement  and in storage  at  Osteotech  and  finished
                         units  of  Tissue   stored  and  shipped  by  Osteotech
                         pursuant  to this  Agreement.  Such  records  shall  be
                         available  to MTF  during  normal  business  hours upon
                         reasonable  advance notice at MTF's expense.  Osteotech
                         shall not be  required  to produce  any data other than
                         data which it is required to obtain and maintain by the
                         Processing Standards.

                    (b)  In addition to the  information  provided in subsection
                         (a),  Osteotech shall provide the following  reports on
                         each  MTF  donor  in a  timely  manner  showing  Tissue
                         processed and shipped by Osteotech:

                                  Daily Reports

                         List of donor Releases to MTF

                                 Weekly Reports

                         Pending donor List

                                      E-22
<PAGE>

                         Listing  of donors  processed  during  prior  week with
                         detailed processing notes

                                 Monthly Reports

                         Grafton(R)DBM and Bioimplants Releases by Serial Number
                         in inventory at Osteotech

                    (c)  Osteotech shall ensure that all information  pertaining
                         to MTF  will  be  disclosed  only  to  those  Osteotech
                         personnel   with  a   need-to-know   who  have   signed
                         Osteotech's standard confidentiality agreement.

                    (d)  Osteotech  shall notify MTF prior to the release of any
                         identifying information,  such as the donor identifying
                         number,  related to any donor  delivered  to  Osteotech
                         pursuant  to  this  Agreement  where  such  release  is
                         legally required by a regulatory or governmental agency
                         or  court or  administrative  order  or  subpoena.  The
                         provisions  of  this  Section  2.5  (d)  shall  survive
                         termination of this Agreement.

                    (e)  In connection  with the marketing and  distribution  of
                         Grafton(R)  DBM  products and  Bioimplants,  during the
                         course  of  each  month  and in  the  case  of  monthly
                         reports,  no later than the tenth  (10th)  business day
                         following  the end of the month,  MTF shall  provide to
                         Osteotech  such  reports  and  data  as  Osteotech  may
                         reasonably request,  including  hospital/end user sales
                         of such products detailed by account.

                    (f)  Osteotech  will  periodically  (no less than once every
                         six (6)  months)  provide MTF with a list of the agents
                         who  are   marketing   Grafton(R)   DBM   products  and
                         Bioimplants  that bear MTF's label and the  territories
                         they are covering;  provided such information  shall be
                         treated   as   Osteotech's   Confidential   Information
                         pursuant to Section 4.1 hereof.

          2.6 New Tissue Form Development

               It is the  understanding  of MTF and Osteotech  that each of them
          may independently develop new Tissue forms and/or processes or improve
          upon existing products and/or processes.

                                      E-23
<PAGE>

                    (a)  Subject  to  subsection  (c),  Osteotech  shall own all
                         rights,  title and interest in and to all  information,
                         technology, data, inventions,  products, and processes,
                         conceived,  made or  developed  solely by  employees of
                         Osteotech as well as the  intellectual  property rights
                         based thereon,  including but not limited to copyrights
                         and patent rights.

                    (b)  Subject to  subsection  (c),  MTF shall own all rights,
                         title  and   interest   in  and  to  all   information,
                         technology, data, inventions,  products, and processes,
                         conceived, made or developed solely by employees of MTF
                         as  well  as the  intellectual  property  rights  based
                         thereon,  including but not limited to  copyrights  and
                         patent rights.

                    (c)  Any joint development of information, technology, data,
                         inventions, products, and processes, shall be conducted
                         pursuant  to a  formal  written  development  agreement
                         signed by Osteotech  and MTF and a  development  budget
                         for the project  agreed to in writing by Osteotech  and
                         MTF.

                    (d)  The  provisions  of  this  Section  2.6  shall  survive
                         termination of this Agreement.

               2.7 Non-Proprietary New Products

               It is  understood  and agreed  that  Osteotech  may  develop  new
          information,  technology,  data,  inventions,  products, and processes
          (collectively,  "new  products")  on its own or jointly with its other
          Tissue  processing  clients and that  certain of such new products may
          not be  subject  to  trade  secret,  patent  or  copyright  protection
          ("nonproprietary  new  products").  MTF agrees  that it shall not have
          access to, or the right to utilize,  such non-proprietary new products
          and shall not be able to cause  Osteotech  to process or produce  such
          non-proprietary  new products  for MTF or on MTF's  behalf  unless and
          until MTF and Osteotech shall have executed a written  agreement which
          provides for such access or utilization by or on behalf of MTF.

               2.8 Other Services

               Osteotech  may provide such  services  other than the  Processing
          services  contemplated  in this  Agreement as are  requested by MTF in
          accordance with one or more separate  agreements  entered into between
          MTF  and  Osteotech.   Reasonable  fees  for  such  services  will  be
          established  at the time such  agreements are entered into and will be
          separate  from the fees listed in Exhibits  3.1 and 3.2.  MTF shall be
          free to obtain any such services from third parties.

               2.9 Publication and Public Disclosure of Scientific Information

                    (a)  Either  party  shall  have  the  right  to  publish  or
                         otherwise   publicly  at  its  own   expense   disclose
                         scientific  information or data developed by such party
                         which   utilizes  or  relates  to  the  other   party's
                         technology  or  other   proprietary   or   confidential
                         processes  or  information;   provided,  however,  that
                         notwithstanding  any other  provision in this Agreement
                         to the  contrary,  no

                                      E-24
<PAGE>

                         such  publication  or  disclosure  shall be made by the
                         publishing  party  if such  publication  or  disclosure
                         would result in the disclosure of  information  defined
                         as  Confidential  Information  in Section  4.1 or would
                         otherwise violate or jeopardize any proprietary  rights
                         the  other   party  may  have  with   respect  to  such
                         technology.    Publication    of   jointly    developed
                         information will be covered in a separate agreement.

                    (b)  Within a  reasonable  period  of time  (not  less  than
                         thirty (30) days) prior to  publication or other public
                         disclosure  of the  information  or data  described  in
                         Section  2.9(a),  the publishing  party shall submit to
                         the other  party for review a draft of the  publication
                         or, if oral disclosure,  a written copy of the remarks.
                         The other party  shall then use Best  Efforts to notify
                         the  publishing  party as soon as  practicable  (not to
                         exceed  thirty (30) days from its receipt of such draft
                         or written copy) of (i) any  reasonable  changes to the
                         publication or disclosure it deems  appropriate,  which
                         changes the publishing  party will make so long as they
                         do not change materially the meaning of the information
                         or data being disclosed or published; (ii) any error in
                         the  information  or data  being  disclosed,  which the
                         publishing party shall correct upon verification of the
                         error;  or (iii) the necessity to delay  publication or
                         disclosure   to  enable   the   filing  of  any  patent
                         application  or  regulatory  filing if  applicable,  in
                         which  event  the  publishing  party  will  delay  such
                         publication  or disclosure  as reasonably  requested by
                         the  other  party.  Management  of both  parties  shall
                         attempt in good faith to resolve any disputes regarding
                         such publications.

                    (c)  If there has been no mutual  agreement  to  publish  or
                         disclose  within thirty (30) days after the other party
                         has received the notice and draft of the publication or
                         oral   disclosure  from  the  publishing   party,   the
                         publishing  party shall again notify the other party in
                         writing of its intention to publish or disclose and may
                         proceed to do so fifteen  (15) days after  delivery  of
                         such  second  notice,  subject  to  the  provisions  of
                         Section 2.9(a).

                    (d)  Authorship  of any  publication  shall be determined in
                         accordance with normal scientific practice.

                    (e)  The  provisions  of  this  Section  2.9  shall  survive
                         termination of this Agreement.

                                      E-25
<PAGE>

     3. FINANCIAL TERMS

          3.1 Fees

               (a)  MTF  will  pay  Osteotech  Processing  fees as set  forth in
                    Section 1.1.3 and Exhibits 3.1 and 3.2.

               (b)  ***

          3.2 Invoicing and Payment

               (a)  Osteotech shall submit  invoices in U.S.  dollars to MTF for
                    all Processing services rendered in accordance with the then
                    existing  fee  schedule.  The invoice date shall be the date
                    that Osteotech's  Quality Assurance  Department releases the
                    finished  units of Tissue for shipment to MTF or the date of
                    shipment of Grafton(R) DBM products or  Bioimplants,  as the
                    case may be.

               (b)  MTF will pay all invoices within forty-five (45) days of the
                    invoice  date.  In the event there is an error in an invoice
                    submitted to it by Osteotech,  MTF shall notify Osteotech of
                    such error within  three (3) business  days of the date such
                    invoice is received by MTF and the invoice date will then be
                    the date of the  corrected  invoice  submitted by Osteotech.
                    All such payments shall be in U.S. dollars.

               (c)  Any balance of any invoice which is not paid within the time
                    specified  above,  at the option of Osteotech,  shall accrue
                    interest at the rate of one percent (1%) per month.

     4. CONFIDENTIALITY AND CERTAIN OTHER COVENANTS

          4.1 Non-Disclosure of Confidential Information

               (a)  For purposes of this Agreement,  "Confidential  Information"
                    means all general and  specific  knowledge,  experience  and
                    information  that is confidential  and of value to MTF or to
                    Osteotech,   including  without  limitation,   formulations,
                    designs,   products,   processes,   supplies,   methods   of
                    manufacture or processing,  SOPs,  cost data,  master files,
                    the nature of research and/or development  projects, as well
                    as data relating thereto, marketing or business plans, donor
                    data and financial  data. It shall also

----------
***  Indicates the omission of confidential material pursuant to the request for
     confidential  treatment  made in  accordance  with  Rule  24b-2  under  the
     Securities Exchange Act of 1934, as amended.  The confidential  material is
     being filed separately with the Securities and Exchange Commission.

                                      E-26
<PAGE>

                    mean any information  disclosed to either party by any third
                    party which either MTF or Osteotech is obligated to treat as
                    confidential or proprietary.

               (b)  Both  parties  agree that neither  party will,  at any time,
                    without the express  agreement of the other party, or except
                    as expressly  permitted by this  Agreement,  disclose to any
                    other  person  or use any  Confidential  Information  of the
                    other  party,  except for the  purposes of  performing  this
                    Agreement or any  successor  Agreement or as may be required
                    by law, governmental regulation or court order.  Information
                    shall not be considered to be Confidential  Information of a
                    party if it can be established that (i) such information was
                    in the  possession of the other party prior to disclosure to
                    such  other  party  by  the  party   claiming   that  it  is
                    Confidential   Information  and  such   information  is  not
                    otherwise subject to a confidentiality  agreement; (ii) such
                    information  is then part of the public domain and became so
                    without  the  breach  of this or any  other  confidentiality
                    agreement by such other party or any of its  affiliates;  or
                    (iii) such  information is developed  independently  by such
                    other  party or becomes  known to or  acquired by such other
                    party  by means  other  than as a  result  of a breach  of a
                    confidentiality agreement or any fiduciary obligation.

               (c)  MTF  and   Osteotech   each  agree  to  require   employees,
                    consultants or others  granted  access to such  Confidential
                    Information  pursuant  to Section  4.1(a)  hereof to execute
                    appropriate confidentiality  agreements;  provided that each
                    organization's    agreements    are    approved    by   such
                    organization's counsel.

               (d)  MTF and Osteotech  recognize  that violation in any material
                    respect  of  any  provision  of  Section  4.1(b)  may  cause
                    irreparable  injuries to Osteotech or MTF and agree that MTF
                    or  Osteotech  shall be  entitled to  preliminary  and final
                    injunctive  relief against such  violation.  Such injunctive
                    relief shall be in addition to, and in no way in  limitation
                    of, any and all  remedies or rights  which MTF or  Osteotech
                    shall  have at law or in equity for the  enforcement  of the
                    provisions  of  this  Section  4.1.  In  addition,  MTF  and
                    Osteotech agree that the party responsible for the breach of
                    confidentiality  shall be responsible for all legal fees and
                    other  costs  and  expenses   incurred  in  the   successful
                    enforcement of the non-breaching party's rights and remedies
                    under this Section 4.1.

                                      E-27
<PAGE>

          4.2 Non-Solicitation of Sales Agents

          MTF shall not engage any (i) sales agent retained by Osteotech or (ii)
     any employee,  independent  contractor or other sales personnel  affiliated
     with such sales agent ("affiliated personnel"),  while any such sales agent
     or  affiliated  personnel  is under  contract  directly  or  indirectly  to
     Osteotech  and for a period  of one (1) year  after  any such  contract  is
     terminated, to promote or represent any form of Tissue developed, processed
     or distributed by or on behalf of MTF or any of MTF's licensees, licensors,
     partners  or agents  which  competes  with any of  Osteotech's  Proprietary
     Products,   including  without   limitation   Grafton(R)  DBM  products  or
     Bioimplants.

          4.3 Osteotech Sales Agents

          MTF acknowledges the existence and importance of the independent sales
     agent network  established  and  maintained by Osteotech.  MTF shall not be
     entitled to engage independent agents to promote Osteotech's Grafton(R) DBM
     products or  Bioimplants  distributed  by MTF unless  Osteotech  shall have
     first consented in writing to MTF engaging such agent. Osteotech shall have
     full discretion to determine whether to withold or grant such consent.

          4.4 Surviving Provisions

          The provision of Section 4.1 and 4.2 shall survive the  termination of
     this Agreement in accordance with their terms.

     5. TERM OF AGREEMENT

     This Agreement shall become  effective on September 1, 2000 (the "Effective
Date") and shall  terminate on August 31,  2005;  unless  terminated  earlier in
accordance with the provisions hereof. Either party may terminate this Agreement
as of March 31, 2002 by delivering  written  notice of such  termination  to the
other  party on or before  October 1, 2001.  Subsequent  to October 1, 2001 this
Agreement  may be  terminated  by either party upon six (6) months prior written
notice of such  termination  delivered  by the party  seeking to  terminate  the
Agreement to the other party.

     6. TERMINATION

          6.1 Either party may terminate this Agreement at any time upon:

               (a)  The  material  breach  by  the  other  party  of  any of its
                    obligations  under this Agreement,  if such breach shall not
                    be cured  within  ninety  (90)  days  after  written  notice
                    thereof  is  given  by  the   non-breaching   party  to  the
                    breaching, party; or

               (b)  An adjudication of the other party as bankrupt or insolvent;
                    or the  admission  in  writing  by such  other  party of its
                    inability to pay its debts as they mature;  or an assignment
                    by such other  party for the  benefit of its  creditors;  or
                    such  other  party   applying  for  or   consenting  to  the
                    appointment  of a receiver,  trustee or similar  officer for
                    its assets;  or the  appointment  of a receiver,  trustee or
                    similar  officer for such other party's  assets  without the
                    application  or  consent  of  such  other

                                      E-28
<PAGE>

                    party, if such appointment shall continue undischarged for a
                    period of ninety (90) days; or such other party  instituting
                    (by petition, application, answer, consent or otherwise) any
                    bankruptcy,  insolvency  arrangement  or similar  proceeding
                    relating  to it under the laws of any  jurisdiction;  or the
                    institution  of any  bankruptcy,  insolvency  arrangement or
                    similar  proceeding  relating to such other  party,  if such
                    proceeding  shall remain  undismissed for a period of ninety
                    (90) days;  or the issuance or levy of any  judgment,  writ,
                    warrant  of  attachment  or  execution  or  similar  process
                    against a substantial part of the property or assets of such
                    other party, if such judgment,  writ,  warrant of attachment
                    or  execution  or  similar  process  shall not be  released,
                    vacated or fully  bonded  within  ninety (90) days after its
                    issue or levy.

          6.2.  MTF may  terminate  this  Agreement at any time upon ninety (90)
     days prior written notice to Osteotech if MTF makes a determination  to end
     its program of procuring  and  distributing  Tissue;  provided  that if MTF
     resumes such program at any time during the term of this Agreement it shall
     provide  prompt  written  notice of such  resumption  to Osteotech and this
     Agreement shall become effective again in accordance with its terms as soon
     as is  practicable,  but in no event later than ninety (90) days after such
     notice is received by Osteotech.

          6.3 In the event MTF enters into an  agreement or  arrangement  with a
     third party whereby finished units of Tissue processed by Osteotech for MTF
     are used as part of such third  party's  technology  or product,  MTF shall
     promptly  inform  Osteotech  of its intent to enter into such  agreement or
     arrangement  and Osteotech shall have the right to terminate this Agreement
     at any time upon ninety (90) days prior  written  notice to MTF without any
     further obligation to MTF, other than (A) Osteotech's obligations hereunder
     with  respect to MTF Tissue  which  Osteotech  has begun to Process and MTF
     Tissue which  Osteotech  has finished  Processing  but not yet delivered to
     MTF, which obligations shall continue until all such Tissue is delivered to
     MTF and (B) those obligations  which otherwise survive  termination of this
     Agreement in accordance with their terms.

          6.4 MTF may terminate this Agreement at any time upon thirty (30) days
     prior  written  notice to  Osteotech if Osteotech is unwilling or unable to
     comply  with  the  provisions  of  Section  1.2.2(b)  to  the  extent  such
     provisions  are  applicable  to Osteotech.  Osteotech  may  terminate  this
     Agreement at any time upon thirty (30) days prior written  notice to MTF if
     MTF is  unwilling  or unable  to  comply  with the  provisions  of  Section
     1.2.2(b) to the extent such provisions are applicable to MTF.

          6.5  Osteotech  may  terminate  this  Agreement as provided in Section
     1.1.3 hereof.

     7. INSURANCE

          (a)  Osteotech  shall  secure and  maintain  in force  reasonable  and
               adequate  insurance  coverage for Osteotech's  Tissue  Processing
               activities,  provided  such  coverage is available at  reasonable
               prices and  terms.  Osteotech  has  previously  delivered  to MTF
               certificates of insurance.

                                      E-29
<PAGE>

          (b)  MTF shall  secure and maintain in force  reasonable  and adequate
               insurance  coverage  of  MTF  Tissue  recovery  and  distribution
               activities,  provided  such  coverage is available at  reasonable
               prices and  terms.  MTF has  previously  delivered  to  Osteotech
               certificates of insurance.

          (c)  Osteotech  shall  require  each  subcontractor  or  assignee  who
               Processes MTF Tissue on behalf of Osteotech (if any are permitted
               by MTF) to  procure  and  maintain  insurance  of the  types  and
               amounts required of Osteotech. In addition, once approved by MTF,
               the subcontractor or assignees shall sign the indemnity agreement
               as it appears in Section  2.4(a) in favor of MTF. If there is any
               assignment  to  a  majority  owned  subsidiary  of  Osteotech  as
               provided in Section 9 of this Agreement,  that  subsidiary  shall
               meet each requirement of this Section 7.

     8. FORCE MAJEURE

     Neither  party  shall be  responsible  to the other for  nonperformance  or
delayed  performance of the terms and conditions hereof due to acts of God, acts
of  government,  wars,  riots,  accidents and  transportation,  fuel or material
shortages,  or other causes  (except  strikes),  in the nature of force  majeure
which is beyond  its  control.  To the  extent  Osteotech  is unable to  perform
Processing of MTF's Tissue due to such events,  Osteotech  shall arrange to have
MTF's Tissue  processed under  Osteotech's  oversight within thirty (30) days of
the occurrence of such event.

     9. BINDING AGREEMENT; ASSIGNMENT

          (a)  Each of Biocon and MTF  represents,  warrants and  covenants  (i)
               that this  Agreement  does not conflict with or cause a breach of
               or default  under any other  agreement to which either of them or
               any other organization,  entity or person which they control, are
               controlled by, or are under common  control with,  either through
               ownership,  common  management,  contract or otherwise  (any such
               organization,  entity or person being an "affiliate" for purposes
               of this Agreement) is a party or is bound;  and (ii) that neither
               of them or any of their  affiliates will enter into any agreement
               which would  conflict  with or  interfere  with MTF's  ability to
               comply with its obligations under this Agreement.  Each of Biocon
               and MTF agree that all of MTF's  obligations under this Agreement
               are and will be binding  upon Biocon and MTF and all existing and
               future  affiliates  of either of them and that each  party  whose
               signature to this  Agreement is required to make such  obligation
               binding  on  all  such  affiliates  has  in  fact  executed  this
               Agreement.  Each  of  Biocon  and  MTF,  on  the  one  hand,  and
               Osteotech, on the other hand, represents,  warrants and covenants
               that  it is not a  party  to any  agreement,  or  subject  to any
               obligation or other duty, that would materially  conflict with or
               intefere with MTF's or Osteotech's  respective  ability to comply
               with its obligations under this Agreement.

          (b)  Osteotech  represents,  warrants  and  covenants  (i)  that  this
               Agreement  does not conflict with or cause a breach of or default
               under any other agreement to which it or any of its affiliates is
               a party or is  bound;  and  (ii)  that  neither  it or any of its

                                      E-30
<PAGE>

               affiliates  will enter into any  agreement  which would  conflict
               with or  interfere  with  Osteotech's  ability to comply with its
               obligations  under this Agreement.  Osteotech  agrees that all of
               Osteotech's  obligations  under  this  Agreement  are and will be
               binding upon all existing and future  affiliates of Osteotech and
               that each party whose  signature to this Agreement is required to
               make such  obligation  binding on all such affiliates has in fact
               executed this Agreement.

          (c)  Except as otherwise expressly herein provided, this Agreement may
               not be  assigned in whole or in part  without  the prior  written
               consent of the other party, provided that either party may assign
               its rights under this Agreement to any majority-owned  subsidiary
               of such party  without the consent of the other  party,  provided
               that such  subsidiary  agrees in writing to be bound by the terms
               and  conditions  of this  Agreement.  In the  event  of any  such
               assignment,  the  party  making  such  assignment  shall  not  be
               relieved of its obligations under this Agreement unless otherwise
               agreed to in a writing executed by the other party.

     10. NAME, EMBLEM, PACKAGING, TECHNOLOGY AND TRADEMARK

          (a)  Except  to the  extent  Osteotech  indicates  in any  literature,
               including without limitation promotional  materials,  that MTF is
               one of Osteotech's  Tissue  Processing  clients,  Osteotech shall
               have no right to use the trademark or emblem of MTF in connection
               with  its  Processing  activities  or to use the  name of MTF for
               commercial  purposes  without the prior  written  consent of MTF;
               provided,  however,  Osteotech may disclose  MTF's name as may be
               required by law, government regulation or court order.

          (b)  Except to the  extent  MTF  indicates  in  literature,  including
               without   limitation   promotional   materials,   that  Osteotech
               processes Tissue distributed by MTF, MTF shall not have the right
               to use any trademark or emblem of  Osteotech,  including the name
               Osteotech,  without  the  prior  written  consent  of  Osteotech;
               provided,  however,  MTF may disclose  Osteotech's name as may be
               required by law, government regulation or court order.

          (c)  (i)  Nothing in this Agreement  shall be interpreted to convey to
                    MTF any trademark, patent or proprietary technology owned by
                    Osteotech;

               (ii) Nothing in this Agreement  shall be interpreted to convey to
                    Osteotech any trademark,  patent, or proprietary  technology
                    owned by MTF.

          (d)  MTF recognizes that Osteotech currently performs,  and intends in
               the future to perform, Processing services for others in addition
               to MTF, and therefore,  agrees that unless specifically developed
               or  customized  for  MTF or as  otherwise  provided  herein,  all
               packaging and technology used by Osteotech to perform  Processing
               services  for MTF may also be used by  Osteotech  to perform such
               services for others.

                                      E-31
<PAGE>

          (e)  MTF recognizes that Osteotech processes  Proprietary Products and
               agrees that if it were to distribute these products it will do so
               only under the trademark, packaging, labels and emblems developed
               and provided by Osteotech.

     11. NOTICES

     All notices and other  communications  provided for  hereunder  shall be in
writing  and  shall be mailed  by  certified  mail,  return  receipt  requested,
telecopied,  with a copy sent promptly  thereafter by U.S. mail, or delivered by
hand or overnight delivery, as follows.

          If to MTF:              Chief Executive Officer
                                  Musculoskeletal Transplant Foundation
                                  125 May Street
                                  Edison, New Jersey 08837
                                  Telephone No. (732) 661-0202
                                  Telecopy No. (732) 661-2297

          If to Osteotech:        Chief Executive Officer
                                  Osteotech, Inc.
                                  51 James Way
                                  Eatontown, New Jersey 07724
                                  Telephone No. (732) 542-2800
                                  Telecopy No. (732) 935-0626

or such other person or address as either party may designate by written  notice
to the other party  complying as to delivery  with the terms of this Section 11.
All such notices and other  communications  shall be effective  (i) if mailed by
certified or registered  mail, when received as indicated by the return receipt;
(ii) if telecopied, when transmitted, as indicated by the facsimile transmission
report,  provided same is on a business day in the U.S.  (excludes  weekends and
federal  holidays) and, if not, on the next business day; or (iii) if delivered,
upon  delivery,  provided  same is on a business  day and,  if not,  on the next
business day.

     12. ENTIRE AGREEMENT

     This Agreement  sets forth the entire  agreement  between the parties.  Any
prior agreements,  promises,  negotiations,  or representations,  either oral or
written,  relating to the subject  matter of this  Agreement  not  expressly set
forth in this  Agreement,  are of no  force  or  effect.  Without  limiting  the
foregoing, except as expressly provided in Section 2.4 hereof, it is agreed that
the Prior  Processing  Agreement is superseded in its entirety by this Agreement
and is of no force and effect as of the effective date of this Agreement.

     13. MODIFICATION

     This  Agreement,  or any  part or  section  of it,  may not be  amended  or
modified except by the written consent of both parties to such Agreement.

                                      E-32
<PAGE>

     14. APPLICABLE LAW

     This Agreement  shall be construed in accordance with the laws of the State
of New Jersey, without giving effect to any conflict of laws principles.

     15. WAIVER

     Waiver or breach of any  provision of this  Amended and Restated  Agreement
shall  not be deemed a waiver  of any  other  breach of the same or a  different
provision of this Agreement.

     16. INDEPENDENT CONTRACTOR

     Osteotech is providing its services hereunder as an independent contractor.
Nothing  herein  shall  create any  affiliation,  partnership  or joint  venture
between the parties hereto, or any employer/employee relationship.

     17. SEVERABILITY

     The  provisions of this  Agreement  shall be  severable,  and if a court of
competent jurisdiction holds any provisions of this Agreement to be in violation
of any applicable law, the remaining  provisions  shall  nevertheless  remain in
full force and effect.

     18. SUCCESSORS

     This  Agreement  shall be  binding  upon and  inure to the  benefit  of the
parties and their respective parents, subsidiaries,  affiliates,  successors and
assigns.

              [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

                                      E-33
<PAGE>

     IN WITNESS  WHEREOF,  the parties have caused this Agreement to be executed
by their duly authorized officers as of the date first written above.

                                        MUSCULOSKELETAL TRANSPLANT FOUNDATION

                                        By:     /s/ Bruce Stroever
                                                --------------------------------
                                                Bruce Stroever, President
                                                and Chief Executive Officer

                                        BIOCON, INC.

                                        By:     /s/ Bruce Stroever
                                                --------------------------------
                                                Bruce Stroever, President

                                        OSTEOTECH, INC.

                                        By:     /s/ Richard W. Bauer
                                                --------------------------------
                                                Richard W. Bauer, Chief
                                                  Executive Officer

                                      E-34
<PAGE>

                                                                     Exhibit 3.1

                                       MTF
                           Schedule of Processing Fees

                                       ***

----------
***  Indicates the omission of confidential material pursuant to the request for
     confidential  treatment  made in  accordance  with  Rule  24b-2  under  the
     Securities Exchange Act of 1934, as amended.  The confidential  material is
     being filed separately with the Securities and Exchange Commission.

                                      E-35
<PAGE>

                                                                     Exhibit 3.2

                                       MTF
                           Schedule of Processing Fees

                                      ***

----------
***  Indicates the omission of confidential material pursuant to the request for
     confidential  treatment  made in  accordance  with  Rule  24b-2  under  the
     Securities Exchange Act of 1934, as amended.  The confidential  material is
     being filed separately with the Securities and Exchange Commission.

                                      E-36
<PAGE>

                                                                   Exhibit 3.2.2

                                       MTF
                           Schedule of Processing Fees

                                      ***

----------
***  Indicates the omission of confidential material pursuant to the request for
     confidential  treatment  made in  accordance  with  Rule  24b-2  under  the
     Securities Exchange Act of 1934, as amended.  The confidential  material is
     being filed separately with the Securities and Exchange Commission.

                                      E-37<PAGE>   1

                                                                   EXHIBIT 10.26

                             OFFICE/WAREHOUSE LEASE

        THIS LEASE, made this 11th Day of September, 2000, by and between Winton
Industrial Center, Inc. (hereinafter referred as "Landlord"), and Aradigm
Corporation, a California corporation (hereinafter referred to as "Tenant");

        WITNESSETH:

        1. LEASED PREMISES. Landlord hereby demises and leases to Tenant that
certain space located at 2704 West Winton Avenue, Hayward, California, which
space contains approximately 125,880 square feet which the northern section of
Building #5 containing a total of 212,971 square feet, as more fully described
on Exhibit "A", attached hereto and made a part hereof (hereinafter referred to
as the "Premises"), plus the use of all common areas in and about Landlord's
building, and the real estate thereunder (hereinafter referred to as the
"Property").

        Tenant has inspected the Premises and accepts the same in its present
"AS IS" condition, acknowledging that the Premises are in good order and
satisfactory condition as of the date of Tenant's possession. Tenant further
acknowledges that Landlord has made no representations to Tenant with respect to
any alterations, repairs or improvements to be constructed within the Premises.

        2. USE. The Premises shall be used only for the purpose of general
offices and/or receiving, storing, shipping materials and light manufacturing of
products and merchandise made and/or distributed by Tenant. Outside storage
including, without limitation, drop shipments, dock storage, trucks and other
vehicles, is prohibited without Landlord's prior written consent. Tenant shall
obtain, at Tenant's sole cost and expense, any and all licenses and permits
necessary for Tenant's contemplated use of the Premises. Tenant shall comply
with all existing and future governmental laws, ordinances and regulations
applicable to the use of the Premises, as well as all requirements of Landlord's
insurance carrier. Tenant shall not permit any objectionable or unpleasant
odors, smoke, dust, gas, noise or vibrations to emanate from the Premises, nor
take any other action which would constitute a nuisance or which would disturb
or endanger any third-party tenants of the Property, or unreasonably interfere
with such third-party tenants' use of their respective space. Tenant shall not
receive, store or otherwise handle any product, material or merchandise which is
explosive or highly inflammable. Tenant shall comply with all statutes,
ordinances, rules, codes, regulations and requirements of any federal, state,
municipal or other governmental or quasi-governmental authority with respect to
any hazardous wastes (as such term is defined from time to time by any
governmental or regulatory authority) which are stored, produced, manufactured,
treated, or disposed of by Tenant within the Premises; and Tenant agrees to
indemnify, defend and hold Landlord harmless from and against any and all
liabilities or claims by reason of any injury to persons or damage to property
arising out of the discharge, disbursement, release, or escape of smoke, vapors,
soot, fumes, acids, alkalis, toxic chemicals, hazardous wastes, liquid or
gasses, waste materials or other irritants, contaminants or pollutants into or
about the Premises or Property, which originate from any products stored,
produced, manufactured, treated, or disposed of by Tenant within the Premises.
The aforesaid indemnification and defenses shall survive the term of this Lease.

        3. COMMENCEMENT. The term of this Lease shall be five (5) years and
three (3) months commencing on the 1st day of October, 2000, and expiring on the
31st day of December, 2005, both inclusive.

        4. RENT. Tenant shall pay the following Base Rent and Additional Rent
(hereinafter collectively referred to as "Rent") during the term of this Lease,
in advance, on the first day of each calendar month, or as otherwise set forth
in this Lease, without setoff or deduction, at the office of Landlord. In the
event any Rent is due for a partial calendar month or year, the Rent shall be
equitably adjusted to reflect that portion of the lease term within such month
or year. All accrued Rent shall survive the lease term.

                                       1
<PAGE>   2

        (a) BASE. Tenant shall pay to Landlord, as Base Rent, the sum of Fifty
Nine Thousand One Hundred Sixty-Three and 60/100 Dollars ($59,163.60), payable
in equal monthly installments of each month. The rent shall be adjusted annually
based on the following schedule:

                                  RENT SCHEDULE

<TABLE>
<CAPTION>
                 Period (Months)     Monthly Base Rent
                 ---------------     -----------------
<S>                                  <C>
                 01 - 12             $   59,163.60
                 13 - 24             $   61,681.20
                 25 - 36             $   64,198.80
                 37 - 48             $   66,716.40
                 49 - 63             $   69,234.00
</TABLE>

        (b) ADDITIONAL. Tenant shall pay to Landlord, as Additional Rent,
Tenant's pro rata share of the taxes, insurance and common area maintenance
charges (as such terms are hereinafter defined) incurred by Landlord for and on
behalf of the Property.

        (i) TAXES. Taxes shall include, without limitation, any tax, assessment,
or governmental charge (herein collectively referred to as "Tax") imposed
against the Property, or against any of Landlord's personal property located
therein. Taxes, as herein defined, are predicated upon the present system of
taxation in the state of California. Therefore, if due to a future change in the
method of taxation any rent, franchise, use, profit or other tax shall be levied
against Landlord in lieu of any Tax which would otherwise constitute a "real
estate tax", such rent, franchise, use, profit or other tax shall be deemed to
be a Tax for the purposes herein. In the event Landlord is assessed with a Tax
which Landlord, in its sole discretion, deems excessive, Landlord may challenge
said Tax or may defer compliance therewith to the extent legally permitted; and,
in the event thereof, Tenant shall be liable for Tenant's pro rata share of all
costs in connection with such challenge.

        (ii) INSURANCE. Insurance shall include, without limitation, premiums
for liability, property damage, fire, workers compensation, rent and any and all
other insurance (herein collectively referred to as "Insurance") which Landlord
deems necessary to carry on, for, or in connection with Landlord's operation of
the Property. In addition thereto, in the event Tenant's use of the Premises
shall result in an increase of any of Landlord's Insurance premiums, Tenant
shall pay to Landlord, upon demand, as Additional Rent, an amount equal to such
increase in Insurance. Such payments of Insurance shall be in addition to all
premiums of insurance which Tenant is required to carry pursuant to Paragraph 18
of this Lease.

        (iii) COMMON AREA MAINTENANCE. Common area maintenance charges
(hereinafter referred to as "CAM") shall include without limitation:. the
maintenance, repair and replacement, if necessary, of the downspouts, gutters
and the non-structural portions of the roof; the paving of all parking
facilities, access roads, driveways, sidewalks and passageways; trunk-line
plumbing (as opposed to branch-line plumbing); common utilities and exterior
lighting; landscaping; snow removal; fire protection; exterior painting and
interior painting of the common areas of the Property; management fees; and all
other expenses actually and reasonably incurred by Landlord for or on behalf of
the Property. Notwithstanding the aforesaid, in no event shall CAM expenses
include any expense chargeable to a capital account or capital improvement under
generally accepted accounting principles as currently employed by Landlord; nor
shall it include any expense for which Landlord is otherwise reimbursed or any
leasing expenses (commissions, improvement costs), debt or ground lease
payments.

        (iv) PAYMENT OF ADDITIONAL RENT. Landlord shall have the right to
invoice Tenant monthly, quarterly, or otherwise from time to time, for Tenant's
pro rata share of the actual Taxes, Insurance and CAM expenses payable by Tenant
under this Lease; and Tenant shall pay to Landlord, as Additional Rent, those
amounts for which Tenant is invoiced within thirty (30) days after receipt of
said invoice.

                                       2
<PAGE>   3

        Alternatively, at Landlord's election, Landlord shall have the right to
invoice Tenant monthly for Tenant's pro rata share of such expenses, as
reasonably estimated by Landlord. Any monies paid in advance to Landlord by
Tenant shall not accrue interest thereon. At the end of each calendar year or
property fiscal year, Landlord shall deliver a statement to Tenant setting forth
the difference between Tenant's actual pro rata share of Taxes, Insurance and/or
CAM expenses and the total amount of monthly payments, paid by Tenant to
Landlord. Tenant shall thereafter pay to Landlord the full amount of any
difference between Tenant's actual obligation over the total amount of Tenant's
estimated payments, within thirty (30) days after receipt of said statement;
conversely, in the event Tenant's estimated payments exceed Tenant's actual
obligation, Landlord shall either refund the overpayment to Tenant or credit
said overpayment against Tenant's monthly obligation in the forthcoming year.

        For purposes of this Lease, Tenant's pro rata share is hereinafter
defined as a fraction, the numerator of which shall be the square footage of the
Premises, and the denominator of which shall be the square footage of the
rentable area of the Property, which pro rata share is hereby agreed to be equal
to 15.2%. In the event this Lease expires on a date other than the end of a
billing period, Tenant's obligation with respect to any amounts owed to Landlord
shall survive the expiration of the lease term, and shall be invoiced to Tenant
when the same have been accurately determined or, at Landlord's option, such
amounts shall be reasonably estimated by Landlord to reflect the period of time
the Lease was in effect during such billing period.

        Landlord shall maintain complete and accurate records of all Taxes,
Insurance and CAM expenses incurred in connection with the Property. Tenant
shall have the right to inspect such records at Tenant's sole cost and expense,
at the office of Landlord's managing agent during said agent's normal business
hours, upon five (5) days prior written notice. Landlord shall not be obligated
to provide Tenant with detailed summaries or receipts for any expenses incurred
by or on behalf of the Property; but Landlord shall provide Tenant with one or
more statements setting forth such expenses, categorized by class and amount.
Notwithstanding the aforesaid, unless Tenant asserts specific errors within
ninety (90) days after receipt of any invoice, or year-end statement, it shall
be deemed that said invoice, or year-end statement, is correct.

        5. LATE CHARGE. In the event Tenant is late in the payment of any Rent
or other charge due Landlord, Tenant shall be assessed a late charge for
Landlord's increased administrative expenses, which late charge shall be equal
to five percent (5%), per month, of all outstanding amounts owed Landlord.
Landlord shall provide Tenant with a written notice of the delinquency. However,
such notice will notify Tenant only and not preclude Landlord from charging the
Tenant with a Late Charge for any outstanding amounts owed Landlord.

        6. UTILITIES. Landlord agrees to supply water, gas, electricity and
sewer connections to the Premises. Tenant shall pay for all gas, electricity,
water and sewer used by Tenant within the Premises, together with any taxes,
penalties, surcharges or the like pertaining thereto, and Tenant shall be liable
for all maintenance and equipment with respect to the continued operation
thereof including, without limitation, all electric light bulbs, tubes and
starters. In no event shall Landlord be liable for any interruption or failure
of any utility servicing the Property unless caused by the act, omission or
neglect of Landlord or its employees or contractors.

        7. LANDLORD'S REPAIRS AND MAINTENANCE. Landlord, at Landlord's sole cost
and expense, shall maintain, repair and replace, if necessary, the structural
portions of the roof and the exterior walls. Notwithstanding the aforesaid, in
the event any such maintenance or repairs are caused by the negligence of Tenant
or Tenant's employees, agents or invitees, Tenant shall reimburse to Landlord,
as Additional Rent, the cost of all such maintenance and repairs within thirty
(30) days after receipt of Landlord's invoice for same. For purposes of this
Paragraph, the term "exterior walls" shall not include windows, plate glass,
office doors, dock doors, dock bumpers, office entries, or any exterior
improvement made by Tenant. Landlord reserves the right to designate all sources
of services in connection with Landlord's obligations under this Lease. Tenant
hereby grants to Landlord the right to enter upon the Premises, at reasonable
times, and upon reasonable notice, except in emergencies exclusively determined
by Landlord, for the

                                       3
<PAGE>   4

purpose of making inspections and/or repairs. Tenant shall have the duty to
periodically inspect the Premises and notify Landlord should Tenant observe a
need for repairs or maintenance of any obligation to be performed by Landlord
under this Lease. Upon receipt of Tenant's notice, Landlord shall have a
reasonable period of time to make such repairs or maintenance; however, it is
expressly understood that Landlord's liability with respect to the failure or
delay to make any such repairs or maintenance shall be limited to the cost of
such repairs or maintenance.

        8. TENANT'S REPAIRS AND MAINTENANCE. Tenant, at Tenant's sole cost and
expense, shall have the affirmative duty to periodically inspect, maintain,
service, repair and replace, if necessary, all portions of the Premises which
are not expressly the responsibility of Landlord including, but not limited to,
any windows, plate glass, office doors, dock doors, office entries, interior
walls and finish work, floors and floor coverings, water heaters, electrical
systems and fixtures, sprinkler systems, dock bumpers, branch plumbing and
fixtures, and pest extermination. In addition thereto, Tenant shall keep the
Premises and the dock area servicing the Premises in a clean and sanitary
condition, and shall keep the common parking areas, driveways and loading docks
free of Tenant's debris. Tenant shall not store materials, waste or pallets
outside of the Premises, and shall timely arrange for the removal and/or
disposal of all pallets, crates and refuge owned by Tenant which cannot be
disposed of in the dumpster servicing the Property.

        Tenant, at its own cost and expense, shall enter into a regularly
scheduled preventive maintenance/service contract with a maintenance contractor
approved by Landlord for servicing all hot water, heating and air conditioning
systems and equipment within the Premises. The service contract must include all
services suggested by the equipment manufacturer in its operations/maintenance
manual and an executed copy of such contract must be provided to Landlord prior
to the date Tenant takes possession of the Premises. Notwithstanding the
aforesaid, Landlord shall have the option to enter into a regularly scheduled
preventative maintenance/service contract on items for and on behalf of Tenant.
Such contract may include, without limitation, all services suggested or
recommended by the equipment manufacturer in the operation and maintenance of
such system. In the event Landlord elects such option, Tenant shall reimburse to
Landlord, as Additional Rent, Tenant's share of Landlord's costs in connection
with said contract, as well as Landlord's actual costs of repair and maintenance
of the HVAC system.

        Upon the expiration or earlier termination of this Lease, Tenant shall
return the Premises to Landlord in substantially the same condition as when
received, reasonable wear and tear excepted. Tenant shall perform all repairs
and maintenance in a good and workmanlike manner, using materials and labor of
the same character, kind and quality as originally employed within the Property;
and all such repairs and maintenance shall be in compliance with all
governmental and quasi-governmental laws, ordinances and regulations, as well as
all requirements of Landlord's insurance carrier. In the event Tenant fails to
properly perform any such repairs or maintenance within a reasonable period of
time, Landlord shall have the option to perform such repairs on behalf of
Tenant, in which event Tenant shall reimburse to Landlord, as Additional Rent,
the costs thereof within thirty (30) days after receipt of Landlord's invoice
for same.

        9. ALTERATIONS. Tenant shall not make any alterations, additions or
improvements to the Premises or Property without the prior written consent of
Landlord. Notwithstanding the aforesaid, Tenant, at Tenant's sole cost and
expense, may install such trade fixtures as Tenant may deem necessary, so long
as such trade fixtures do not penetrate or disturb the structural integrity and
support provided by the roof, exterior walls or subfloors. All such trade
fixtures shall be constructed and/or installed by contractors approved by
Landlord, in a good and workmanlike manner, and in compliance with all
applicable governmental and quasi-governmental laws, ordinances and regulations,
as well as all requirements of Landlord's insurance carrier.

        Upon the expiration or earlier termination of this Lease, Tenant shall
remove all trade fixtures and any other alterations, additions or improvements
installed by Tenant within the Premises; and, upon such removal, Tenant shall
restore the Premises to a condition substantially similar to that condition when
received by Tenant. However, notwithstanding the aforesaid, upon Landlord's
written election, such alterations, additions and improvements shall revert to
Landlord and shall remain within the Premises. In no event shall Landlord have
any right to any of Tenant's trade fixtures; and, except as otherwise set forth

                                       4
<PAGE>   5

in this Lease, Tenant may remove such trade fixtures upon the termination of
this Lease, provided Tenant repairs any damage caused by such removal.

        10. DESTRUCTION. If the Premises or the Property are damaged in whole or
in part by casualty so as to render all or a substantial portion of the Premises
untenantable, and if the damages cannot be repaired within one hundred eighty
(180) days from the date of said casualty, this Lease shall terminate as of the
date of such casualty at the election of either party. If such damage can be
repaired within said one hundred eighty (180) days, and Landlord does not elect
within sixty (60) days after the date of such casualty to repair same, then
either party may terminate this Lease by written notice served upon the other.
In the event of any such termination, the parties shall have no further
obligations to the other, except for those obligations accrued through the
effective date of such termination; and, upon such termination, Tenant shall
immediately surrender possession of the Premises to Landlord. Should Landlord
elect to make such repairs, this Lease shall remain in full force and effect,
and Landlord shall proceed with all due diligence to repair and restore the
Premises to a condition substantially similar to that condition which existed
prior to such casualty. In the event the repair and restoration of the Premises
extends beyond one hundred eighty (180) days after the date of such casualty due
to causes beyond the control of Landlord, this Lease shall remain in full force
and effect, and Landlord shall not be liable therefor; but Landlord shall
continue to complete such repairs and restoration with all due diligence. Tenant
shall not be required to pay any Rent for any period in which the Premises are
untenantable. In the event only a portion of the Premises are untenantable,
Tenant's Rent shall be equitably abated in proportion to that portion of the
Premises which are so unfit. However, there shall be no Rent abatement if said
damage is due to the fault or negligence of Tenant or Tenant's agents, employees
or invitees.

        11. INSPECTION. Landlord shall have the right to enter and inspect the
Premises at any reasonable time for the purpose of ascertaining the condition of
the Premises, or in order to make such repairs as may be required or permitted
to be made by Landlord under the terms of this Lease. In addition thereto,
during the last six (6) months of the lease term, Landlord shall have the right
to enter the Premises at any reasonable time for the purpose of showing the
Premises to prospective third-party tenants; and, during said six (6) months,
Landlord shall have the right to erect on the Property and/or Premises suitable
signs indicating that the Premises are available for lease.

        Tenant shall give Landlord thirty (30) days written notice prior to
Tenant vacating the Premises, for the purpose of arranging a joint inspection of
the Premises with respect to any obligation to be performed therein by Tenant
including, without limitation, the necessity of any repair or restoration of the
Premises. In the event Tenant fails to notify Landlord of such inspection,
Landlord's inspection after Tenant vacates shall be conclusively deemed correct
for purposes of determining Tenant's responsibility for repairs and restoration.

        12. SIGNS. Tenant shall not place or permit any signs, lights, awnings
or poles in or about the Premises or the Property, other than the standard
building signage as per Landlord specifications, without the prior written
consent of Landlord; nor shall Tenant change the uniform architecture, paint,
landscape, or otherwise alter or modify the exterior of the Property without the
prior written consent of Landlord.

        13. SUBLETTING AND ASSIGNING. Tenant shall not assign or sublet the
Premises, or any portion thereof, nor allow the same to be used or occupied by
any other person or for any other use than herein specified, without the prior
written consent of Landlord which shall not be unreasonably withheld or
delayed. For purposes of this Paragraph, the transfer of any majority interest
in any corporation or partnership shall be deemed to be an assignment of this
Lease. In the event Landlord consents to any sublease or assignment, the same
shall not constitute a release of Tenant from the full performance of Tenant's
obligations under this Lease. Notwithstanding the above, Tenant may assign or
sublease this Lease without Landlord's consent to any entity affiliated with
Tenant or which succeeds to Tenant's interest by way of merger, stock or asset
sale or as a result of a non-bankruptcy reorganization (a "Permitted
Transferee"). Tenant shall provide written notice of such assignment and the new
entity or Assignee shall have equal or greater creditworthiness as the original
Tenant. In the event of a sublease, Landlord shall receive 50% of any net profit
after deducting costs for tenant improvements, lease

                                       5

<PAGE>   6

commission and legal costs associated with the sublease. Further, in the event
of any such sublease or assignment, Tenant shall reimburse Landlord for all
reasonable attorneys' fees in connection with reviewing and/or drafting any
appropriate documents to effect such transfer of Tenant's interests.

        14. DEFAULT. This Lease and Tenant's right to possession of the Premises
is made subject to and condition upon Tenant performing all of the covenants and
obligations to be performed by Tenant hereunder, at the times and pursuant to
terms and conditions set forth herein. If Tenant should fail to pay any Rent or
other charge when the same is due, or if Tenant should fail to perform any other
obligation to be performed by Tenant within the time or times set forth herein,
Tenant shall be in Default under this Lease. In the event any Default shall
continue for five (5) days after receipt of written notice from Landlord, or if
Tenant makes an assignment for the benefit of creditors, vacates or abandons the
Premises for more than thirty (30) days, files or has filed against it a
petition in bankruptcy, has a receiver, trustee or liquidator appointed over a
substantial portion of its property, or is adjudicated insolvent, Landlord may
either (a) terminate this Lease, or (b) enforce the remedy described in
California Civil Code Section 1951.4. In either event, Landlord shall have the
right to dispossess Tenant, or any other person in occupancy, together with
their property, and re-enter the Premises. Upon such re-entry, Tenant shall be
liable for all expenses incurred by Landlord in recovering the Premises,
including, without limitation, clean-up costs, legal fees, removal, storage or
disposal of Tenant's property, and restoration costs.

        In the event Landlord elects to terminate this Lease, all Rent through
the effective date of termination shall immediately become due, together with
any late fees payable to Landlord and the aforesaid expenses incurred by
Landlord to recover possession, plus an amount equal to all tenant concessions
granted to Tenant including, but not limited to, free or reduced rent, all
tenant finish constructed within the Premises, or any contribution paid to
Tenant in lieu thereof.

        Landlord shall use reasonable efforts to mitigate its damages and relet
the Premises upon terms and conditions satisfactory to Landlord; however,
Landlord shall have no duty to prioritize the reletting of the Premises over the
leasing of other vacant space within the Property. Tenant shall remain liable
for all past due Rent and late fees, plus the aforesaid expenses incurred by
Landlord to recover possession of the Premises. In addition, Tenant shall be
liable for all Rent thereafter accruing under this Lease, payable at Landlord's
election: (a) monthly as such Rent accrues, in an amount equal to the Rent
payable under this Lease less the rent (if any) collected from any reletting, or
(b) in a lump sum within thirty (30) days after Landlord repossesses the
Premises, in an amount equal to the total Rent payable under this Lease for the
unexpired term, discounted at the rate of six percent (6%), per annum. In the
event the Premises are relet, Tenant shall also be liable for all costs of
reletting, including, without limitation, any brokers fees, legal fees, and/or
tenant finish required to be paid in connection with any reletting.

        No payment of money by Tenant after the termination of this Lease,
service of any notice, commencement of any suit, or after final judgment for
possession of the Premises, shall reinstate this Lease or affect any such
notice, demand or suit, or imply consent for any action for which Landlord's
consent is required. Tenant shall pay all costs and attorney's fees incurred by
Landlord from enforcing the covenants of this Lease. Should Landlord elect not
to exercise its rights in the event of a Default, it shall not be deemed a
waiver of such rights as to subsequent Defaults.

        15. HOLDOVER. Upon the expiration or earlier termination of this Lease,
Tenant shall surrender the Premises to Landlord, without demand, in as good
condition as when delivered to Tenant, reasonable wear and tear and casualty
excepted. If Tenant shall remain in possession of the Premises after the
termination of this Lease, and hold over for any reason, Tenant shall be deemed
guilty of unlawful detainer; or, at Landlord's election, Tenant,shall be deemed
a holdover tenant and shall pay to Landlord monthly Rent equal to one hundred
fifty percent (150%) of the Base Rent payable hereunder during the last month
prior to any such holdover, as well as any other damages incurred by Landlord as
a result of such holdover. Should any of Tenant's property remain within the
Premises after the termination of this Lease, it shall be deemed abandoned, and
Landlord shall have the right to store or dispose of it at Tenant's cost and
expense.

                                       6
<PAGE>   7

        16. RIGHT TO CURE TENANT'S DEFAULT. In the event Tenant is in Default
under any provision of this Lease, other than for the payment of Rent, and
Tenant has not cured same within ten (10) days after receipt of Landlord's
written notice, Landlord may cure such Default on behalf of Tenant, at Tenant's
expense. Landlord may also perform any obligation of Tenant, without notice to
Tenant, should Landlord deem the performance of same to be an emergency. Any
monies expended by Landlord to cure any such Default(s), or resolve any deemed
emergency shall be payable by Tenant as Additional Rent. If Landlord incurs any
expense, including reasonable attorney's fees, in prosecuting and/or defending
any action or proceeding by reason of any emergency or Default, Tenant shall
reimburse Landlord for same, as Additional Rent, with interest thereon at
thirteen percent (13%) annually from the date such payment is due Landlord.

        17. HOLD HARMLESS. Landlord shall not be liable to Tenant for any
damages to the Premises or the Property, nor for any damages to Tenant on or
about the Property, nor for any other damages arising from the action or
negligence of Landlord, Tenant, co-tenants or other occupants of the Property;
and Tenant hereby releases, discharges and shall indemnify, hold harmless and
defend Landlord, at Tenant's sole cost and expense, from all losses, claims,
liability, damages, and expenses (including reasonable attorney's fees)
("Claims") due to any damage or injury to persons or property of the parties
hereto or of third persons, caused by Tenant's use or occupancy of the Premises,
Tenant's breach of any covenant under this Lease, or Tenant's use of any
equipment, facilities or property in, on, or adjacent to the Property except, in
each case, to the extent any such Claims are a result of the negligence of
Landlord or its contractors. In the event any suit shall be instituted against
Landlord by any third person for which Tenant is hereby indemnifying and holding
Landlord harmless, Tenant shall defend such suit at Tenant's sole cost and
expense with counsel reasonably satisfactory to Landlord; or, in Landlord's
discretion, Landlord may elect to defend such suit, in which event Tenant shall
pay Landlord, as Additional Rent, Landlord's costs of such defense.

        18. CONDEMNATION. If the whole or any part of the Property or the
Premises shall be taken in condemnation, or transferred by agreement in lieu of
condemnation, either Tenant or Landlord may terminate this Lease by serving the
other party with written notice of same, effective as of the taking date;
provided in the case of termination by Tenant that the Premises (or the
remaining portion thereof) may no longer be adequately used for the purpose set
forth in Paragraph 2 of this Lease. If neither Tenant nor Landlord elect to
terminate this Lease as aforesaid, then this Lease shall terminate on the taking
date only as to that portion of the Premises so taken, and the Rent and other
charges payable by Tenant shall be reduced proportionally. Landlord shall be
entitled to the entire condemnation award for all realty and improvements.
Tenant shall only be entitled to an award for Tenant's fixtures, personal
property, and moving expenses, provided Tenant independently petitions the
condemning authority for same. Notwithstanding the aforesaid, if any
condemnation takes a portion of the parking area the result of which does not
reduce the minimum required parking ratio below that established by local code
or ordinance, this Lease shall continue in full force and effect without
modification.

        19. INSURANCE. Landlord shall maintain in full force and effect policies
of insurance covering the Property in an amount not less than eighty percent
(80%) of the Property's "replacement cost", as such term is defined in the
Replacement Cost Endorsement attached to such policy, insuring against physical
loss or damage generally included in the classification of "all risk" coverage.
Except as set forth below, such insurance shall be for the sole benefit of
Landlord, and under Landlord's sole control.

        Tenant shall maintain in full force and effect throughout the term
of-this Lease policies providing "all risk" insurance coverage protecting
against physical damage (including, but not limited to, fire, lightning,
extended coverage perils, vandalism, sprinkler leakage, water damage, collapse,
and other special extended perils) to the extent of 100% of the replacement cost
of Tenant's property and improvements, as well as broad form comprehensive or
commercial general liability insurance, in an occurrence form, insuring Landlord
and Tenant jointly against any liability (including bodily injury, property
damage and contractual liability) arising out of Tenant's use or occupancy of
the Premises, with a combined single limit of not less than $2,000,000, or for a
greater amount as may be reasonably required by Landlord from time to time. All
such policies shall be of a form and content satisfactory to Landlord; and
Landlord, its Property Manager, any Mortgagee and PMRealty Advisors, shall be
named as an additional insured on all such

                                       7
<PAGE>   8

policies. All policies shall be with companies licensed to do business in the
State of California, and rated A+:XV in the most current issue of Best's Key
Rating Guide. Tenant shall furnish Landlord with certificates of all policies at
least ten (10) days prior to occupancy; and, Tenant shall use best efforts to
assure that such policies shall provide that not less than thirty (30) days
written notice be given to Landlord before any such policies are canceled or
substantially changed to reduce the insurance provided thereby. All such
policies shall be primary and non-contributing with or in excess of any
insurance carried by Landlord. Tenant shall not do any act which may make void
or voidable any insurance on the Premises or Property; and, in the event
Tenant's use of the Premises shall result in an increase in Landlord's insurance
premiums, Tenant shall pay to Landlord upon demand, as Additional Rent, an
amount equal to such increase in insurance.

        Landlord and Tenant hereby mutually waive any and all right of recovery
against one another, directly or by way of subrogation or otherwise, due to the
negligence of either party, their agents or employees, for real or personal
property damage occurring to the Premises, the Property, or any personal
property located therein, from perils agreed to be insured against in the
aforesaid policies (whether or not such insurance is actually carried). Each
party shall have the affirmative duty to inform their respective insurance
carriers of this Paragraph and the mutual waiver of subrogation contained
herein.

        20. MORTGAGES. This Lease is subject and subordinated to any mortgages,
deeds of trust or underlying leases, as well as to any extensions or
modifications thereof (hereinafter collectively referred to as "Mortgages"), now
of record or hereafter placed of record provided that so long as Tenant is not
in default hereunder, its peaceable occupancy and use shall not be disturbed. In
the event Landlord exercises its option to further subordinate this Lease,
Tenant shall at the option of the holder of said Mortgage attorn to said holder.
Any subordination shall be self-executing, but Tenant shall, at the written
request of Landlord, execute such further assurances as Landlord deems desirable
to confirm such subordination. In the event Tenant should fail or refuse to
execute any instrument required under this Paragraph, within fifteen (15) days
after Landlord's request, Landlord shall be granted a limited power of attorney
to execute such instrument in the name of Tenant. In the event any existing or
future lender, holding a mortgage, deed of trust or other commercial paper,
requires a modification of this Lease which does not increase Tenant's Rent
hereunder, or does not materially change any obligation of Tenant hereunder,
Tenant agrees to execute appropriate instruments to reflect such modification,
upon request by Landlord.

        21. LIENS. Tenant shall not mortgage or otherwise encumber or allow to
be encumbered its interest herein without obtaining the prior written consent of
Landlord. Should Tenant cause any mortgage, lien or other encumbrance
(hereinafter singularly or collectively referred to as "Encumbrance") to be
filed, against the Premises or the Property, Tenant shall dismiss or bond
against same within 30 days after the filing thereof. If Tenant fails to remove
said Encumbrance within said 30 days, Landlord shall have the absolute right to
remove said Encumbrance by whatever measures Landlord shall deem convenient
including, without limitation, payment of such Encumbrance, in which event
Tenant shall reimburse Landlord, as Additional Rent, all costs expended by
Landlord, including reasonable attorneys fees, in removing said Encumbrance. All
of the aforesaid rights of Landlord shall be in addition to any remedies which
either Landlord or Tenant may have available to them at law or in equity.

        22. GOVERNMENT REGULATIONS. To the best of Landlord's knowledge, the
Premises and Building comply with applicable laws as of the Commencement Date.
Subject to the foregoing, Tenant, at Tenant's sole cost and expense, shall
conform with all laws and requirements of any Municipal, State, or Federal,
authorities now in force, or which may hereafter be in force, pertaining to its
use of the Premises, as well as any requirement of Landlord's insurance carrier
with respect to Tenant's use of the Premises. The judgment of any court, or an
admission of Tenant in any action or proceeding at law, whether Landlord be a
party thereto or not, shall be conclusive of the fact as between Landlord and
Tenant. In complying with the foregoing, Tenant shall not be required to make
any structural modifications to the Premises or Building unless triggered by
Tenant's alterations to the Premises.

        23. NOTICES. All Rents which are required to be paid by Tenant shall be
delivered to Landlord by the United States Mail, postage prepaid, at Landlord's
address set forth below or other address Landlord

                                       8
<PAGE>   9

may specify from time to time. All notices which are required to be given
hereunder shall be in writing, and delivered by either (a) United States
registered or certified mail, or (b) an overnight commercial package
courier/delivery service with a follow-up letter sent by United States mail; and
such notices shall be sent postage prepaid, addressed to the parties hereto at
their respective addresses below:

                 Tenant:           ARADIGM CORPORATION
                                   3929 Point Eden Way
                                   Hayward, CA 94545
                                   Attn: CFO

                 Landlord:         WINTON INDUSTRIAL CENTER, INC.
                                   c/o PMRealty Advisors, Inc.
                                   800 Newport Center Drive, Suite 300
                                   Newport Beach, CA 92660
                                   Attn: Mr. Scott Amling

Either party may designate a different address by giving notice to the other
party of same at the address set forth above. Notices shall be deemed received
on the date of the return receipt. If any such notices are refused, or if the
party to whom any such notice is sent has relocated without leaving a forwarding
address, then the notice shall be deemed received on the date the notice-receipt
is returned stating that the same was refused or is undeliverable at such
address.

        24. PARKING. Tenant shall be liable for all vehicles owned, rented or
used by Tenant or Tenant's agents and invitees in or about the Property. Tenant
shall not store any equipment, inventory or other property in any trucks, nor
store any trucks on the parking lot of the Property. Notwithstanding the
aforesaid, in the event the Premises have access to a loading dock which
exclusively services the Premises, and no other space, Tenant may store one or
more of its vehicles in and about such dock area, provided such storage does not
restrict truck access or maneuverability for any other tenant or person to or
from any other loading dock servicing the Property. In the event the Premises
have access to a loading dock which does not exclusively service the Premises,
Tenant shall not park its trucks in the dock area longer than the time it takes
to reasonably load or unload its trucks. In no event shall Tenant park any
vehicle in or about a loading dock which exclusively services another tenant
within the Property, or in a thoroughfare, driveway, street, or other area not
specifically designated for parking. Landlord reserves the right to establish
uniform rules and regulations for the loading and unloading of trucks upon the
Property, which rules may include the right to designate specific parking spaces
for tenants' use. Upon request by Landlord, Tenant shall move its trucks and
vehicles if, in Landlord's reasonable opinion, said vehicles are in violation of
any of the above restrictions.

        25. OWNERSHIP. Notwithstanding anything in this Lease to the contrary,
the term "Landlord" as used in this Lease, shall be defined as the current owner
of the Property. In the event of any transfer of the Property, the party
conveying same shall thereafter be automatically released from all liability
with respect to Landlord's performance of any obligations thereafter occurring
or covenants thereafter to be performed. It is expressly understood and agreed
that none of Landlord's covenants under this Lease are personal in nature, and
that Tenant agrees to look solely to the Property for recovery of any damages
for breach or non-performance of any of the obligations of Landlord hereunder.

                                       9
<PAGE>   10

        26. SECURITY DEPOSIT. Tenant has deposited with Landlord the sum of
Eighty Thousand, Five Hundred Sixty-Three and 20/100 Dollars ($80,563.20), as
security for the full and faithful performance of Tenant's obligations under
this Lease. The parties agree that, unless otherwise required by law, Landlord
shall not be required to keep said security deposit separate from its general
funds, nor pay any interest thereon to Tenant. Such security deposit shall not
be construed as an advance Rent payment, or as a measure of Landlord's damages
in the event of a Default by Tenant. If Tenant should be placed in Default with
respect to any provision of this Lease, Landlord may apply all or a portion of
said security deposit for the payment of any sum in Default or for the payment
of any amount which Landlord expends by reason of such Default. If any portion
of said deposit is so applied, Tenant shall deposit with Landlord, within five
(5) days after receipt of Landlord's written demand, an amount sufficient to
restore said security deposit to its original amount. Upon the expiration of
this Lease, Landlord shall return said security deposit to Tenant, provided
Tenant has paid to Landlord all sums owing to Landlord under this Lease, and
Tenant has returned the Premises to Landlord in as good order and satisfactory
condition as when Tenant took possession.

        27. ESTOPPEL CERTIFICATES. Upon Landlord's written request, Tenant shall
execute and return to Landlord, within fifteen (15) days, a statement in writing
certifying that this Lease is unmodified and in full force and effect, that
Tenant has no defenses, offsets or counterclaims against its obligations to pay
any Rent or to perform any other covenants under this Lease, that there are no
uncured Defaults of Landlord or Tenant, and setting forth the dates to which the
Rent and other charges have been paid, and any other information reasonably
requested by Landlord. In the event Tenant fails to return such statement within
said fifteen (15) days, setting forth the above or, alternatively, setting forth
those lease modifications, defenses and/or uncured Defaults, Tenant shall be in
default hereunder or, at Landlord's election, it shall be deemed that Landlord's
statement is correct with respect to the information therein contained. Any such
statement delivered pursuant to this Paragraph may be relied upon by any
prospective purchaser, mortgagee, or assignee of any mortgagee of the Property.

        28. PERSONAL PROPERTY TAXES. Tenant shall timely pay all taxes assessed
against Tenant's personal property and all improvements to the Premises in
excess of Landlord's standard installations. If said personal property and
improvements are assessed with the property of Landlord, Tenant shall pay to
Landlord an amount equal to Tenant's share of such taxes, within ten (10) days
after receipt of Landlord's statement for same.

        29. BROKERAGE. The parties warrant that they have dealt with no other
broker or person in connection with this transaction other than Colliers
International, representing Landlord and Cornish and Carey representing Tenant.
Any real estate fee due as a result of a completed transaction shall be paid for
by Landlord. This provision shall survive the termination of this Lease.

        30. SEVERABILITY. In the event any provision of this Lease is invalid or
unenforceable, the same shall not affect or impair the validity or
enforceability of any other provision.

        31. MISCELLANEOUS. (a) In addition to the terms and conditions set forth
herein, Landlord and Tenant shall be bound by those certain Rules and
Regulations, set forth on Exhibit "B", attached hereto and made a part hereof.

        (b) All of the covenants of Tenant hereunder shall be deemed and
construed to be "conditions" as well as "covenants" as though both words were
used in each separate instance.

        (c) This Lease shall not be recorded by Tenant without the prior written
consent of Landlord.

        (d) The paragraph headings appearing in this Lease are inserted only as
a matter of convenience, and in no way define or limit the scope of any
paragraph.

                                       10
<PAGE>   11

        (e) Except with respect to Tenant's obligation for the payment of Rent
hereunder, in the event any obligation to be performed by either Landlord or
Tenant is prevented or delayed due to labor disputes, acts of God, inability to
obtain materials, government restrictions, casualty, or other causes beyond the
control of the parties hereto, the party liable to perform such obligation shall
be excused from performing same for a period of time equal to any aforesaid
delay.

        (f) Submission of this Lease shall not be deemed to be an offer, or an
acceptance, or a reservation of the Premises; and Landlord shall not be bound
hereby until Landlord has delivered to Tenant a fully executed copy of this
Lease, signed by both of the parties on the last page of this Lease in the
spaces herein provided. Until such delivery, Landlord reserves the right to
exhibit and lease the Premises to other prospective tenants. Notwithstanding
anything contained herein to the contrary, Landlord may withhold possession of
the Premises from Tenant until such time as Tenant has paid to Landlord the
security deposit required by Paragraph 25 of this Lease, and the first month of
Base Rent as set forth in Paragraph 4 of this Lease.

        (g) All of the terms of this Lease shall extend to and be binding upon
the parties hereto and their respective heirs, executors, administrators,
successors and assigns.

        (h) This Lease and the parties' respective rights hereunder shall be
governed by the laws of the State of California. In the event of litigation,
suit shall be brought in Alameda County, California. Landlord and Tenant hereby
waive any and all right to a trial by jury on any issue to enforce any term or
condition of this Lease, or with respect to Landlord's right to terminate this
Lease, or terminate Tenant's right of possession.

        (i) This Lease is modified and affected by the following Exhibits which
are attached hereto and made a part hereof.

                 Exhibit "A": Floor Plan

                 Exhibit "B": Rules and Regulations

                 Exhibit "C": Option to Extend

                                       11
<PAGE>   12

        WHEREFORE, Landlord and Tenant have respectively signed and sealed this
Lease the day and year first above written.

LANDLORD:                                   TENANT:

WINTON INDUSTRIAL CENTER, INC.              ARADIGM CORPORATION,

A DELAWARE CORPORATION                      A CALIFORNIA CORPORATION

By                                          By /S/  [SIGNATURE ILLEGIBLE]
  ---------------------------------           ----------------------------------

Title:                                      Title: PRESIDENT
      -----------------------------               ------------------------------

By                                          By /S/  [SIGNATURE ILLEGIBLE]
  ---------------------------------           ----------------------------------

Title:                                      Title: CFO
      -----------------------------               ------------------------------

                                       12
<PAGE>   13

                                  EXHIBIT "B"

                              RULES AND REGULATIONS

        Tenant agrees to comply with the following rules and regulations, and
any subsequent rules or regulations which Landlord may reasonably adopt or
modify from time to time. Tenant shall be bound by such rules and regulations to
the same extent as if such rules and regulations were covenants of this Lease;
and any non-compliance thereof shall constitute grounds for Default under this
Lease. Landlord shall not be liable for the non-observance of said rules and
regulations by any other tenant.

        (1) Tenant shall not use any picture or likeness of the Property in any
notices or advertisements, without Landlord's prior written consent.

        (2) In the event Tenant requires any telegraph, telephone or satellite
dish connections, Landlord shall have the right to prescribe additional rules
and regulations regarding the same including, but not limited to, the size,
manner, location and attachment of such equipment and connections.

        (3) No additional locks shall be placed upon any door of the Premises,
and Tenant shall not permit any duplicate keys to be made, without the prior
consent of Landlord. Upon the expiration or earlier termination of this Lease,
Tenant shall surrender to Landlord all keys to the Premises and Property.

        (4) Tenant shall not install or operate any steam or internal combustion
engine, boiler, machinery, or carry on any mechanical business within the
Premises. Tenant shall not use any fuel source within the Premises other than
the fuel source(s) provided by Landlord.

        (5) Tenant shall not permit within the Premises any animals other than
service animals; nor shall Tenant create or allow any foul or noxious gas,
noise, odors, sounds, and/or vibrations to emanate from the Premises, or create
any interference with the operation of any equipment or radio or television
broadcasting/reception from within or about the Property, which may obstruct or
interfere with the rights of other tenant(s) in the Property.

        (6) All sidewalks, loading areas, stairways, doorways, corridors, and
other common areas shall not be obstructed by Tenant or used for any purpose
other than for ingress and egress. Landlord retains the right to control all
public and other areas not specifically designated as the Premises, provided
nothing herein shall be construed to prevent access to the Premises or the
common areas of the Property by Tenant or Tenant's invitees.

        (7) Tenant shall not install any window treatments other than existing
treatments or otherwise obstruct the windows of the Premises without Landlord's
prior written consent.

        (8) After business hours, Tenant shall lock all doors and windows of the
Premises which enter upon any common areas of the Property; and Tenant shall be
liable for all damages sustained by Landlord or other tenants within the
Property resulting from Tenant's default or carelessness in this respect.

        (9) Any person(s) who shall, be employed by Tenant for the purpose of
cleaning the Premises shall be employed at Tenant's cost. Tenant shall indemnify
and hold Landlord harmless from all losses, claims, liability, damages, and
expenses for any injury to person or damage to property of Tenant, or third
persons, caused by Tenant's cleaning contractor.

                                       13
<PAGE>   14

        (10) Tenant shall not canvass or solicit business, or allow any employee
of Tenant to canvass or solicit business, from other tenants in the Property,
unless the same is within the scope of Tenant's normal business.

        (11) Landlord reserves the right to place into effect a "no smoking"
policy within all or selected portions of the common areas of the Property,
wherein Tenant, its agents, employees and invitees shall not be allowed to
smoke. Tenant shall not be allowed to smoke in any common stairwells, elevators
or bathrooms; nor shall Tenant dispose of any smoking material including,
without limitation, matches, ashes and cigarette butts on the floors of the
Property, about the grounds of the Property, or in any receptacle other than a
specifically designated receptacle for smoking.

                                       14
<PAGE>   15

                                    EXHIBIT A

                                    PREMISES

                                     [IMAGE]

<PAGE>   16

                                   Exhibit "C"

                                OPTION TO EXTEND

A.      Tenant shall have the right, at its option, to extend the term of this
        Lease for two periods of five (5) years, provided that (i) Tenant is
        current with respect to all of its monetary obligations under this lease
        and no default exists with respect to any of its non-monetary
        obligations hereunder, both at the time of the exercise of the option
        and at the commencement of the option period, (ii) Tenant gives Landlord
        written notice of its intent to extend the term of this Lease for the
        two (2) additional five (5) year periods at least nine (9) months before
        the end of the initial Lease term or the first Option Term, and (iii)
        during the initial term of this Lease, Tenant has not been late with any
        rent payment three (3) or more times (a rental payment shall be
        considered late for purposes of this option if it is received by
        Landlord on or after the fifth calendar day of the month and Tenant has
        received notice from Landlord that it is late). These options to extend
        are personal to Tenant and may not be exercised by any assignee of
        Tenant, other than an Permitted Transferee, even if Landlord has
        consented to the assignment (from Tenant to the assignee). Both five (5)
        year extended teams shall be governed by all of the provisions of this
        Lease applicable to the initial term, except that the monthly Base Rent
        for said extended term shall be an amount based on "Current Market Rent"
        as defined and described below.

B.      "Current Market Rent" will be the prevailing market rent (including
        reimbursements of operating expenses and of property taxes and other
        periodic rental adjustments) per square foot per month as of the date
        which is six months prior to the expiration of the initial Lease Term
        for comparable space at Winton Industrial Center and for a comparable
        (to both five (5) year extended terms) lease term. If there is no such
        comparable space at The Project being offered to prospective tenants for
        a comparable lease term, the Current Marker Rent shall be based upon the
        then current (i.e., six months prior to the expiration of the initial
        Lease term) prevailing market rent (including reimbursements of
        operating expenses and of property taxes, as well as other periodic
        rental adjustments) for comparable space and lease term in projects
        comparable to the Project in the Hayward area. Regardless of whether the
        proposed new monthly base rent (to be charged for the Premises during
        both five (5) year extended terms) is based upon the prevailing market
        rent for comparable space and lease term at the Project, or based upon
        the prevailing market rent for comparable leases in comparable buildings
        in the aforementioned market area, items 1-5 below shall apply (in
        either instance):

<PAGE>   17

        1.      In determining "comparable space", the particular location in
                the Project shall be relevant.

        2.      Charges for parking will be taken into consideration in
                determining Current Market Rent.

        3.      In no event will rent which has not been set or adjusted during
                the immediately preceding twelve months be considered
                "prevailing" or "current".

        4.      Notwithstanding anything herein contained to the contrary, in no
                event shall the new monthly base rent for both five (5) year
                extended terms be less than the monthly base rent for the last
                year of the Lease term.

        5.      Landlord shall notify Tenant (in writing) of the proposed new
                monthly Base Rent (as well as any periodic rental adjustments
                during both five (5) year extended terms) and the applicable
                reimbursement of operating expenses and property taxes for said
                extended term at least ninety (90) days prior to the
                commencement of said extended term. Unless Tenant objects in
                writing within fifteen days after its receipt of such notice,
                the amount stated in such notice as the proposed new monthly
                Base Rent (plus any periodic rental adjustments) and the
                proposed reimbursements of operating expenses and property taxes
                (all as stated in such notice) shall be deemed to be the new
                monthly base rent and periodic adjustments for the five (5) year
                extended term.

C.      If Tenant timely objects to Landlord's proposal, the new monthly Base
        Rent for both five (5) year extended terms shall be determined as
        follows:

        1.      In its letter objecting to Landlord's proposal, Tenant shall
                nominate an MAI appraiser of its choice, and promptly after its
                receipt of such letter, Landlord will notify Tenant of its
                choice (as Landlord's MAI appraiser).

        2.      Tenants and Landlord's appraisers (both of whom must be familiar
                with commercial real estate values in the aforementioned
                relevant market area) shall attempt to jointly determine the
                Current Market Rent, and (if they agree) shall send a joint
                notice to both Landlord and Tenant, specifying such Current
                Market Rent, not later than forty-five days after Landlord's
                receipt of Tenant's aforementioned letter, (objecting to
                Landlord's proposal and nominating Tenant's MAI appraiser).

<PAGE>   18

        3.      If the MAI appraisers cannot agree on the Current Market Rent
                within such forty-five day period, each of the two appraisers
                shall select a third independent MAI appraiser within fifteen
                days. The third MAI appraiser will review the findings of the
                ocher two appraisers and make a determination as to Current
                Market Rent within thirty days.

        4.      The Current Market Rent determined under each either
                sub-paragraph C(2) or C(3) shall become the basis for computing
                the new monthly Base Rent for the Premises for relevant five (5)
                year extended term.

        5.      Landlord and Tenant shall each be responsible for the fees and
                costs of its own appraiser and will share equally in the cost of
                the third appraiser, if needed.

D.      The new monthly Base Rent for the applicable five (5) year extended
        term, as determined pursuant to either Paragraph B or Paragraph C above,
        shall thereafter fee paid by Tenant on a monthly basis in accordance
        with Paragraph 4 of this Lease, plus any other periodic rental
        adjustments, reimbursements (for operating expenses and property taxes)
        acid parking charges as otherwise provided herein.

                                           Landlord's Initials
                                                                  ------------

                                                                  ------------

                                           Tenant's Initials  /s/ [ILLEGIBLE]
                                                                  ------------

                                                                  ------------

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