Document:

Exhibit 10.1

                      EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT is made and entered into as of July
1, 2004, by and between VSE Corporation, a Delaware corporation
("Employer"), and Thomas R. Loftus ("Employee");

     WHEREAS, Employee currently is employed by Employer as Senior
Vice President and Chief Financial Officer,

     WHEREAS, Employee has rendered many years of good and valuable
service to the Employer and has contributed greatly to Employer' s
growth and success;

     WHEREAS, Employer wishes to induce Employee to remain in
Employer's employ to prevent the significant loss which Employer
would incur if Employee were to leave and to enter the employment
of a competitor;

     WHEREAS, in the current business climate of takeovers and
acquisitions, Employee may be concerned about the continuation of
his employment and his status and responsibilities if a Change in
Control (as defined below) occurs, and Employer is concerned that
Employee may be approached by others with employment opportunities;

     WHEREAS, Employer desires to ensure that, if a Change in
Control appears possible, Employee will be in a secure position
from which to objectively engage in any potential deliberations or
negotiations respecting such Change in Control without fear of any
direct or implied threat to employment, status and
responsibilities; and

     WHEREAS, Employee desires to have the foregoing assurances;

     NOW, THEREFORE, in consideration of the mutual promises
contained herein, and for other good and valuable consideration,
the adequacy of which is hereby acknowledged, Employer and
Employee, each intending to be legally bound, agree as follows:

     1.   Term.     The term of Employee's employment hereunder
          shall commence on the date hereof and shall continue
          until December 31, 2006, except as otherwise provided in
          Section 7. If the term of Employee's employment hereunder
          shall have continued until December 31, 2006, thereafter,
          such term of Employee's employment hereunder shall be
          deemed to be renewed automatically, on the same terms and
          conditions contained herein, for successive periods of
          one year each, unless and until Employee or the Employer,
          at least 90 days prior to the expiration of the original
          term or any such extended term, shall give written notice
          to the Employer of intent not to renew the term of
          Employee's employment hereunder. All references herein to
          the "Term" refer to the original term of Employee's
          employment hereunder and all extensions thereof.

     2.   Duties

          (a)  Offices

               During the Term, Employee shall serve as Employer's
               Chief Financial Officer or in a comparable or
               higher management position. Employer agrees that
               Employee will be assigned only duties of the type,
               nature and dignity normally assigned to Senior Vice
               Presidents of a corporation of the size, stature
               and nature of Employer.  During the Term, Employee
               shall have, at a minimum, the same perquisites of
               office as he had on the date hereof, and he shall
               report to the president and chief executive
               officer, or to such other officer as the Employer
               shall designate, or as the Bylaws of the Employer
               shall otherwise require.

          (b)  Full-Time Basis

               During the Term, Employee shall devote, on a full-time
               basis, his services, skills and abilities to
               his employment hereunder, excepting periods of
               vacation, illness or Disability (as defined below),
               and excepting any pursuits which do not materially
               interfere with duties hereunder or present a
               conflict of interest with the interests of Employer
               or of any subsidiary thereof ("Subsidiary").

     3.   Compensation

          (a)  Salary

               During the Term, as compensation for services
               rendered by Employee hereunder, Employer shall pay
               to Employee a base salary at the rate of not less
               than his current annual rate, payable in
               installments in accordance with Employer's policy
               governing salary payments to senior officers
               generally ("Base Salary"). Effective January 1 of
               every year during the Term, or on such other annual
               date as shall be determined by the Employer,
               Employee's compensation, including Base Salary,
               will be subject to review.

          (b)  Performance Bonus

               Except as otherwise provided in Section 7, in
               addition to the Base Salary, Employee shall be
               eligible for an annual performance bonus as
               determined by the Board or its Compensation
               Committee ("Performance Bonus"). Any Performance
               Bonus payable pursuant to this Section 3(b) shall
               be paid within 60 days after the end of the fiscal
               year to which such Performance Bonus relates.

          (c)  Other Compensation Plans or Arrangements

               During the Term, Employee shall also be eligible to
               participate in all other currently existing or
               subsequently implemented compensation or benefit
               plans or arrangements available generally to other
               officers or senior officers of Employer, including
               Employer's "Deferred Supplemental Compensation
               Plan," ESOP/401(k), and any stock grant, stock
               option, stock purchase or similar stock plans or
               arrangements.

          (d)  Tax Withholdings

               Employer shall withhold from Employee's
               compensation hereunder and pay over to the
               appropriate governmental agencies all payroll
               taxes, including income, social security, and
               unemployment compensation taxes, required by the
               federal, state and local governments with
               jurisdiction over Employer.

     4.   Benefits. During the Term, Employee shall be entitled to
          such comparable fringe benefits and perquisites as may be
          provided to any or all of Employer's officers pursuant to
          policies established from time to time by the Board.
          These fringe benefits and perquisites may include
          holidays, paid vacation, group health insurance, short-term
          and long-term disability insurance, and life insurance.

     5.   Expenses and Other Perquisites. Employer shall reimburse
          Employee for all reasonable and proper business expenses
          incurred by him during the Term in the performance of his
          duties hereunder, in accordance with Employer's customary
          practices for senior officers, and provided such business
          expenses are reasonably documented. Also, during the
          Term, Employer shall continue to provide Employee with an
          office and suitable office fixtures, telephone services,
          and secretarial assistance of a nature appropriate to
          Employee's position and status.

     6.   Exclusive Services, Confidential Information, Business
          Opportunities and Non-Solicitation

          (a)  Exclusive Services

               (i)  During the Term, Employee shall at all times devote
                    his full-time attention, energies, efforts and
                    skills to Employer's business and shall not,
                    directly or indirectly, engage in any other
                    business activity, whether or not for profit,
                    gain or other pecuniary advantages, without
                    the Board's written consent provided that such
                    prior consent shall not be required with
                    respect to (1) business interests that neither
                    compete with Employer or any Subsidiaries nor
                    interfere with Employee's duties and
                    obligations hereunder, and (2) Employee's
                    charitable, eleemosynary, philanthropic or
                    professional association activities.

               (ii) During the Term, Employee shall not, without
                    the Board's prior written consent, directly or
                    indirectly, either as an officer, director,
                    employee, agent, advisor, consultant,
                    principal, stockholder, partner, owner or in
                    any other capacity, on Employee's own behalf
                    or otherwise, in any way engage in, represent,
                    be connected with or have a financial interest
                    in, any business which is, or to his
                    knowledge, is about to become, engaged in the
                    business of providing engineering, management,
                    energy or environmental services to the United
                    States Government or any department, agency,
                    or instrumentality thereof or any state or
                    local governmental agency or to any person,
                    corporation or other entity (collectively a
                    "Person") with which Employer or any
                    Subsidiary is currently or has previously done
                    business or any subsequent line of business
                    developed by Employee or any Subsidiary during
                    the term. Notwithstanding the foregoing,
                    Employee shall be permitted to own passive
                    investments in publicly held companies
                    provided that such investments do not exceed
                    five percent of any such company's outstanding
                    equity.

          (b)  Confidential Information

               During the Term and for the first 24 consecutive
               months after the termination of the Term, Employee
               shall not disclose or use, directly or indirectly,
               any Confidential Information (as defined below).
               For the purposes of this Agreement, "Confidential
               Information" shall mean all information disclosed
               to Employee, or known by him as a consequence of or
               through his employment with Employer or any
               Subsidiary, where such information is not generally
               known in the trade or industry or was regarded or
               treated as confidential by Employer or any
               Subsidiary, and where such information refers or
               relates in any manner whatsoever to the business
               activities, processes, services or products of
               Employer or its Subsidiaries. Confidential
               Information shall include business and development
               plans (whether contemplated, initiated or
               completed), information with respect to the
               development of technical and management services,
               business contacts, methods of operation, results of
               analysis, business forecasts, financial data,
               costs, revenues, and similar information. Upon
               termination of Term, Employee shall immediately
               return to Employer all of property of Employer or
               any Subsidiary and Confidential Information which
               is in tangible form, and all copies thereof.

          (c)  Business Opportunities

               (i)  During the Term, Employee shall promptly
                    disclose to Employer each business opportunity
                    of a type which, based upon its prospects and
                    relationship to the existing businesses of
                    Employer or any Subsidiary, Employer or any
                    Subsidiary might reasonably consider pursuing.
                    Upon termination of the Term, regardless of
                    the circumstances thereof, Employer shall have
                    the exclusive right to participate in or
                    undertake any such opportunity on its own
                    behalf without any involvement of Employee.

               (ii) During the Term, Employee shall refrain from
                    engaging in any activity, practice or act
                    which conflicts with, or has the potential to
                    conflict with, the interests of Employer or
                    its Subsidiaries, and he shall avoid any acts
                    or omissions which are disloyal to, or
                    competitive with Employer or its Subsidiaries.

          (d)  Non-Solicitation of Employees

               During the Term and for the first 24 consecutive
               months after termination of the Term, Employee
               shall not, except in the course of duties
               hereunder, directly or indirectly, induce or
               attempt to induce or otherwise counsel, advise, ask
               or encourage any person to leave the employ of
               Employer or any Subsidiary, or solicit or offer
               employment to any person who was employed by
               Employer or any Subsidiary at any time during the
               twelve-month period preceding the solicitation or
               offer.

          (e)  Covenant Not To Compete

               (i)  During the period of his employment and for a
                    one (1) year period commencing with the
                    effective date of the termination of
                    Employee's employment with the Company for any
                    reason and under any circumstances, Employee
                    shall not, without the prior written consent
                    of the Company, alone or with others, whether
                    as an owner, stockholder, partner, lender,
                    investor, employee, consultant, contractor,
                    subcontractor or in any other capacity,
                    directly or indirectly:  (a) engage, within a
                    fifty (50) mile radius of any office of the
                    Company, in any business activity that is
                    competitive with the business of the Company
                    or otherwise in conflict with or contrary to
                    the interests of the Company, including
                    without limitation, the business of performing
                    engineering and management services for the
                    United States Government, all as such
                    businesses and services are more particularly
                    described in the then most recent "VSE
                    Corporation Annual Report", (b) solicit any
                    person or entity who then is or was at any
                    time during Employee's employment, a customer
                    of the Company (including without limitation
                    any person or entity who was at any time
                    during Employee's employment solicited to be a
                    customer of the Company where Employee was
                    directly or indirectly involved in such
                    solicitation) to cease doing business as to
                    curtail business with the Company, or (c)
                    solicit any person who then is or was in the
                    preceding six (6) months an employee or
                    independent contractor of the Company to end
                    his or her relationship with the Company or to
                    work for any other person or entity as an
                    employee or independent contractor.

               (ii) For purposes of this Agreement, Employee shall
                    be deemed to engage in competition with
                    Employer if he shall directly or indirectly,
                    either individually or as a stockholder,
                    director, officer, partner, consultant, owner,
                    employee, agent, or in any other capacity,
                    consult with or otherwise assist any person or
                    entity engaged in providing technical and
                    management services to any person or entity
                    which Employer or any Subsidiary, during the
                    Term, has developed or is working to develop.
                    Notwithstanding anything herein to the
                    contrary, if Employer is in material breach of
                    this Agreement, the provisions of this Section
                    6 shall not apply.

          (f)  Employee Acknowledgment

               Employee hereby agrees and acknowledges that the
               restrictions imposed upon by the provisions of this
               Section 6 are fair and reasonable considering the
               nature of Employer's business, and are reasonably
               required for Employer's protection.

          (g)  Invalidity

               If a court of competent jurisdiction or an
               arbitrator shall declare any provision or
               restriction contained in this Section 6 as
               unenforceable or void, the provisions of this
               Section 6 shall remain in full force and effect to
               the extent not so declared to be unenforceable or
               void, and the court may modify the invalid
               provision to make it enforceable to the maximum
               extent permitted by law.

          (h)  Specific Performance

               Employee agrees that if Employee breaches any of
               the provisions of this Section 6, the remedies
               available at law to Employer would be inadequate
               and in lieu thereof, or in addition thereto,
               Employer shall be entitled to appropriate equitable
               remedies, including specific performance and
               injunctive relief.  Employee agrees not to enter
               into any agreement, either written or oral, which
               may conflict with this Agreement, and Employee
               authorizes Employer to make known the terms of
               Sections 6 and 7 hereof to any Person, including
               future employers of Employee.

     Termination

          (a)  By Employer

               (i)  Termination for Cause

                    Employer may for Cause (as defined below)
                    terminate the Term at any time by written
                    notice to Employee.  For purposes of this
                    Agreement, the term "Cause" shall mean any one
                    or more of the following:  (1) conduct by
                    Employee which is materially illegal or
                    fraudulent or contrary to Company policy; (2)
                    the breach or violation by Employee of any of
                    the material provisions of this Agreement,
                    provided that Employee must first be given
                    notice by the President or the Board of the
                    alleged breach or violation and 30 days to
                    cure said alleged breach or violation; (3)
                    Employee's use of illegal drugs or abuse of
                    alcohol or authorized drugs which impairs
                    Employee's ability to perform duties
                    hereunder, provided that Employee must be
                    given notice by the President/CEO of such
                    impairment and 60 days to cure the impairment;
                    (4) Employee's knowing and willful neglect of
                    duties or negligence in the performance of
                    duties which materially affects Employer's or
                    any Subsidiary's business, provided that
                    Employee must first be given notice by the
                    President/CEO or the Board of such alleged
                    neglect or negligence and 30 days to cure said
                    alleged neglect or negligence. If a
                    termination occurs pursuant to clause (1)
                    above, the date on which the Term is
                    terminated (the "Termination Date") shall be
                    the date Employee receives notice of
                    termination and, if a termination occurs
                    pursuant to clauses (2), (3) or (4) above, the
                    Termination Date shall be the date on which
                    the specified cure period expires. In any
                    event, as of the Termination Date (in the
                    absence of satisfying the alleged breach or
                    violation within the applicable cure period),
                    Employee shall be relieved of all duties
                    hereunder and Employee shall not be entitled
                    to the accrual or provision of any
                    compensation or benefit, after the Termination
                    Date but Employee shall be entitled to the
                    provision of all compensation and other
                    benefits that shall have accrued as of the
                    Termination Date, including Base Salary,
                    Performance Bonuses, paid leave benefits,
                    Deferred Compensation Units, Deferred
                    Supplemental Compensation to the extent
                    permitted by the plans, and reimbursement of
                    incurred business expenses.

               (ii) Termination Without Cause

                    Employer may, in its sole discretion, without
                    Cause, terminate the Term at any time by
                    providing Employee with (a) 60 days' prior
                    notice thereof and (b) on or prior to the
                    Termination Date, a lump sum severance
                    compensation payment equal to one (1) times
                    the total amount of Employee's Annual Base
                    Salary payable hereunder, based upon the
                    amount in effect as of the effective
                    Termination Date. In such event, Employee
                    shall not be entitled to the accrual or
                    provision of any other compensation or benefit
                    after the Termination Date other than (a) the
                    medical and hospitalization benefits for the
                    first 18 months after the Termination Date or
                    longer if permitted under Employer's policies
                    and procedures; (b) the provision of all
                    compensation and other benefits that shall
                    have accrued as of the Termination Date,
                    including Base Salary, Performance Bonus, paid
                    leave benefits, Deferred Compensation Units,
                    Deferred Supplemental Compensation and
                    reimbursements of incurred expenses; and (c)
                    all stock options or similar rights to acquire
                    capital stock granted by Employer to Employee
                    shall automatically become vested and
                    exercisable in whole or in part.  It is
                    understood and agreed that the expiration or
                    non-renewal of the Term by Employer shall not
                    be considered a termination without Cause for
                    the purposes of this Agreement.

          (b)  Death or Disability

               The Term shall be terminated immediately and
               automatically upon Employee's death or
               "Disability." The term "Disability" shall mean
               Employee's inability to perform all of the
               essential functions of his position hereunder for a
               period of 26 consecutive weeks or for an aggregate
               of 150 work days during any 12-month period by
               reason of illness, accident or any other physical
               or mental incapacity, as may be permitted by
               applicable law. Employee's capability to continue
               performance of Employee's duties hereunder shall be
               determined by a panel composed of two independent
               medical doctors appointed by the Board and one
               appointed by the Employee or designated
               representative. If the panel is unable to reach a
               decision, the matter will be referred to
               arbitration in accordance with Section 8. In the
               event of Employee's death or Disability for any
               period of six consecutive months, Employee (or
               designated beneficiary) will be paid his Base
               Salary then in effect for one full year following
               the date of death or disability.

          (c)  By Employee

               (i)  Employee may, in his sole discretion, without
                    cause, terminate the Term at any time upon 60
                    days' written notice to Employer. If Employee
                    exercises such termination right, Employer
                    may, at its option, at any time after
                    receiving such notice from Employee, relieve
                    Employee of all duties and terminate the Term
                    at any time prior to the expiration of said
                    notice period, it being understood that such
                    termination would not be considered a
                    termination without Cause pursuant to Section
                    7(a)(ii) above. If the Term is terminated by
                    Employee or Employer pursuant to this Section
                    7(c)(i), Employee shall not be entitled to any
                    further Base Salary or the accrual or
                    provision of any compensation or benefits
                    after the Termination Date, except standard
                    medical and hospitalization benefits in
                    accordance with Employer's policy.

               (ii) If, during the Term, a Change of Control (as
                    defined below) occurs, Employee may, in his
                    sole discretion, terminate the Term upon 30
                    days' notice to Employer. If Employee
                    exercises such termination right, Employer
                    may, at its option, at any time after
                    receiving such notice from Employee, relieve
                    Employee of all duties hereunder and terminate
                    the Term at any time prior to the expiration
                    of said notice period, and such termination
                    shall not be considered a termination without
                    Cause pursuant to Section 7(a)(ii) above.
                    However, if this Agreement is terminated by
                    Employee or Employer pursuant to this Section
                    7(c)(ii), Employee shall be entitled to (a)
                    payment on or prior to the Termination Date of
                    a lump sum severance compensation payment
                    equal to one (1) times the total amount of
                    Employee's Annual Base Salary payable
                    hereunder, based on the amount in effect as of
                    the Termination Date; (b) continue the medical
                    and hospitalization benefits in accordance
                    with Employer's policy and to payment of all
                    compensation and other benefits that shall
                    have accrued as of the Termination Date, as
                    described in Section 7(a)(ii)(l); and (c) to
                    the automatic vesting and exercisability in
                    whole or in part of all stock options or
                    similar rights to acquire capital stock
                    granted by Employer to Employee; provided that
                    Employee shall not be entitled, after the
                    Termination Date to the accrual or provision
                    of any other compensation payable hereunder,
                    including the Performance Bonus.

          (d)  Change of Control

               For purposes of this Section 7, a "Change of
               Control" shall be deemed to have occurred upon the
               happening of any of the following events:

               (i)  any "person," including a "group," as such
                    terms as defined in Sections 13(d) and 14(d)
                    of the Securities Exchange Act of 1934, as
                    amended, and the rules promulgated thereunder
                    (collectively the "Exchange Act"), other than
                    a trustee or other fiduciary holding voting
                    securities of Employer ("Voting Securities")
                    under any Employer-sponsored benefit plan,
                    becomes the beneficial owner, as defined under
                    the Exchange Act, directly or indirectly,
                    whether by purchase or acquisition or
                    agreement to act in concert or otherwise, of
                    30% or more of the outstanding Voting
                    Securities;

               (ii) a cash tender or exchange offer is completed
                    for such amount of Voting Securities which,
                    together with the Voting Securities then
                    beneficially owned, directly or indirectly, by
                    the offeror (and affiliates thereof)
                    constitutes 40% or more of the outstanding
                    Voting Securities;

               (iii)except in the case of a merger or
                    consolidation in which (a) Employer is the
                    surviving corporation and (b) the holders of
                    Voting Securities immediately prior to such
                    merger or consolidation beneficially own,
                    directly or indirectly, more than 50% of the
                    outstanding Voting Securities immediately
                    after such merger or consolidation (there
                    being excluded from the number of Voting
                    Securities held by such holders, but not from
                    the outstanding Voting Securities, any Voting
                    Securities received by affiliates of the other
                    constituent corporation(s) in the merger or
                    consolidation in exchange for stock of such
                    other corporation), Employer's shareholders
                    approve an agreement to merge, consolidate,
                    liquidate, or sell all or substantially all of
                    Employer's assets; or

               (iv) two or more directors are elected to the Board
                    without having previously been nominated and
                    approved by the members of the Board incumbent
                    on the day immediately preceding such
                    election. For purposes of this Section 7,
                    "affiliate" of a person or another entity
                    shall mean a person or other entity that
                    directly or indirectly controls, is controlled
                    by, or is under common control with the person
                    or other entity specified.

          (e)  No Duty to Mitigate

               If Employee is entitled to the compensation and
               other benefits provided under Sections 7(a)(ii) or
               (c)(ii), Employee shall have no obligation to seek
               employment to mitigate damages hereunder.

     8.   Arbitration.   Whenever a dispute arises between the
          parties concerning this Agreement or any of the
          obligations hereunder, or Employee's employment
          generally, Employer and Employee shall use their best
          efforts to resolve the dispute by mutual agreement. If
          any dispute cannot be resolved by Employer and Employee,
          it shall be submitted to arbitration to the exclusion of
          all other avenues of relief and adjudicated pursuant to
          the American Arbitration Association's Rules for
          Employment Dispute Resolution then in effect. The
          decision of the arbitrator must be in writing and shall
          be final and binding on the parties, and judgment may be
          entered on the arbitrator's award in any court having
          jurisdiction thereof. The arbitrator's authority in
          granting relief to Employee shall be limited to an award
          of compensation, benefits and unreimbursed expenses as
          described in Sections 3, 4, and 5 above, and to the
          release of Employee from the provisions of Section 6 and
          the arbitrator shall have no authority to award other
          types of damages or relief to Employee, including
          consequential or punitive damages. The arbitrator Shall
          also have no authority to award consequential or punitive
          damages to Employer for violations of this Agreement by
          Employee. The expenses of the arbitration shall be borne
          by the losing party to the arbitration and the prevailing
          party shall be entitled to recover from the losing party
          all of its own costs and attorneys' fees with respect to
          the arbitration. Nothing in this Section 8 shall be
          construed to derogate Employer's rights to seek legal and
          equitable relief in a court of competent jurisdiction as
          contemplated by Section 6(h).

     9.   Non-Waiver.    It is understood and agreed that one
          party's failure at any time to require the performance by
          the other party of any of the terms, provisions,
          covenants or conditions hereof shall in no way affect the
          first party's right thereafter to enforce the same, nor
          shall the waiver by either party of the breach of any
          term, provision, covenant or condition hereof be taken or
          held to be a waiver of any succeeding breach.

     10.  Severability.  If any provision of this Agreement
          conflicts with the law under which this Agreement is to
          be construed, or if any such provision is held invalid or
          unenforceable by a court of competent jurisdiction or any
          arbitrator, such provision shall be deleted from this
          Agreement and the Agreement shall be construed to give
          full effect to the remaining provision thereof.

     11.  Survivability. Unless otherwise provided herein, upon
          termination of the Term, the provisions of Sections 6(b),
          (d) and (e) shall nevertheless remain in full force and
          effect.

     12.  Governing Law. This Agreement shall be interpreted,
          construed and governed according to the laws of the
          Commonwealth of Virginia, without regard to the conflict
          of law provisions thereof.

     13.  Construction.  The paragraph headings and captions
          contained in this Agreement are for convenience only and
          shall not be construed to define, limit or affect the
          scope or meaning of the provisions hereof. All references
          herein to Sections shall be deemed to refer to Sections
          of this Agreement.

     14.  Entire Agreement.  This Agreement contains and represents
          the entire agreement of Employer and Employee and
          supersedes all prior agreements, representations or
          understandings, oral or written, express or implied with
          respect to the subject matter hereof. This Agreement may
          not be modified or amended in any way unless in  writing
          signed by each of Employer and Employee. No
          representation, promise or inducement has been made by
          either Employer or Employee that is not embodied in this
          Agreement, and neither Employer nor Employee shall be
          bound by or liable for any alleged representation,
          promise or inducement not specifically set forth herein.

     15.  Assignability. Neither this Agreement nor any rights or
          obligations of Employer or Employee hereunder may be
          assigned by Employer or Employee without the other
          party's prior written consent. Subject to the foregoing,
          this Agreement shall be binding upon and inure to the
          benefit of Employer and Employee and their heirs,
          successors and assigns.

     16.  Notices.  All notices required or permitted hereunder
          shall be in writing and shall be deemed properly given if
          delivered personally or sent by certified or registered
          mail, postage prepaid, return receipt requested, or sent
          by telegram, telex, telecopy or similar form of
          telecommunication, and shall be deemed to have been given
          when received. Any such notice or communication shall be
          addressed: (a) if to Employer, to Chief Executive
          Officer, c/o VSE Corporation, 2550 Huntington Avenue,
          Alexandria, Virginia 22303-1499 or (b) if to Employee, to
          the last known home address on file with Employer, or to
          such other address as Employer or Employee shall have
          furnished to the other in writing.

     IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement, to be effective as of the day and year first above
written.

                                   VSE CORPORATION
                                   a Delaware corporation

Date:  July 1, 2004                By:    /s/ D. M. Ervine
                                          ------------------------------------
                                          D. M. Ervine
                                          Chairman and Chief Executive Officer

Date:   July 1, 2004               By:    /s/ Thomas R. Loftus
                                          ------------------------------------
                                          Thomas R. Loftus<PAGE>
                                                                    EXHIBIT 10.2

                          AGREEMENT AND PLAN OF MERGER

                                  BY AND AMONG

                         CHROMOS MOLECULAR SYSTEMS INC.

                                       and

                                  CHROMOS, INC.

                                       and

                                 CELLEXSYS, INC.

                                       and

                     CERTAIN SHAREHOLDERS OF CELLEXSYS, INC.

                            dated as of June 21, 2004

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                                   PAGE
<S>                                                                                                                <C>
1.                 DEFINITIONS...............................................................................        1

2.                 THE MERGER................................................................................       10

        2.1        The Merger ...............................................................................       10
        2.2        The Closing...............................................................................       10
        2.3        Effective Date and Time...................................................................       11
        2.4        Articles of Incorporation of the Surviving Corporation....................................       11
        2.5        Bylaws of the Surviving Corporation.......................................................       11
        2.6        Directors and Officers....................................................................       11
        2.7        Merger Consideration; Conversion of Shares................................................       11
                   (a)          Cancellation of Company Shares...............................................       11
                   (b)          Consideration................................................................       11
                   (c)          Payment of Merger Consideration..............................................       12
                   (d)          Closing of Transfer Books; Surrender of Certificates.........................       13
                   (e)          Deliveries at the Closing....................................................       13
                   (f)          Minimum Net Asset Adjustment.................................................       14
                   (g)          The Deposit..................................................................       16
                   (h)          Outstanding Merger Sub Shares to be Converted................................       16
                   (i)          Outstanding Options to Purchase Company Shares...............................       16
                   (j)          Shareholders' Rights under Washington Law....................................       16
                   (k)          No Dividends.................................................................       16
                   (l)          No Fractional Shares.........................................................       17
        2.8        Shareholder Representative................................................................       17

3.                 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL SHAREHOLDERS..............       17
                   (a)          Organization of the Company..................................................       17
                   (b)          Charter Documents; Records...................................................       18
                   (c)          Authorization of Transaction.................................................       18
                   (d)          Noncontravention.............................................................       18
                   (e)          Brokers' Fees................................................................       19
                   (f)          Title to Assets..............................................................       19
                   (g)          Capitalization; Company Shares...............................................       19
                   (h)          Financial Statements.........................................................       20
                   (i)          Events Subsequent to December 31, 2003.......................................       21
                   (j)          Undisclosed Liabilities......................................................       22
                   (k)          Legal Compliance.............................................................       23
                   (l)          Clinical Trials..............................................................       23
                   (m)          Tax Matters..................................................................       24
                   (n)          Real Property................................................................       26
                   (o)          Intellectual Property........................................................       26
                   (p)          Software.....................................................................       29
</TABLE>

                                      -i-

<PAGE>

                                TABLE OF CONTENTS
                                   (continued)

<TABLE>
<CAPTION>
                                                                                                                   PAGE
<S>                                                                                                                <C>
                   (q)          Use of Intellectual Property.................................................       30
                   (r)          Contracts....................................................................       30
                   (s)          Powers of Attorney...........................................................       32
                   (t)          Insurance....................................................................       32
                   (u)          Litigation...................................................................       33
                   (v)          Product Liability............................................................       33
                   (w)          Employees....................................................................       33
                   (x)          Employee Benefits............................................................       34
                   (y)          Guaranties...................................................................       37
                   (z)          Environment, Health, and Safety..............................................       37
                   (aa)         Certain Business Relationships with the Company..............................       37
                   (bb)         Certain Payments.............................................................       37
                   (cc)         Access.......................................................................       38
                   (dd)         Vote Required ...............................................................       38

4.                 REPRESENTATIONS AND WARRANTIES OF THE PARENT AND MERGER SUB...............................       38
                   (a)          Organization.................................................................       38
                   (b)          Authorization of Transaction.................................................       38
                   (c)          Noncontravention.............................................................       39
                   (d)          Broker's Fees................................................................       39
                   (e)          The Parent Shares............................................................       39
                   (f)          Convertible Debenture and Convertible Debenture Shares.......................       39
                   (g)          Foreign Issuer...............................................................       40
                   (h)          Public Disclosure Record.....................................................       40

5.                 CONDITIONS TO OBLIGATION TO CLOSE.........................................................       40
                   (a)          Conditions to Obligation of the Parent and Merger Sub........................       40
                   (b)          Conditions to Obligation of the Company and the Shareholders.................       44

6.                 PRE-CLOSING COVENANTS.....................................................................       46
                   (a)          Access and Investigation.....................................................       46
                   (b)          Operation of the Businesses of the Company...................................       46
                   (c)          Negative Covenant............................................................       47
                   (d)          Obligation to Fund the Company...............................................       48
                   (e)          Repayment of Advances Made by Targeted.......................................       48
                   (f)          Intercompany Indebtedness....................................................       48
                   (g)          Termination of Plans.........................................................       48
                   (h)          No Solicitation..............................................................       49
                   (i)          Satisfaction of Indebtedness.................................................       52
                   (j)          Tax Matters..................................................................       52
                   (k)          Approval of Company Shareholders; Information Statement......................       53
                   (l)          Dissenting Shares............................................................       54
</TABLE>

                                      -ii-
<PAGE>

                                TABLE OF CONTENTS
                                   (continued)

<TABLE>
<CAPTION>
                                                                                                                   PAGE
<S>                                                                                                                <C>
7.                 POST-CLOSING COVENANTS....................................................................       54
                   (a)          General......................................................................       54
                   (b)          Litigation Support...........................................................       55
                   (c)          Transition...................................................................       55
                   (d)          Confidentiality..............................................................       55
                   (e)          Noncompetition...............................................................       56
                   (f)          Tax Matters..................................................................       57
                   (g)          Non-Solicitation.............................................................       60
                   (h)          Foreign Private Issuer Status................................................       61
                   (i)          Listing of Parent Shares.....................................................       61

8.                 REMEDIES FOR BREACHES OF THIS AGREEMENT...................................................       61
                   (a)          Survival of Representations and Warranties...................................       61
                   (b)          Indemnification Provisions for Benefit of the Parent.........................       61
                   (c)          Indemnification Holdback.....................................................       62
                   (d)          Indemnification Provisions for Benefit of the Principal Shareholders.........       63
                   (e)          Matters Involving Third Parties..............................................       64
                   (f)          Determination of Adverse Consequences........................................       65
                   (g)          Post-Closing.................................................................       65

9.                 TERMINATION AND EXTENSION.................................................................       65
                   (a)          Termination..................................................................       65
                   (b)          Termination Fee Payable to Parent............................................       67
                   (c)          Termination Fee Payable to the Company.......................................       68
                   (d)          Effect of Termination........................................................       69
                   (e)          Extension of Closing Date by Parent..........................................       69
                   (f)          Payment of Additional Deposit by Parent......................................       69
                   (g)          Treatment of Termination Fees................................................       69

10.                MISCELLANEOUS.............................................................................       70
                   (a)          Press Releases and Public Announcements......................................       70
                   (b)          No Third-Party Beneficiaries.................................................       70
                   (c)          Entire Agreement.............................................................       70
                   (d)          Succession and Assignment....................................................       70
                   (e)          Counterparts.................................................................       70
                   (f)          Headings.....................................................................       70
                   (g)          Notices......................................................................       70
                   (h)          Governing Law................................................................       71
                   (i)          Amendments and Waivers.......................................................       71
                   (j)          Severability.................................................................       72
                   (k)          Expenses.....................................................................       72
                   (l)          Construction.................................................................       72
                   (m)          Incorporation of Exhibits and Schedules......................................       72
</TABLE>

                                      -iii-
<PAGE>

                                TABLE OF CONTENTS
                                   (continued)

<TABLE>
<CAPTION>
                                                                                                                   PAGE
<S>                                                                                                                <C>
                   (n)          Specific Performance.........................................................       72
                   (o)          Submission to Jurisdiction...................................................       73
                   (p)          Arbitration..................................................................       73
</TABLE>

TABLE OF SCHEDULES AND EXHIBITS:

<TABLE>
<S>                        <C>
Schedule A         --      Company Disclosure Schedule
Schedule B         --      Required Consents
Exhibit A          --      Form of Convertible Debenture
Exhibit B          --      Articles of Merger
Exhibit C          --      Form of Milestone Payment Agreement
Exhibit D          --      Form of Transition Services Agreement
Exhibit E          --      Form of Opinion of Dorsey & Whitney LLP
Exhibit F          --      Form of Opinion of Graham & Dunn
Exhibit G          --      Form of Security Agreement
Exhibit H          --      Form of Representation and Support Agreement
Exhibit I          --      Form of Optionholder Representation Agreement
Exhibit J          --      Form of Opinion of Fasken Martineau DuMoulin LLP
Exhibit K          --      Form of Opinion of Davis Wright Tremaine LLP
</TABLE>

                                      -iv-
<PAGE>
                          AGREEMENT AND PLAN OF MERGER

This Agreement and Plan of Merger (this "AGREEMENT") is entered into on June 21,
2004, by and among CHROMOS MOLECULAR SYSTEMS INC. a corporation formed under the
laws of the Province of British Columbia, Canada (the "PARENT"), CHROMOS, INC.,
a corporation organized under the laws of the State of Washington ("MERGER
SUB"), CELLEXSYS, INC., a corporation organized under the laws of the State of
Washington (the "COMPANY"), and each of the Principal Shareholders (as defined
below) of the Company. The Parent, Merger Sub, the Company and the Principal
Shareholders are referred to collectively herein as the "PARTIES".

                                     - 1 -

<PAGE>

                                    RECITALS

A.    The Company is in the business of the research and development of
intellectual property in the area of cell therapy technology, including a
patented process for expanding substantial quantities of antigen-specific
cytotoxic T-cells ex vivo (outside the body) before administering them for
therapeutic applications.

B.    This Agreement contemplates a merger of the Company and Merger Sub on the
Closing Date, pursuant to which the Parent will acquire one hundred percent
(100%) of the outstanding shares of the Surviving Corporation (as defined
below), and in connection therewith, each of the Shareholders will receive
consideration in the form of cash or shares in the capital of the Parent,
together with such Shareholder's proportionate share of the Convertible
Debenture (as defined below).

Now, therefore, in consideration of the premises and the mutual promises herein
made, and in consideration of the representations, warranties, and covenants
herein contained, the Parties agree as follows:

1.    DEFINITIONS.

      "ACQUISITION PROPOSAL" has the meaning set forth in section 6(h)(i) below.

      "ACQUISITION TRANSACTION" has the meaning set forth in section 6(h)(i)
      below.

      "ACTUAL VALUE" has the meaning in Section 2.7(f)(iv)(C) below.

      "ADVERSE CONSEQUENCES" means all actions, suits, proceedings, hearings,
      investigations, charges, complaints, claims, demands, injunctions,
      judgments, orders, decrees, rulings, damages, penalties, fines, costs,
      amounts paid in settlement, Liabilities, obligations, Taxes, liens,
      losses, expenses, and fees, including court costs and reasonable
      attorneys' fees and expenses.

      "AFFILIATED GROUP" means any affiliated group within the meaning of Code
      Section 1504(a) (or any similar group defined under a similar provision of
      state, local, or foreign law).

      "AGREEMENT" has the meaning set forth in the preface above.

      "AMENDED TRANSACTION" has the meaning set forth in section 6(h)(iii)
      below.

      "ARTICLES OF MERGER" has the meaning set forth in Section 2.3 below.

      "BOARD APPROVAL MODIFICATION" has the meaning set forth in Section
      6(h)(iii) below.

      "BUSINESS" means the business conducted by the Company prior to and as of
      the Closing Date, which is the business of research and development of
      intellectual property in the area of cell therapy technology, including a
      patented process for expanding substantial

                                      - 2 -
<PAGE>

      quantities of antigen-specific T-cells ex vivo before administering them
      for therapeutic applications.

      "CERTIFICATES" has the meaning set forth in Section 2.7(d) below.

      "CLOSING" has the meaning set forth in Section 2.2 below.

      "CLOSING DATE" has the meaning set forth in Section 2.2 below.

      "CLOSING DATE BALANCE SHEET" has the meaning set forth in Section
      2.7(f)(ii) below.

      "COBRA" has the meaning set forth in Section 3(x)(xi) below.

      "CODE" means the Internal Revenue Code of 1986, as amended.

      "COMPANY" means CellExSys, Inc.

      "COMPANY BOARD" has the meaning set forth in Section 6(h)(ii) below.

      "COMPANY DISCLOSURE SCHEDULE" has the meaning set forth in Section 3
      below.

      "COMPANY PLANS" has the meaning set forth in Section 3(x)(ii) below.

      "COMPANY SHAREHOLDERS MEETING" has the meaning set forth in Section 6(k)
      below.

      "COMPANY SHARES" means, collectively all of the issued and outstanding
      common shares and preferred shares of the Company as of the Closing Date.

      "COMPANY'S TRANSACTIONAL EXPENSES" has the meaning set forth in Section
      10(k)(iii) below.

      "COMPETITIVE BUSINESS" means any business, trade or activity engaged in
      the research and development, manufacture, or sale of intellectual
      property, products or services in the area of cell therapy technology
      using ex vivo (outside the body) expansion of autologous antigen-specific
      T-cells.

      "CONFIDENTIAL INFORMATION" means: (a) confidential data and confidential
      information relating to the business of any Party (the "PROTECTED PARTY")
      which is or has been disclosed to another Party (the "RECIPIENT") or of
      which the Recipient became aware as a consequence of or through its
      relationship with the Protected Party and which has value to the Protected
      Party and is not generally known to its competitors and which is
      designated by the Protected Party as confidential or otherwise restricted;
      and (b) information of the Protected Party, without regard to form,
      including, but not limited to, Intellectual Property, technical or
      non-technical data, prototypes, specimens, algorithms, formulas, patents,
      compilations, technology, devices, methods, techniques, drawings,
      processes, personnel and financial data, financial plans, research product
      or service plans or lists of customers or suppliers which is not commonly
      known or available to the public and which information (i) derives
      economic value from not being generally known to,

                                      - 3 -
<PAGE>

      and not being readily ascertainable by proper means by, other Persons who
      can obtain economic value from its disclosure or use, and (ii) is the
      subject of efforts that are reasonable under the circumstances to maintain
      its secrecy. Notwithstanding anything to the contrary contained herein,
      Confidential Information shall not include any data or information that
      (v) has been voluntarily disclosed to the public by the Protected Party,
      (w) has been independently developed and disclosed to the public by
      others, (x) otherwise enters the public domain through lawful means, (y)
      was already known by Recipient prior to such disclosure (as evidenced by
      written documentation) or was lawfully and rightfully disclosed to
      Recipient by another Person, or (z) that is required to be disclosed by
      law or order without the availability of applicable protective orders or
      treatment.

      "CONFIDENTIAL INFORMATION AGREEMENTS" has the meaning set forth in Section
      7.2(e)(ii) below.

      "CONVERTIBLE DEBENTURE" means the convertible debenture in substantially
      the form attached as Exhibit A hereto to be issued on the Closing Date by
      the Parent to the Shareholder Representative, as administrative agent for
      the Shareholders, representing, in the aggregate, the balance of the
      Merger Consideration payable by the Parent to the Shareholders in
      accordance with Section 2.7(c)(ii) hereof.

      "CONVERTIBLE DEBENTURE SHARES" means the Parent Shares issuable at the
      option of the Parent in accordance with the terms and conditions of the
      Convertible Debenture.

      "DEPOSIT" means initially the cash amount of Cdn.$750,000, of which
      Cdn.$450,000 has been paid by the Parent to the Company and Cdn.$300,000
      has been placed in trust with Fasken Martineau DuMoulin LLP and is to be
      paid in accordance with Section 2.7(g). The Deposit may be increased to up
      to Cdn.$1,000,000 in accordance with Section 9(f).

      "DISSENTING SHARES" has the meaning set forth in Section 2.7(j) below.

      "EFFECTIVE DATE" has the meaning set forth in Section 2.3 below.

      "EFFECTIVE TIME" has the meaning set forth in Section 2.3 below.

      "EMPLOYEE BENEFIT PLAN" means any "employee pension benefit plans" (as
      defined in ERISA Section 3(2)) any "employee welfare benefit plans" (as
      defined in ERISA Section 3(1)) and all other plans, agreements, policies
      or arrangements, whether written or unwritten, relating to stock options,
      stock purchases, compensation, deferred compensation, bonus, severance,
      and other employee benefits, in each case maintained or contributed to as
      of the date of this Agreement by the Company for the benefit of any
      current or former employees, officers or directors of the Company or for
      which the Company is or could be liable, as a result of its status as an
      ERISA Affiliate and including any plan which is maintained for Canadian
      citizens without regard to whether such plan, agreement policy or
      arrangement exists under US or any similar non-US law, rule or regulation.

      "EMPLOYMENT AGREEMENT" has the meaning set forth in Section 5(a)(vii)
      below.

                                      - 4 -
<PAGE>

      "ENVIRONMENTAL, HEALTH, AND SAFETY LAWS" means the Comprehensive
      Environmental Response, Compensation and Liability Act of 1980, the
      Resource Conservation and Recovery Act of 1976, and the Occupational
      Safety and Health Act of 1970, each as amended, together with all other US
      and non-US laws (including rules, regulations, state law rulings, codes,
      plans, permits, injunctions, judgments, orders, decrees, rulings, and
      charges thereunder) of federal, state, local and foreign governments (and
      all agencies thereof) concerning pollution or protection of the
      environment, natural resources, public health and safety, or employee
      health and safety, including, but not limited to, laws relating to
      emissions, discharges, releases, or threatened releases of Hazardous
      Substances in ambient air, surface water, drinking water, wetlands, ground
      water, or lands or otherwise relating to the manufacture, processing,
      distribution, use, treatment, storage, disposal, recycling, transport, or
      handling of pollutants, contaminants, or chemical, industrial, hazardous,
      or toxic materials or wastes.

      "EQUITY RIGHTS" has the meaning set forth in Section 6(g) below.

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

      "ERISA AFFILIATE" means, with respect to any entity, trade or business,
      any other entity, trade or business that is a member of a group described
      in Code Section 414(b), (c), (m) or (o) or ERISA Section 4001(b)(1) that
      includes the first entity, trade or business, or that is a member of the
      same "controlled group" as the first entity, trade or business pursuant to
      ERISA Section 4001(a)(14), at any time.

      "EXTREMELY HAZARDOUS SUBSTANCE" has the meaning set forth in Section 302
      of the Emergency Planning and Community Right-to-Know Act of 1986, as
      amended, and any counterpart or similar non-US law.

      "FDA" means the United States Food and Drug Administration.

      "FIDUCIARY" has the meaning set forth in ERISA Section 3(21).

      "FINAL ADJUSTMENT SCHEDULE" has the meaning set forth in Section
      2.7(f)(ii) below.

      "FINANCIAL STATEMENTS" has the meaning set forth in Section 3(h) below.

      "FUNDAMENTAL MATTERS" has the meaning set forth in Section 8(a) below.

      "GAAP" means United States generally accepted accounting principles as in
      effect as of the date hereof.

      "GOVERNMENTAL BODY" means any: (a) nation, principality, state,
      commonwealth, province, territory, county, municipality, district, or
      other jurisdiction of any nature; (b) federal, state, local, municipal,
      foreign, or other government; (c) governmental or quasi-governmental
      authority of any nature; (d) multi-national organization or body; or (e)
      individual, entity or body exercising, or entitled to exercise, any
      executive, legislative, judicial, administrative, regulatory, police,
      military, or taxing authority or power of any nature.

                                      - 5 -
<PAGE>

      "HAZARDOUS SUBSTANCE" means any substance regulated under or defined by
      Environmental, Health, and Safety Laws, including, but not limited to, any
      pollutant, contaminant, hazardous substance, hazardous constituent,
      hazardous waste, special waste, solid waste, industrial waste, petroleum
      derived substance or waste, or toxic substance.

      "HIGH VALUE" has the meaning set forth in Section 2.7(f)(iv)(B) below.

      "HIPAA" has the meaning set forth in Section 3(x)(xii) below.

      "INCOME TAXES" means any taxes determined by reference to net income.

      "INDEBTEDNESS" means (a) all indebtedness for borrowed money or for the
      deferred purchase price of property or services (including, without
      limitation, reimbursement and all other obligations with respect to surety
      bonds, letters of credit and bankers' acceptances, whether or not
      matured), including the current portion of such indebtedness, (b) all
      obligations evidenced by notes, bonds, debentures or similar instruments,
      and (c) all capital lease obligations.

      "INDEMNIFICATION AMOUNT" has the meaning set forth in Section 8(b)(i)
      below.

      "INDEMNIFIED PARTY" has the meaning set forth in Section 8(e) below.

      "INDEMNIFYING PARTY" has the meaning set forth in Section 8(e) below.

      "INFORMATION STATEMENT" has the meaning set forth in Section 6(k) below.

      "INTELLECTUAL PROPERTY" means, with respect to the Company and the
      Business:

      (a)   all inventions (whether patentable or unpatentable and whether or
            not reduced to practice), all improvements thereto, and all US and
            non-US patents, patent applications (whether published or
            unpublished), and patent disclosures, together with all reissuances,
            continuations, divisionals, continuations-in-part, revisions,
            extensions, and re-examinations thereof;

      (b)   all US and non-US trademarks, service marks, trade dress, logos,
            trade names and corporate names, together with all translations,
            adaptations, derivations, and combinations thereof and including all
            goodwill associated therewith, and all applications, registrations,
            and renewals in connection therewith;

      (c)   all copyrightable works, all US and non-US copyrights, and all
            applications, registrations, and renewals in connection therewith;

      (d)   all trade secrets and confidential business information (including
            without limitation ideas, research and development plans, know-how,
            formulas, compositions, manufacturing and production processes and
            techniques, technical data, designs, drawings, specifications,
            customer and supplier lists, pricing and cost information, and
            business and marketing plans and proposals);

                                      - 6 -
<PAGE>

      (e)   all other proprietary rights;

      (f)   all right, title, and interest in and to the names "CellExSys" and
            "SPECIFEX-HBV";

      (g)   all Licensed Software and license agreements relating thereto; and

      (h)   with respect to each of the foregoing, all copies and tangible
            embodiments thereof (in whatever form or medium).

      "IND" means an investigational new drug application made under the rules
      and regulations of the FDA.

      "KNOWLEDGE" means the actual knowledge of the Company and the Principal
      Shareholders, which in the case of Targeted means the actual knowledge of
      its executive officers, and the employees of the Company with management
      responsibility in the area of the operations of the Company with respect
      to which the applicable representation or warranty applies.

      "LEGAL REQUIREMENT" means any federal, state, local, municipal, foreign,
      or other law, statute, legislation, constitution, principle of common law,
      resolution, ordinance, code, edict, decree, proclamation, treaty,
      convention, rule, regulation, ruling, directive, pronouncement,
      requirement, specification, determination, decision, opinion, or
      interpretation that is, has been or may in the future be issued, enacted,
      adopted, passed, approved, promulgated, made, implemented or otherwise put
      into effect by or under the authority of any Governmental Body.

      "LIABILITY" means any liability (whether known or unknown, whether
      asserted or unasserted, whether absolute or contingent, whether accrued or
      unaccrued, whether liquidated or unliquidated, and whether due or to
      become due), including any liability for Taxes.

      "LICENSED SOFTWARE" has the meaning set forth in Section 3(p) below.

      "LOW VALUE" has the meaning set forth in Section 2.7(f)(iv)(A) below.

      "MATERIAL ADVERSE EFFECT" means a material adverse effect on the property
      or assets of the entity, or a material adverse effect on the condition or
      prospects, financial or otherwise, of the business of the entity or the
      entity.

      "MERGER" means the merger of the Company and Merger Sub on the terms
      contemplated under this Agreement in accordance with Washington Law.

      "MERGER CONSIDERATION" has the meaning set forth in Section 2.7(b) below.
      For the purpose of the indemnification provisions set forth in this
      Agreement, the Representation and Support Agreement and the Optionholder
      Representation Agreement that limit the liability of each Shareholder to
      the value of the Merger Consideration received by such Shareholder
      pursuant to this Agreement, "MERGER CONSIDERATION" shall mean the market

                                      - 7 -
<PAGE>

      value of the consideration for the Merger received by a Shareholder at the
      time such consideration was received. For clarification, if the Merger
      Consideration is delivered to the Shareholder by the issuance of Parent
      Shares, the value of such Parent Shares for indemnification purposes shall
      be the closing bid price of the Parent Shares on the Toronto Stock
      Exchange on the day prior to the Closing Date or the date of conversion
      pursuant to the Convertible Debenture, as applicable.

      "MERGER SUB" has the meaning set forth in the preface above.

      "MILESTONE PAYMENT AGREEMENT" has the meaning set forth in Section
      5(a)(xi) below.

      "MULTIEMPLOYER PLAN" has the meaning set forth in ERISA Section 3(37).

      "NET ASSETS" means the difference between the (a) total assets of the
      Company (excluding the Deposit), and (b) total liabilities of the Company
      (excluding the Deposit and excluding any Indebtedness owing by the Company
      to any member of the Targeted Affiliated Group), in each case determined
      on a book value basis in accordance with GAAP as applied on a consistent
      basis. All accounting entries will be made regardless of their amount and
      all detected errors and omissions will be corrected regardless of their
      materiality.

      "OBSERVER" has the meaning set forth in Section 9(j) below.

      "OPERATIONAL MATTERS" has the meaning set forth in Section 8(a) below.

      "OPTION PLAN" has the meaning set forth in Section 2.7(i) below.

      "OPTIONHOLDER REPRESENTATION AGREEMENT" has the meaning set forth in
      Section 5(a)(xxvii) below.

      "ORDER" means: (a) an order, judgment, injunction, edict, decree, ruling,
      pronouncement, determination, decision, opinion, verdict, sentence,
      subpoena, writ, or award that is, has been, or may in the future be,
      issued, made, entered, rendered or otherwise put into effect by or under
      the authority of any court, administrative agency, or other Governmental
      Body or any arbitrator or arbitration panel; or (b) a contract with any
      Governmental Body that is, has been, or may in the future be entered into
      in connection with any proceeding.

      "ORDINARY COURSE OF BUSINESS" means the ordinary course of the Business
      consistent with past custom and practice (including with respect to
      quantity and frequency) consisting of actions that are recurring in nature
      in the course of normal day-to-day operations and which are taken in
      accordance with sound and prudent business practices.

      "PARENT" means Chromos Molecular Systems, Inc.

      "PARENT SECURITIES" means collectively the Parent Shares, the Convertible
      Debenture and the Convertible Debenture Shares.

      "PARENT SHARES" means common shares in the capital of the Parent.

                                      - 8 -
<PAGE>

      "PARENT'S ADVISORS" has the meaning set forth in Section 6(a)(i) below.

      "PARTIES" has the meaning set forth in the preface above.

      "PERSON" means any individual, corporation, company, partnership,
      association, estate, trust or government or any agency or political
      subdivision of any government.

      "PRE-CLOSING TAX PERIOD" has the meaning set forth in Section 7(f)(i)
      below.

      "PRINCIPAL SHAREHOLDERS" means Targeted and David M. Schubert.

      "PROPOSED AGREEMENT" has the meaning set forth in Section 6(h)(iii) below.

      "MERGER CONSIDERATION ADJUSTMENT" has the meaning set forth in Section
      2.7(f)(i) below.

      "RELATED PERSON" means with respect to a particular individual: (a) each
      other member of such individual's Family (as defined below); (b) any
      Person that is directly or indirectly controlled by such individual or one
      or more members of such individual's Family; (c) any Person in which such
      individual or members of such individual's Family hold (individually or in
      the aggregate) a Material Interest (as defined below); and (d) any Person
      with respect to which such individual or one or more members of such
      individual's Family serves as a director, manager, officer, partner,
      executor, or trustee (or in a similar capacity). With respect to a
      specified Person other than an individual: (A) any Person that directly or
      indirectly controls, is directly or indirectly controlled by, or is
      directly or indirectly under common control with such specified Person;
      (B) any Person that holds a Material Interest in such specified Person;
      (C) each Person that serves as a director, manager, officer, partner,
      executor, or trustee of such specified Person (or in a similar capacity);
      (D) any Person in which such specified Person holds a Material Interest;
      (E) any Person with respect to which such specified Person serves as a
      general partner or a trustee (or in a similar capacity); and (F) any
      Related Person of any individual described in clause (B) or (C).

      For purposes of this definition, (a) the "Family" of an individual
      includes (i) the individual, (ii) the individual's spouse, (iii) any other
      natural person who is related to the individual or the individual's spouse
      within the second degree, and (iv) any other natural person who resides
      with such individual, and (b) "Material Interest" means direct or indirect
      beneficial ownership (as defined in Rule 13d-3 under the United States
      Securities Exchange Act of 1934, as amended) of voting securities or other
      voting interests representing at least 10% of the outstanding voting power
      of a Person or equity securities or other equity interests representing at
      least 10% of the outstanding equity securities or equity interests in a
      Person.

      "RELEASE AGREEMENT" has the meaning set forth in Section 5(a)(ix) below.

      "REPRESENTATION AND SUPPORT AGREEMENT" has the meaning given to that term
      in Section 5(a)(xxvi) below.

                                      - 9 -
<PAGE>

      "PARENT SECURITIES" means collectively the Parent Shares, the Convertible
      Debenture and the Convertible Debenture Shares.

      "SECTION (9)(b)(i)(2) PAYMENT" has the meaning set forth in Section
      9(b)(i) below.

      "SECTION (9)(c)(i)(B) PAYMENT" has the meaning set forth in Section
      9(c)(i) below.

      "SECURITY AGREEMENT" has the meaning set forth in Section 5(a)(xxiv)
      below.

      "SECURITY INTEREST" means any mortgage, pledge, lien, encumbrance, charge,
      hypothecation, encumbrance, equity, trust, equitable interest, claim,
      preference, right of possession, lease, tenancy, license, encroachment,
      interference, court order, option, right of first refusal, pre-emptive
      right, community property interest, legend, defect, impediment, exception,
      reservation, limitation, impairment, imperfection of title, condition,
      restriction of any nature or other security interest, other than (a)
      mechanic's, materialmen's, and similar liens incurred in the Ordinary
      Course of Business not yet due and payable, (b) liens for Taxes not yet
      due and payable, (c) purchase money liens and liens securing rental
      payments under capital lease arrangements, and (d) other liens arising in
      the Ordinary Course of Business and not incurred in connection with the
      borrowing of money.

      "SHAREHOLDER REPRESENTATIVE" has the meaning given to that term in Section
      2.8;

      "SHAREHOLDERS" means each holder of Company Shares immediately prior to
      the Effective Time.

      "SUBSIDIARY" means any corporation, limited partnership, limited liability
      company, or other entity with respect to which a specified Person (or a
      Subsidiary thereof) owns a majority of the common shares, units or other
      equity interests or has the power to vote or direct the voting of
      sufficient securities to elect a majority of the directors.

      "SUPERIOR TRANSACTION" has the meaning set forth in Section 6(h)(ii)(A)
      below.

      "SURVIVING CORPORATION" has the meaning set forth in Section 2.1 below.

      "TARGETED" means Targeted Genetics Corporation.

      "TARGETED AFFILIATED GROUP" means the Affiliated Group, of which Targeted
      and the Company are members.

      "TARGETED BOARD" has the meaning set forth in Section 6(h)(ii) below.

      "TAX" means any tax imposed of any nature including federal, state, local
      or foreign net income tax, alternative or add-on minimum tax, profits or
      excess profits tax, franchise tax, gross income, adjusted gross income or
      gross receipts tax, license fee, employment related tax (including
      employee withholding or employer payroll tax, FICA, or FUTA), real or
      person property tax or ad valorem tax, sales or use tax, transfer tax,
      excise tax, stamp tax or duty, any withholding or backup withholding tax,
      value added tax, severance

                                     - 10 -
<PAGE>

      tax, prohibited transaction tax, premiums tax, occupation tax, windfall
      profits tax, environmental tax (including taxes under Code Section 59A),
      customs duties, or estimated tax, together with any interest or any
      penalty, addition to tax or additional amount imposed by any government
      authority responsible for the imposition of any such tax, whether disputed
      or not and including any obligations to indemnify or otherwise assume or
      succeed to the Tax liability of any other Person.

      "TAX RETURN" means any report, estimate, declaration of estimated tax,
      information statement or return relating to or required to be filed in
      connection with, any Tax, including any information return or report with
      respect to backup withholding and other payment to third parties.

      "THIRD PARTY ASSETS" has the meaning set forth in Section 3(f) below.

      "THIRD PARTY CLAIM" has the meaning set forth in Section 8(e)(i) below.

      "TRANSITION SERVICES AGREEMENT" has the meaning set forth in Section
      5(a)(xii) below.

      "U.S. SECURITIES ACT" means the United States Securities Act of 1933, as
      amended.

      "UNDISCLOSED LIABILITIES" has the meaning set forth in Section 3(j) below.

      "WASHINGTON LAW" has the meaning set forth in Section 2.3 below.

      "WASHINGTON SECRETARY OF STATE" has the meaning set forth in Section 2.3
      below.

2.    THE MERGER.

2.1   THE MERGER.

      Upon the terms and subject to the conditions hereof, (a) at the Effective
Time (defined below) the separate existence of Merger Sub shall cease and Merger
Sub shall be merged with and into the Company (the Company as the surviving
corporation after the Merger is sometimes referred to herein as the "SURVIVING
CORPORATION") and (b) from and after the Effective Time, the Merger shall have
the effects set forth in this Agreement and all the effects of a merger under
the laws of the State of Washington and other applicable law.

2.2   THE CLOSING .

      Subject to the terms and conditions of this Agreement, the closing of the
Merger (the "CLOSING") shall take place on July 27, 2004 (the "CLOSING DATE") at
10:00 a.m. local time at the offices of Dorsey & Whitney, LLP, 3400 - 1420 Fifth
Avenue, Seattle, Washington, or such other date, time or location as the Parent
and the Company shall agree, provided however that the Parent may postpone the
Closing by up to 45 days in accordance with Section 9(e).

                                     - 11 -
<PAGE>

2.3   EFFECTIVE DATE AND TIME.

      On the Closing Date and subject to the terms and conditions hereof, the
parties hereto shall cause the appropriate certificates (the "ARTICLES OF
MERGER") in the form attached as Exhibit B complying with the applicable
provisions of the Washington Business Corporation Act ("WASHINGTON LAW") to be
properly executed and filed with the Secretary of State of the State of
Washington (the "WASHINGTON SECRETARY OF STATE"). The Merger shall become
effective on the date (the "EFFECTIVE DATE") and at the time (the "EFFECTIVE
TIME") of filing of the Articles of Merger or at such other time as may be
specified in the Articles of Merger as filed. If the Washington Secretary of
State requires any changes in the Articles of Merger as a condition to filing or
to issuing its certificate to the effect that the Merger is effective, the
Parent, Merger Sub and the Company will execute any necessary revisions
incorporating such changes, provided such changes are not inconsistent with and
do not result in any material change in the terms of this Agreement.

2.4   ARTICLES OF INCORPORATION OF THE SURVIVING CORPORATION.

      At the Effective Time, the Articles of Incorporation of the Surviving
Corporation shall be amended and restated in their entirety in a form acceptable
to Parent. Thereafter, the Articles of Incorporation of the Surviving
Corporation may be amended in accordance with their terms and as provided by
law.

2.5   BYLAWS OF THE SURVIVING CORPORATION.

      At the Effective Time, the Bylaws of the Surviving Corporation as in
effect immediately prior to the Effective Time shall continue to be the Bylaws
of the Surviving Corporation. Thereafter, the Bylaws may be amended or repealed
in accordance with their terms and the Articles of Incorporation of the
Surviving Corporation and as provided by law.

2.6   DIRECTORS AND OFFICERS.

      At the Effective Time, the directors of Merger Sub shall continue in
office as the directors of the Surviving Corporation and the officers of Merger
Sub shall continue in office as the officers of the Surviving Corporation, and
such directors and officers shall hold office in accordance with and subject to
the Articles of Merger and Bylaws of the Surviving Corporation.

2.7   MERGER CONSIDERATION; CONVERSION OF SHARES.

      As of the Effective Time, by virtue of the Merger and without any action
on the part of the holders thereof:

      (a)   Cancellation of Company Shares. All shares of any class of capital
            stock of the Company held by the Company as treasury shares shall be
            cancelled.

      (b)   Consideration. Each issued and outstanding Company Share, other than
            as provided in Section 2.7(a), shall be converted into the right to
            receive pro rata from the Parent in the manner described in Section
            2.7(c) below, the aggregate of Canadian Five Million Six Hundred and
            Twenty-Five Thousand Dollars

                                     - 12 -
<PAGE>

            (Cdn.$5,625,000), subject to adjustment as provided in Section
            2.7(f) below (the "MERGER CONSIDERATION").

      (c)   Payment of Merger Consideration. At the Closing Date, the Merger
            Consideration shall be paid as follows:

            (i)   Canadian Two Million Two Hundred and Fifty Thousand Dollars
                  (Cdn.$2,250,000.00) shall be paid, at the option of the Parent
                  in its sole discretion, to the Shareholders pro rata based
                  upon the number of Company Shares held by each Shareholder
                  immediately prior to the Effective Time:

                  (A)   by wire transfer or other immediately available funds to
                        a bank or other account designated in writing to the
                        Parent by the Shareholder Representative at least two
                        business days prior to the Closing Date; or

                  (B)   by the issuance to the Shareholder Representative (in
                        the names and amounts designated by the Shareholder
                        Representative) of that number of the Parent Shares
                        equal to Cdn.$2,250,000 divided by the average closing
                        bid price of the Parent Shares on the Toronto Stock
                        Exchange during the period of 30 consecutive trading
                        days ending not more than 3 trading days prior to the
                        date of this Agreement, provided that if such bid price
                        is less than Cdn.$1.50 per share such bid price will be
                        deemed to be Cdn.$1.50 per share, and if such bid price
                        is greater than Cdn.$2.75 per share, such bid price will
                        be deemed to be Cdn.$2.75 per share; or

                  (C)   by any combination of cash and the Parent Shares
                        aggregating Cdn.$2,250,000 in accordance with
                        subsections 2.7(c)(i)(A) and (B),

                  provided that if the total number of the Parent Shares to be
                  issued will result in Targeted owning that number of the
                  Parent Shares equal to or greater than 20% of the total issued
                  and outstanding the Parent Shares, on a fully diluted basis,
                  as at the Closing Date, the Parent shall not be entitled to
                  exercise its option to issue the Parent Shares to the
                  Shareholders pursuant to subsection 2.7(c)(i)(B) on such date
                  with respect to that amount which would result in Targeted
                  owning in the aggregate that number of the Parent Shares equal
                  to greater than 20% of the total issued and outstanding the
                  Parent Shares, on a fully diluted basis, as at the Closing
                  Date, but rather payments representing such amounts shall be
                  paid in accordance with subsection 2.7(c)(i)(A); and

            (ii)  the balance of the Merger Consideration shall be paid to the
                  Shareholders pro rata based upon the number of Company Shares
                  held by each Shareholder immediately prior to the Effective
                  Time by the issuance of the

                                     - 13 -
<PAGE>

                  Convertible Debenture to the Shareholder Representative as
                  administrative agent for the Shareholders in accordance with
                  the terms and conditions of the Convertible Debenture.

      (d)   Closing of Transfer Books; Surrender of Certificates. At the
            Effective Time, holders of certificates representing shares of the
            Company's capital stock that were outstanding immediately prior to
            the Effective Time shall cease to have any rights as shareholders of
            the Company, and the stock transfer books of the Company shall be
            closed with respect to all shares of such capital stock outstanding
            immediately prior to the Effective Time. No further transfer of any
            such shares of the Company's capital stock shall be made on such
            stock transfer books after the Effective Time. At the Closing, the
            Shareholder Representative shall deliver an executed letter of
            transmittal, in a form reasonably satisfactory to the Parent,
            together with those original certificates that immediately prior to
            the Closing represented the Company Shares held by each of the
            Shareholders, or an affidavit of lost certificate and indemnity duly
            executed by the applicable Shareholder for any Certificate which has
            been lost, stolen, seized or destroyed (the "CERTIFICATES") to the
            Parent. Upon the surrender of Certificates to the Parent, the
            Shareholder Representative shall be entitled to receive in exchange
            therefor the Merger Consideration in accordance with Section 2.7(c),
            subject to any Merger Consideration Adjustment, and the Certificates
            so surrendered shall be forthwith cancelled.

      (e)   Deliveries at the Closing. At the Closing, (i) the Company and the
            Shareholders will deliver to the Parent the various certificates,
            instruments, and documents referred to in Section 5(a) below; (ii)
            the Parent will deliver to the Company and the Shareholder
            Representative the various certificates, instruments, and documents
            referred to in Section 5(b) below; (iii) the Company and the
            Shareholders will execute, acknowledge (if appropriate), and deliver
            to the Parent such documents as the Parent and its counsel may
            reasonably request; (iv) the Parent will execute, acknowledge (if
            appropriate), and deliver to the Company such documents as the
            Company and the Shareholder Representative and their counsel
            reasonably may request; and (v) the Parent will deliver to the
            Shareholder Representative, and others specified in Section 2.7(c),
            the Merger Consideration.

                                     - 14 -
<PAGE>

      (f)   Minimum Net Asset Adjustment.

            (i)   The Merger Consideration shall be:

                  (A)   decreased on a dollar-for-dollar basis to the extent
                        that the Net Assets of the Company as of the close of
                        business on the Closing Date is less than United States
                        negative One Hundred and Sixty-Five Thousand Dollars (US
                        $165,000) dollars. For greater certainty and by way of
                        example, if the Net Assets are negative $200,000, the
                        Merger Consideration would be decreased by $35,000 under
                        this Section 2.7(f)(i)(A); and

                  (B)   increased on a dollar-for-dollar basis to the extent
                        that the Net Assets of the Company as of the close of
                        business on the Closing Date is greater than United
                        States negative One Hundred and Sixty-Five Thousand
                        Dollars (US $165,000) dollars.

                  Any decrease or increase in the Merger Consideration pursuant
                  to this Section 2.7(f) shall be referred to as a "MERGER
                  CONSIDERATION ADJUSTMENT".

            (ii)  No later than sixty (60) days after the Closing Date, the
                  Parent shall deliver to the Shareholder Representative (A) a
                  balance sheet of the Company for the period ended as of the
                  close of business on the Closing Date (the "CLOSING DATE
                  BALANCE SHEET") prepared in accordance with GAAP applied on a
                  basis consistent with the preparation of the Financial
                  Statements; provided, however, that assets, liabilities,
                  gains, losses, revenues, and expenses in interim periods or as
                  of the dates other than year-end (which normally are
                  determined through the application of so-called interim
                  accounting conventions or procedures) will be determined, for
                  purposes of the Closing Date Balance Sheet, through full
                  application of the procedures used in preparing the most
                  recent unaudited balance sheet included within the Financial
                  Statements, and (B) a separate statement showing any
                  calculations with respect to any necessary Merger
                  Consideration Adjustment prepared in accordance with GAAP (the
                  "FINAL ADJUSTMENT SCHEDULE"). The Shareholder Representative
                  shall have the right to examine and make copies of the work
                  papers and such other documents that are generated or reviewed
                  by the Parent in connection with the preparation of the
                  Closing Date Balance Sheet and the Final Adjustment Schedule.

            (iii) The Shareholder Representative shall, within sixty (60) days
                  following its receipt of the Closing Date Balance Sheet and
                  the Final Adjustment Schedule, accept or reject the Merger
                  Consideration Adjustment submitted by the Parent. If the
                  Shareholder Representative disagrees with such calculation, it
                  shall give written notice to the Parent of such disagreement
                  and any reason therefor within such sixty (60) day period.
                  Should the

                                     - 15 -
<PAGE>

                  Shareholder Representative fail to notify the Parent of a
                  disagreement within such sixty (60) day period, the
                  Shareholders shall be deemed to agree with the Parent's
                  calculation. The Parent and the Shareholders Representative
                  will use reasonable efforts to resolve any such objections
                  themselves. If the Parties do not obtain a final resolution
                  within thirty (30) days after the Parent has received the
                  statement of objections, however, the Parent and the
                  Shareholder Representative will select a nationally-recognized
                  accounting firm mutually acceptable to them to resolve any
                  remaining objections. If the Parent and the Shareholders
                  Representative are unable to agree on the choice of an
                  accounting firm, they will select a nationally recognized
                  accounting firm by lot (after excluding their respective
                  regular outside accounting firms). The determination of any
                  accounting firm so selected will be set forth in writing and
                  will be conclusive and binding upon the parties. The Parent
                  will revise the Closing Date Balance Sheet as appropriate to
                  reflect the resolution of any objections thereto pursuant to
                  this Section 2.7(f)(iii).

            (iv)  In the event the Parties submit any unresolved objections to
                  an accounting firm for resolution as provided in Section
                  2.7(f)(iii) above, the Parent and the Shareholders will share
                  responsibility for the fees and expenses of the accounting
                  firm as follows:

                  (A)   if the accounting firm resolves all of the remaining
                        objections in favour of the Parent (the Net Assets of
                        the Company so determined is referred to herein as the
                        "LOW VALUE"), the Shareholder Representative will be
                        responsible for all of the fees and expenses of the
                        accounting firm;

                  (B)   if the accounting firm resolves all of the remaining
                        objections in the favour of the Shareholder
                        Representative (the Net Assets of the Company so
                        determined is referred to herein as the "HIGH VALUE"),
                        the Parent will be responsible for all of the fees and
                        expenses of the accounting firm; and

                  (C)   if the accounting firm resolves some of the remaining
                        objections in favour of the Parent and the rest of the
                        remaining objections in favour of the Shareholder
                        Representative (the Net Assets of the Company so
                        determined is referred to herein as the "ACTUAL VALUE"),
                        the Shareholders will be responsible for that fraction
                        of the fees and expenses of the accounting firm equal to
                        (x) the difference between the High Value and the Actual
                        Value over (y) the difference between the High Value and
                        the Low Value, and the Parent will be responsible for
                        the remainder of the fees and expenses.

            (v)   If, based on the Final Adjustment Schedule as finally
                  determined pursuant to this Section 2.7(f), the Net Assets of
                  the Company as of the close of

                                     - 16 -
<PAGE>

                  business on the Closing Date is greater or less than United
                  States negative One Hundred and Sixty-Five Thousand Dollars
                  (US $-165,000), the aggregate amounts payable by the Parent
                  pursuant to the Convertible Debenture shall be deemed to be
                  adjusted by such deficit or such excess.

      (g)   The Deposit. The total amount of the Deposit is Cdn.$750,000. The
            Deposit shall not be deemed to be a payment to the Shareholders as a
            part of the Merger Consideration. The Parties acknowledge that the
            initial Cdn.$450,000 of the Deposit was a fee paid to the Company as
            an inducement to execute the letter of intent with the Parent dated
            March 24, 2003 and shall only be returned to the Parent pursuant to
            the provisions of Section 9. Upon execution of this Agreement, the
            remaining Cdn.$300,000 of the Deposit shall be paid to the Company
            and shall be used by the Company to fund its operations. The Deposit
            may not be applied to the repayment of an Indebtedness owed by the
            Company to any member of the Targeted Affiliated Group.

      (h)   Outstanding Merger Sub Shares to be Converted. Each issued and
            outstanding share of capital stock of Merger Sub shall be converted
            into one share of common stock of the Surviving Corporation.

      (i)   Outstanding Options to Purchase Company Shares. At the Effective
            Time, each outstanding option to purchase shares in the capital
            stock of the Company granted pursuant to the Company's 2001 Stock
            Option Plan (the "OPTION PLAN") shall terminate. All outstanding and
            unvested options shall vest immediately prior to the Effective Time.
            All outstanding options, unless exercised prior to the Effective
            Time, shall be cancelled as of the Effective Time.

      (j)   Shareholders' Rights under Washington Law. Holders of Company Shares
            who have complied with all the requirements for perfecting
            dissenters' rights, as required under Washington Law, shall be
            entitled to their rights under Washington Law with respect to such
            shares (the "DISSENTING SHARES"). Notwithstanding the foregoing, if
            any holder of Dissenting Shares shall effectively withdraw or lose
            (through failure to perfect or otherwise) the right to dissent,
            then, as of the later of the Effective Time and the occurrence of
            such event, such holder's shares shall automatically be converted
            into and represent only the right to receive the Merger
            Consideration to which such holder is then entitled under this
            Agreement and Washington Law, without interest thereon and upon
            surrender of the certificates representing such shares.
            Notwithstanding any provision of this Agreement to the contrary, any
            Dissenting Shares held by a Shareholder who has perfected
            dissenter's rights for such shares in accordance with Washington Law
            shall not be converted into Merger Consideration.

      (k)   No Dividends. No dividends or other distributions declared or made
            with respect to Parent Shares with a record date after the Effective
            Time shall be paid to the holder of any unsurrendered Certificates
            with respect to the Parent Shares represented thereby (if any), and
            no cash payment in lieu of fractional shares shall be paid to any
            such holder, until such holder surrenders such Certificates in

                                     - 17 -
<PAGE>

            accordance with this Section 2.7 (at which time such holder shall be
            entitled to receive all such dividends and distributions and such
            cash payment).

      (l)   No Fractional Shares. No fractional shares of Parent Shares shall be
            issued in connection with the Merger, and no certificates for any
            such fractional shares shall be issued. In lieu of such fractional
            shares, any holder of Company Shares who would otherwise be entitled
            to receive a fraction of a share of Parent Shares (after aggregating
            all such fractional shares of Parent Shares issuable to such holder)
            shall, upon surrender of such holders Certificates, be paid the
            dollar amount (rounded to the nearest whole cent), determined by
            multiplying such fraction by the conversion price used pursuant to
            Section 2.7(c).

2.8   SHAREHOLDER REPRESENTATIVE.

      The shareholders of the Company, by approving the Merger at a special
      meeting of shareholders or by written consent of the Shareholders, will be
      deemed to have irrevocably authorized and appointed Targeted (the
      "SHAREHOLDER REPRESENTATIVE") for the purpose of acting on behalf of the
      Shareholders with respect to the transactions contemplated by this
      Agreement, including without limitation, acting as transfer agent for the
      Company Shares, administering the Merger Consideration, as adjusted, as
      set forth in Section 2.7 above, making decisions with respect to indemnity
      claims and amendments to this Agreement or any ancillary agreements, and
      acting on behalf of the Shareholders with respect to the transaction
      contemplated by the Convertible Debenture as such Shareholders'
      administrative agent.

3.    REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL
      SHAREHOLDERS.

      The Company and the Principal Shareholders, jointly and severally,
      represent and warrant to the Parent and to Merger Sub that the statements
      contained in this Section 3 are true, correct and complete as of the date
      hereof and will be true, correct and complete as of the Closing Date,
      except as specified to the contrary in the corresponding paragraph of the
      disclosure schedule prepared by the Company and the Principal Shareholders
      and initialled by the Parent (the "COMPANY DISCLOSURE SCHEDULE"). The
      Company Disclosure Schedule will be arranged in paragraphs corresponding
      to the lettered and numbered paragraphs contained in this Section 3.

      (a)   Organization of the Company. The Company is a corporation duly
            organized, validly existing and authorized to do business in the
            corporate form under the laws of the State of Washington and is duly
            qualified to conduct business in every jurisdiction where such
            qualification is required, except where the lack of such
            qualification would not have a Material Adverse Effect. The
            Shareholders are as of the date hereof, and will be as of the
            Closing Date, the sole record holders of the outstanding Company
            Shares (except for such persons who may receive shares pursuant to
            the exercise of currently outstanding options). The Company has all
            necessary power and authority to conduct its Business in the manner
            in

                                     - 18 -
<PAGE>

            which its Business is currently being conducted and in the manner in
            which its Business is proposed to be conducted.

      (b)   Charter Documents; Records.

            (i)   The Company has delivered to the Parent accurate and complete
                  copies of:

                  (A)   the Company's articles of incorporation and bylaws,
                        including all amendments thereto;

                  (B)   records relating to Company Shares, which contain a
                        complete and correct record of all issuances and
                        transfers of equity interests and Equity Rights of the
                        Company;

                  (C)   the minutes and other records of the meetings and other
                        proceedings, including any action taken by written
                        consent or otherwise without a meeting of the
                        shareholders of the Company, the board of directors of
                        the Company, and all committees of the board of
                        directors of the Company.

            (ii)  There have been no meetings or other proceedings of the
                  shareholders, the board of directors, or any committee of the
                  board of directors of the Company that are not fully reflected
                  in such minutes or other records.

            (iii) The books of account, stock records, minute books, and other
                  records of the Company are accurate, up to date, and complete,
                  and have been maintained in accordance with sound and prudent
                  business practices.

      (c)   Authorization of Transaction. Each of the Company and the Principal
            Shareholders has the full power and authority to execute and deliver
            this Agreement and subject to approval by the shareholders of the
            Company to perform its obligations hereunder. Without limiting the
            generality of the foregoing, the board of directors of each of the
            Company and Targeted have duly authorized the execution, delivery,
            and performance of this Agreement by the Company and Targeted,
            respectively. This Agreement constitutes a valid and legally binding
            obligation of each of the Company and Principal Shareholders,
            enforceable in accordance with its terms and conditions, except as
            limited by (i) applicable bankruptcy, insolvency, reorganization,
            moratorium and other laws of general application affecting the
            enforcement of creditors' rights generally and (ii) general
            principles of equity, regardless of whether asserted in a proceeding
            in equity or at law. Other than filing the Articles of Merger with
            the Washington Secretary of State, neither the Company nor Targeted
            need give any notice to, make any filing with, or obtain any
            authorization, consent, or approval of any Governmental Body in
            order for the Parties to consummate the transactions contemplated by
            this Agreement.

      (d)   Noncontravention. Neither the execution nor the delivery of this
            Agreement, nor the consummation of the transactions contemplated
            hereby, will (i) violate (1) any

                                     - 19 -
<PAGE>

            material constitution, statute, law, regulation, rule, injunction,
            judgment, order, decree, ruling, charge, or other restriction of any
            government, Governmental Body, or court to which the Company is
            subject or (2) any provision of the constating documents, board
            resolutions or shareholder resolutions of the Company or (ii)
            conflict with, result in a violation of, result in a breach of,
            constitute a default under, result in the acceleration of, create in
            any party the right to accelerate, terminate, modify, or cancel, or
            require any notice under any agreement, contract, lease, license,
            instrument, or other arrangement to which the Company is a party or
            to the knowledge of the Company and the Principal Shareholders by
            which it is bound or to which any of its assets is subject (or
            result in the imposition of any Security Interest upon any of its
            assets) or (iii) give any Governmental Body or other Person a valid
            right to challenge this Agreement or any of the transactions
            contemplated hereby or to exercise any remedy or obtain any relief
            under any Legal Requirement or any Order to which the Company or any
            of its assets are subject.

      (e)   Brokers' Fees. The Company has not incurred any Liability or
            obligation to pay any fees or commissions to any broker, finder, or
            agent with respect to the transactions contemplated by this
            Agreement.

      (f)   Title to Assets. Other than Intellectual Property and the assets set
            forth in the Financial Statements, the Company has no assets. All of
            the assets of the Company, other than Intellectual Property, which
            are necessary and sufficient or material to conduct the Business as
            presently conducted are owned by a third party (the "THIRD PARTY
            ASSETS"). The Third Party Assets are listed in Section 3(f) of the
            Company Disclosure Schedule and are the subject of the Transition
            Services Agreement. The Third Party Assets, together with the
            Intellectual Property are all of the assets used by the Company or
            necessary to conduct the Business as presently conducted. Each such
            tangible asset listed in Section 3(f) of the Company Disclosure
            Schedule is free from any known material defects, has been
            maintained in accordance with normal industry practice, is in good
            operating condition and repair (subject to normal wear and tear) and
            is suitable for the purposes for which it is presently used.

      (g)   Capitalization; Company Shares. Section 3(g) of the Company
            Disclosure Schedule sets forth the number of authorized, issued, and
            outstanding equity securities of the Company and indicates the
            record and beneficial owners of such securities. The equity
            securities of the Company set forth on Section 3(g) of the Company
            Disclosure Schedule constitute all of the issued and outstanding
            shares of the Company and are duly and validly issued, fully paid
            and non-assessable and held of record, by the Shareholders set forth
            on Section 3(g) of the Company Disclosure Schedule free and clear of
            any Security Interests, and none of such equity securities are
            subject to, nor have any been issued in violation of, pre-emptive,
            rights of first offer, or similar rights, whether arising under the
            constating documents of the Company, or by contract of which the
            Company is a party or of which the Company and the Principal
            Shareholders have knowledge. Other than Indebtedness to Targeted,
            the Company is not the maker or obligor in

                                     - 20 -
<PAGE>

            respect to any Indebtedness owed to any current or former
            shareholder or other equity interest holder of the Company, or to
            any other member of the Targeted Affiliated Group. All issuances,
            sales and repurchases of equity interests by the Company have been
            effected in compliance with all applicable federal and state
            securities laws. The share ledger and other corporate records of the
            Company contain a complete and correct record of all issuances and
            transfers of equity interests of the Company. There are no
            pre-emptive, rights of first offer, or similar rights on the part of
            any holder of any Company Shares. Except as disclosed in Section
            3(g) of the Company Disclosure Schedule, no options, warrants,
            conversion or other rights, agreements, commitments, arrangements or
            understandings of any kind obligating the Company, contingently or
            otherwise, to issue or sell any shares of its common stock or any
            securities convertible into or exchangeable for any such shares or
            any other securities, are outstanding, and no such authorizations
            therefor have been given. The Company and the Principal Shareholders
            have no Knowledge of any condition or circumstance that would,
            directly or indirectly, give rise to or provide a basis for the
            assertion of a claim by any Person to the effect that such Person is
            entitled to acquire or receive any shares of capital stock or other
            securities of the Company.

      (h)   Financial Statements. Attached as Section 3(h) of the Company
            Disclosure Schedule are unaudited balance sheets and statements of
            income, cumulative deficit, changes in shareholders' equity and
            income and cash flow of the Company as of December 31, 2003,
            December 31, 2002, and December 31, 2001, and unaudited interim
            balance sheets and statements of income, cumulative deficit, changes
            in shareholders' equity and income and cash flow of the Company
            through February 29, 2004 (together, "FINANCIAL STATEMENTS").

            (i)   Each of the Financial Statements is true, correct, complete
                  and consistent with the books and records of the Company. Each
                  of the Financial Statements has been prepared in accordance
                  with GAAP applied on a consistent basis throughout the periods
                  covered thereby and presents fairly the financial condition
                  and results of operations and cash flows of the Company at the
                  dates and for the periods specified, subject, in the case of
                  unaudited financial statements, to the absence of notes and
                  the absence of normal recurring year-end adjustments and
                  procedures (none of which require material adjustment or are
                  inconsistent with past practice).

            (ii)  The Company does not have any debt, liability or obligation of
                  any nature, whether accrued, absolute, contingent or
                  otherwise, and whether due or to become due, that is not
                  reflected or reserved against in the Financial Statements.
                  Accounts payable reflected in the Financial Statements have
                  arisen from bona fide transactions. All debts, liabilities and
                  obligations of the Company incurred after the date of the
                  Financial Statements were incurred in the Ordinary Course of
                  Business, arose from bona fide transactions, and are usual and
                  normal in amount both individually and in the aggregate. The
                  Company is not directly or indirectly liable to or obligated
                  to provide funds in respect of or to guaranty or assume any

                                     - 21 -
<PAGE>

                  obligation of any person except to the extent reflected and
                  fully reserved against in the Financial Statements. Except as
                  set forth in the Financial Statements, all liabilities of the
                  Company can be prepaid without penalty at any time.

            (iii) The loans, notes and accounts receivable reflected in the
                  Financial Statements and all such loans, notes and accounts
                  receivable arising after the applicable dates of the Financial
                  Statements arose, and have arisen, from bona fide
                  transactions, and the bad debt reserves established in
                  connection with such loans, notes, and accounts receivable are
                  in accordance with GAAP applied on a consistent basis.

      (i)   Events Subsequent to December 31, 2003. Since December 31, 2003,
            there has not been any change resulting in a Material Adverse Effect
            on the Business, assets, Liabilities, financial condition,
            operations, net income or results of operations of the Company taken
            as a whole. Except in accordance with this Agreement and without
            limiting the generality of the foregoing, since that date, the
            Company:

         (i)      has not sold, leased, transferred, or assigned any of its
                  assets, tangible or intangible;

         (ii)     has not entered into any agreement, contract, lease, or
                  license (or series of related agreements, contracts, leases,
                  and licenses) either involving more than US$20,000 or outside
                  the Ordinary Course of Business;

         (iii)    has not, and, to the Knowledge of the Company and the
                  Principal Shareholders, no party has, accelerated, terminated,
                  modified, or cancelled any agreement, contract, lease, or
                  license (or series of related agreements, contracts, leases,
                  and licenses) involving more than US$20,000 to which the
                  Company is a party or by which it is bound;

         (iv)     has not imposed or permitted any Security Interest upon any of
                  its assets, tangible or intangible;

         (v)      has not made any distribution or any capital expenditure (or
                  series of related capital expenditures) either involving more
                  than US$20,000 or outside the Ordinary Course of Business;

         (vi)     has not made any capital investment in, any loan to, or any
                  acquisition of the securities or assets of, any other Person;

         (vii)    has not issued any note, bond, or other debt security or
                  created, incurred, assumed, or guaranteed any Indebtedness;

         (viii)   has not delayed or postponed the payment of accounts payable
                  or other Liabilities outside of the Ordinary Course of
                  Business;

                                     - 22 -
<PAGE>

         (ix)     has not cancelled, compromised, waived, or released any right
                  or claim (or series of related rights and claims) in excess of
                  US$20,000 outside the Ordinary Course of Business other than
                  the Subscription Agreement and Release with Itochu Corporation
                  dated February 9, 2004;

         (x)      has not granted any license or sublicense of any rights under
                  or with respect to any Intellectual Property;

         (xi)     has not changed or authorized any change in its articles of
                  incorporation, bylaws, or similar charter documents or been a
                  party to an Acquisition Transaction, recapitalization,
                  reclassification of shares, stock split, reverse stock split
                  or similar transaction;

         (xii)    has not experienced any material damage, destruction, or loss
                  (whether or not covered by insurance) to its property;

         (xiii)   has not made any loan to, or entered into any other
                  transaction with, any of its directors, officers, and
                  employees;

         (xiv)    has not adopted, amended, modified or terminated any bonus,
                  profit-sharing incentive, severance, or other plan, contract,
                  or commitment for the benefit of any of its directors,
                  officers, and employees (or taken any such action with respect
                  to any other Employee Benefit Plan);

         (xv)     has not made any other change in employment terms for any of
                  its directors, officers, and employees, including any increase
                  in compensation;

         (xvi)    has not made or pledged to make any charitable or other
                  capital contribution;

         (xvii)   has not suffered or experienced any other occurrence, event,
                  incident, action, failure to act, or transaction outside the
                  Ordinary Course of Business;

         (xviii)  has not declared or paid any dividend or other distribution,
                  whether in cash or other property; and

         (xix)    has not entered into a commitment to do any of the foregoing.

      (j)   Undisclosed Liabilities. The Company has no Liability (and to the
            Knowledge of the Company and the Principal Shareholders there is no
            basis for any present or future action, suit, proceeding, hearing,
            investigation, charge, complaint, claim or demand against the
            Company giving rise to any Liability), except for (i) Liabilities
            set forth on the face of the Financial Statements, and (ii)
            Liabilities which have arisen after the date of the Financial
            Statements in the Ordinary Course of Business (none of which results
            from, arises out of, or was caused by any breach of contract, breach
            of warranty claims, product liability, tort,

                                     - 23 -
<PAGE>

            infringement, or violation of law), (iii) Liabilities which will
            arise from and after the Closing Date in the Ordinary Course of
            Business under contracts, instruments and similar obligations of the
            Company to be performed following the Closing Date and (iv)
            Liabilities set forth on Section 3(j) of the Company Disclosure
            Schedule ("UNDISCLOSED LIABILITIES").

      (k)   Legal Compliance. Except as set forth on Section 3(k) of the Company
            Disclosure Schedule, the Company (or parties under contractual
            obligation to the Company) now holds, and as of the Closing Date
            will hold, all licenses, certificates, approvals and permits from
            all state, United States, foreign and other regulatory authorities,
            including but not limited to the FDA and any foreign regulatory
            authorities performing functions similar to those performed by the
            FDA, that are material to the conduct of the Business of the Company
            (as such Business is currently conducted), except for such licenses,
            certificates, approvals and permits the failure of which to hold
            would not have a Material Adverse Effect on the Business of the
            Company, all of which are valid and in full force and effect (and
            there is no proceeding pending or, to the Knowledge of the Company
            and the Principal Shareholders, threatened which may cause any such
            license, certificate, approval or permit to be withdrawn, cancelled,
            suspended or not renewed). To the Knowledge of the Company and the
            Principal Shareholders, the Company is not in violation of any
            material law, order, rule, regulation, writ, injunction or decree of
            any court or governmental agency or body, including, but not limited
            to, those promulgated by the FDA. To the Knowledge of the Company
            and the Principal Shareholders, no event has occurred and no
            condition or circumstance exists, that might with or without notice
            or lapse of time constitute or result directly or indirectly in a
            material violation by the Company, or a failure on the part of the
            Company to comply with any Legal Requirement, and the Company has
            not received, at any time, any notice or other communication in
            writing or otherwise from any Governmental Body or any other Person
            regarding (i) any actual, alleged, or potential violation of, or
            failure to comply with any Legal Requirement, or (ii) any actual,
            alleged, possible or potential obligation on the part of the Company
            to undertake or bear all or any portion of the cost of, any cleanup
            or remedial, corrective or response action of any nature. No prior
            notice, consent or waiver from any Person, other than the consents
            and waivers listed on Schedule B are required to consummate the
            transactions contemplated in this Agreement.

      (l)   Clinical Trials. All clinical studies and tests (including, but
            without limitation the human clinical trials and animal studies)
            conducted by the Company or in which the Company has participated
            are set forth in Section 3(l) of the Company Disclosure Schedule,
            and, to the Knowledge of the Company and the Principal Shareholders,
            such studies, to the extent the study IND application was held by
            the Company, and tests that were conducted on behalf of the Company,
            were and, if still pending, are being conducted in all material
            respects (i) in accordance with the protocols, procedures and
            controls for such studies and tests of new medical devices or
            biologic products, as the case may be, and (ii) in accordance with
            all applicable laws, rules and regulations; the descriptions of the
            results of such

                                     - 24 -
<PAGE>

            studies and tests are set forth in Section 3(l) of the Company
            Disclosure Schedule and are accurate, complete and fair, and neither
            the Company nor the Principal Shareholders has Knowledge of any
            other studies or tests, the results of which call into question the
            results described or referred set forth is Section 3(l) of the
            Company Disclosure Schedule, and the Company has not received any
            notices or correspondence from the FDA or any other governmental
            agency requiring the termination, suspension or modification of any
            studies, to the extent the study IND application was held by the
            Company, or tests conducted by, or on behalf of, the Company or in
            which the Company has participated that are set forth in Section
            3(l) of the Company Disclosure Schedule that would cause the Company
            to change the descriptions in Section 3(l) of the Company Disclosure
            Schedule;

      (m)   Tax Matters.

         (i)      The Targeted Affiliated Group has filed all Tax Returns that
                  it was required to file under applicable laws and regulations
                  for each taxable period during which the Company (or its
                  predecessors) was a member of such Affiliated Group. The
                  Company has filed all Tax Returns that it was required to
                  file. All such Tax Returns were correct and complete in all
                  material respects and have been prepared in substantial
                  compliance with all applicable laws and regulations. All
                  material Taxes due and payable by the Company (whether or not
                  shown on any Tax Return), except for sales or use Taxes
                  reflected on the Closing Date Balance Sheet, have been paid.
                  No claim has ever been made by an authority in a jurisdiction
                  where the Company does not file Tax Returns that the Company
                  is or may be subject to taxation by that jurisdiction. There
                  are no Security Interests on any of the assets of the Company
                  that arose in connection with any failure (or alleged failure)
                  to pay any Tax. The Company has not been a member of an
                  Affiliated Group (other than a group the common parent of
                  which was Targeted) that has filed a "consolidated return"
                  within the meaning of Code Section 1501, or has filed a
                  combined or consolidated return with another entity with any
                  other taxing authority.

         (ii)     Each member of the Targeted Affiliated Group has made all
                  withholdings of Taxes required to be made in connection with
                  amounts paid or owing to any employee, independent contractor,
                  creditor, shareholder, or other third party and such
                  withholdings have either been paid to the appropriate
                  governmental agency or set aside in appropriate accounts for
                  such purpose.

         (iii)    There is no dispute or claim concerning any material Income
                  Tax liability of the Targeted Affiliated Group for any taxable
                  period during which the Company (or its predecessors) was a
                  member of such Affiliated Group either (A) claimed or raised
                  by any governmental tax authority in a writing or (B) as to
                  which Targeted or any of its officers responsible for Tax
                  matters has Knowledge based upon personal contact with any
                  agent of such tax authority. Neither Targeted nor any officer
                  responsible for Tax

                                     - 25 -
<PAGE>

                  matters of the Company expects any tax authority to assess any
                  additional Taxes against the Company or for which the Company
                  may be liable for any period for which Returns have been
                  filed. The Company is not currently under audit with respect
                  to Taxes by any tax authority, and has not received any notice
                  or other indication that any tax authority is considering
                  assessing any additional Taxes for any period for which Tax
                  Returns have been filed since inception of the Company. There
                  is no dispute or claim concerning any Tax Liability of the
                  Company either (A) claimed or raised by any tax authority in
                  writing or (B) as to which the Company has Knowledge based
                  upon personal contact with any agent or representative of such
                  tax authority. Section 4(m) of the Company Disclosure Schedule
                  lists all material federal, state, local, and foreign income
                  Tax returns filed with respect to the Company for taxable
                  periods ended on or after the inception of the Company,
                  indicates those Tax Returns that have been audited, and
                  indicates those Tax Returns that currently are the subject of
                  audit. The Company has delivered to the Parent true, correct
                  and complete copies of all material federal and foreign income
                  Tax Returns, examination reports, and statements of
                  deficiencies assessed against or agreed to by the Company.

         (iv)     No member of the Targeted Affiliated Group has waived any
                  statute of limitations in respect of Income Taxes or agreed to
                  any extension of time with respect to an Income Tax assessment
                  or deficiency. The Company has not waived any statute of
                  limitations in respect of Taxes or agreed to any extension of
                  time with respect to a Tax assessment or deficiency.

         (v)      The Company has not filed a consent under Code Section 341(f)
                  concerning collapsible corporations. The Company is not a
                  party to any agreement, contract, arrangement or plan that has
                  resulted or would result, separately or in the aggregate, in
                  the payment of any "excess parachute payment" within the
                  meaning of Code Section 280G (or any corresponding provision
                  of state, local or foreign Tax law). The Company has not been
                  a United States real property holding corporation within the
                  meaning of Code Section 897(c)(2) during the applicable period
                  specified in Code Section 897(c)(1)(A)(ii). Each member of the
                  Targeted Affiliated Group has disclosed on its federal Income
                  Tax Returns all positions taken therein that could give rise
                  to a substantial understatement of federal Income Tax within
                  the meaning of Code Section 6662. The Company (or its
                  predecessors) (x) has not been a member of an Affiliated Group
                  filing a consolidated federal Income Tax Return (other than a
                  group the common parent of which was Targeted) and (y) has no
                  liability for the Taxes of any Person (other than the Company
                  and the Targeted Affiliated Group) under Treasury Regulation
                  Section 1.1502-6 (or any similar provision of state, local, or
                  foreign law), as a transferee or successor, by contract, or
                  otherwise.

                                     - 26 -
<PAGE>

         (vi)     The unpaid Taxes of the Company did not, as of the date of the
                  Financial Statements, exceed the reserve for Tax liability
                  (rather than any reserve for deferred Taxes established to
                  reflect timing differences between book and Tax income) set
                  forth on the face of the Financial Statements (rather than in
                  any notes thereto). Since the date of the current Financial
                  Statements, the Company has not incurred any liability for
                  Taxes arising from extraordinary gains or losses, as that term
                  is used in GAAP, outside the ordinary course of business
                  consistent with past custom and practice.

         (vii)    The Company will not be required to include any item of income
                  in, or exclude any item of deduction from, taxable income for
                  any taxable period (or portion thereof) ending after the
                  Closing Date as a result of any: (A) change in method of
                  accounting for a taxable period ending on or prior to the
                  Closing Date; (B) "closing agreement" as described in Code
                  Section 7121 (or any corresponding or similar provision of
                  state, local or foreign Tax law) executed on or prior to the
                  Closing Date; (C) intercompany transactions or any excess loss
                  account described in Treasury Regulations promulgated under
                  Code Section 1502 (or any corresponding or similar provision
                  of state, local or foreign Tax law); (D) instalment sale or
                  open transaction disposition made on or prior to the Closing
                  Date; or (E) prepaid amount received on or prior to the
                  Closing Date.

         (viii)   Notwithstanding any provision to the contrary in this
                  Agreement, with respect to the representations and warranties
                  set forth in this Section 3(m) and the covenants contained in
                  Section 7(f) of this Agreement:

                  (A)   "TARGETED AFFILIATED GROUP" shall mean a group of
                        corporations which includes the Company and only for
                        such period in which the Company is included in such
                        group of corporations;

                  (B)   "TAX RETURNS" when such term is used with reference to
                        Tax Returns required to be filed by the Targeted
                        Affiliated Group, shall only include Tax Returns which
                        report financial data of the Company, such as revenues
                        and expenses, but such term shall not be so limited when
                        referring to Tax Returns required to be filed by the
                        Company; and

                  (C)   "TAX" shall only include Taxes for which the Company is
                        directly or indirectly liable.

      (n)   Real Property. The Company does not own or lease any real property.

      (o)   Intellectual Property.

            (i)   The Company owns, or has the right to use pursuant to license,
                  sublicense, agreement, or permission, all of the Intellectual
                  Property necessary or used in the operation of the Business as
                  presently conducted or as proposed to be conducted, and is not
                  a party to any unwritten or implied licenses. The

                                     - 27 -
<PAGE>

                  Shareholders and each director, officer, employee, or
                  independent contractor of the Company have heretofore
                  transferred to the Company all right, title and interest of
                  such person in and to any Intellectual Property used or
                  necessary for the operation of the Business as presently
                  conducted or as proposed to be conducted. Each item of
                  Intellectual Property owned or used by the Company immediately
                  prior to the Closing hereunder will be owned or available for
                  use by the Surviving Corporation and the Parent on identical
                  terms and conditions immediately subsequent to the Closing
                  hereunder. Except with respect to those Liabilities arising
                  under those licenses, sublicenses, agreements, or permissions
                  for Intellectual Property to which the Company is a party and
                  which Intellectual Property is owned by a third party, as set
                  forth on Section 3(o)(iv) of the Company Disclosure Schedule,
                  the Company has no Liability to any Person with respect to the
                  Intellectual Property, or with respect to the license,
                  distribution, use, creation, development, design,
                  implementation, or adaptation of the Intellectual Property to
                  the Business. The Company has not developed jointly with any
                  other Person, any Intellectual Property that is material to
                  the Business of the Company and with respect to which such
                  other Person has any rights. The Company has not granted or
                  permitted any government agency or instrumentality, foreign or
                  domestic, to obtain unlimited or government purpose license
                  rights or any ownership interest in any technical data or
                  invention belonging to the Company.

            (ii)  To the Knowledge of the Company and the Principal
                  Shareholders, the Company has not interfered with, infringed
                  upon, misappropriated, or otherwise come into conflict with
                  any Intellectual Property rights of third parties, and to the
                  Knowledge of the Company and the Principal Shareholders,
                  neither the Company nor the Shareholders have ever received
                  any charge, complaint, claim, demand, or notice alleging any
                  such interference, infringement, misappropriation, or
                  violation (including any claim that the Company must license
                  or refrain from using any Intellectual Property rights of any
                  third party). To the Knowledge of the Company and the
                  Principal Shareholders, no third party has interfered with,
                  infringed upon, misappropriated, or otherwise come into
                  conflict with any Intellectual Property rights of the Company.

            (iii) Section 3(o)(iii) of the Company Disclosure Schedule
                  identifies each patent or registration which has been issued
                  or transferred to the Company with respect to any of the
                  Company's Intellectual Property, identifies each pending
                  patent application for registration which the Company has made
                  with respect to any of the Company's Intellectual Property,
                  and identifies each license, agreement, or other permission
                  which the Company has granted to any third party with respect
                  to any of the Company's Intellectual Property. The Company has
                  delivered to the Parent true, correct and complete copies of
                  all such patent, trademark and copyright registrations,
                  applications, licenses, agreements, and permissions (as
                  amended to date) and has made available to the Parent true,
                  correct and

                                     - 28 -
<PAGE>

                  complete copies of all other written documentation evidencing
                  ownership and prosecution (if applicable) of each such item.
                  Section 3(o)(iii) of the Company Disclosure Schedule also
                  identifies each trade name or unregistered trademark used by
                  the Company in connection with the Business. With respect to
                  each item of Intellectual Property required to be identified
                  in Section 3(o)(iii) of the Company Disclosure Schedule:

                  (A)   the Company possess all right, title, and interest in
                        and to the item, free and clear of any Security
                        Interest, license, or other restriction;

                  (B)   the item is not subject to any outstanding injunction,
                        judgment, order, decree, ruling, or charge;

                  (C)   no action, suit, proceeding, hearing, investigation,
                        charge, complaint, claim, or demand is pending or, to
                        the Knowledge of the Company or the Principal
                        Shareholders, threatened, which challenges the legality,
                        validity, enforceability, use, ownership of the item;
                        and

                  (D)   the Company has never agreed to indemnify any Person for
                        or against any interference, infringement,
                        misappropriation, or other conflict with respect to the
                        item.

            (iv)  Section 3(o)(iv) of the Company Disclosure Schedule identifies
                  each item of Intellectual Property that any third party owns
                  and that the Company uses or distributes pursuant to license,
                  sublicense, agreement, or permission. The Company has
                  delivered to the Parent true, correct and complete copies of
                  all such licenses, sublicenses, agreements, and permissions
                  (as amended to date). With respect to each item of
                  Intellectual Property required to be identified in Section
                  3(o)(iv) of the Company Disclosure Schedule:

                  (A)   the license, sublicense, agreement, or permission
                        covering the item is legal, valid, binding, enforceable,
                        and in full force and effect, except as limited by (i)
                        applicable bankruptcy, insolvency, reorganization,
                        moratorium and other laws of general application
                        affecting the enforcement of creditors' rights generally
                        and (ii) general principles of equity, regardless of
                        whether asserted in a proceeding in equity or at law;

                  (B)   the license, sublicense, agreement, or permission will
                        continue to be legal, valid, binding, enforceable, and
                        in full force and effect, except as limited by (i)
                        applicable bankruptcy, insolvency, reorganization,
                        moratorium and other laws of general application
                        affecting the enforcement of creditors' rights generally
                        and (ii) general principles of equity, regardless of
                        whether asserted in a

                                     - 29 -
<PAGE>

                        proceeding in equity or at law on identical terms
                        following the consummation of the transactions
                        contemplated hereby;

                  (C)   neither the Company, nor to the Knowledge of the Company
                        and the Principal Shareholders, any other party to the
                        license, sublicense, agreement, or permission, is in
                        breach or default thereunder, and no event has occurred
                        which with notice of lapse of time would constitute a
                        breach or default or permit termination, modification,
                        or acceleration thereunder;

                  (D)   the Company has not, and to the Knowledge of the Company
                        and the Principal Shareholders, no other party to the
                        license, sublicense, agreement, or permission has,
                        repudiated any provision thereof;

                  (E)   with respect to each sublicense, the representations and
                        warranties set forth in subsections (A) through (D)
                        above are true and correct with respect to the
                        underlying license;

                  (F)   the underlying item of Intellectual Property is not
                        subject to any outstanding injunction, judgment, order,
                        decree, ruling, or charge;

                  (G)   no action, suit, proceeding, hearing, investigation,
                        charge, complaint, claim or demand is pending or, to the
                        Knowledge of the Company and the Principal Shareholders,
                        threatened, which challenges the legality, validity, or
                        enforceability of the underlying item of Intellectual
                        Property or alleges infringement by such item of any
                        Intellectual Property rights of any third party; and

                  (H)   the Company has not granted any sublicense or similar
                        right with respect to the license, sublicense,
                        agreement, or permission.

      (p)   Software.

            (i)   The Company does not own any software.

            (ii)  Section 3(p)(ii) of the Company Disclosure Schedule sets forth
                  under the caption "Licensed Software" a true, correct and
                  complete list of all computer programs licensed to the Company
                  by another person (the "LICENSED SOFTWARE") and the license
                  agreements for such programs, whether integrated or bundled
                  with any other software or as a separate stand-alone product.
                  Such license agreements are in full force and effect,
                  unamended by written or oral agreement, and the Company is
                  entitled to the full benefits and advantages of the License
                  Agreements in accordance with their respective terms, except
                  as limited by (i) applicable bankruptcy, insolvency,
                  reorganization, moratorium and other laws of general
                  application affecting the enforcement of creditors' rights
                  generally and (ii) general principles of equity, regardless of
                  whether asserted in a proceeding

                                     - 30 -
<PAGE>

                  in equity or at law, and in good standing and there has not
                  been any default by any party thereto.

      (q)   Use of Intellectual Property. To the Knowledge of the Company and
            the Principal Shareholders, neither the existence nor the sale,
            license, lease, transfer, use, reproduction, distribution,
            modification or other exploitation by the Company or any of its
            successors or assigns of any Intellectual Property, as such
            Intellectual Property is or was, or is currently contemplated to be
            sold, licensed, leased, transferred, used or otherwise exploited by
            such persons, does, did or will (A) constitute a misuse or
            misappropriation of any trade secret or proprietary information of
            any other person or a violation of any relevant agreement governing
            the license of the Intellectual Property, or (B) entitle any other
            person to any interest therein, or right to compensation from the
            Company, or any of its respective successors or assigns, by reason
            thereof. The Company has not received any complaint, assertion,
            threat or allegation or otherwise has notice of any lawsuit, claim,
            demand, proceeding or investigation involving matters of the type
            contemplated by the immediately preceding sentence or has Knowledge
            of any facts or circumstances that could reasonably be expected to
            give rise to any such lawsuit, claim, demand, proceeding or
            investigation. Except with respect to Intellectual Property that is
            licensed by the Company from third parties, there are no
            restrictions on the ability of the Company, any of its successors or
            assigns to sell, license, lease, transfer, use, reproduce,
            distribute, modify or otherwise exploit any Intellectual Property.

      (r)   Contracts. Section 3(r) of the Company Disclosure Schedule lists the
            following contracts and other agreements, written or oral, to which
            the Company is a party other than licenses involving Intellectual
            Property disclosed in Section 4(o)(iii) and 4(o)(v) of the Company
            Disclosure Schedule:

         (i)      any agreement (or group of related agreements) for the lease
                  of personal property to or from any Person providing for lease
                  payments in excess of US$20,000 per annum;

         (ii)     any agreement (or group of related agreements) for the
                  purchase or sale of raw materials, commodities, supplies,
                  products, or other personal property, or for the furnishing or
                  receipt of services, the performance of which will extend over
                  a period of more than one year, or which to the Knowledge of
                  the Company and the Principal Shareholders, will result in a
                  loss to the Company, or which involves consideration, in
                  excess of US$20,000;

         (iii)    any agreement with a foreign, federal, state, or local
                  government agency or instrumentality, whether foreign or
                  domestic;

         (iv)     any agreement concerning a partnership or joint venture;

         (v)      any agreement (or group of related agreements) under which any
                  of them have created, incurred, assumed, or guaranteed any
                  Indebtedness, under

                                     - 31 -
<PAGE>

                  which any of them have imposed a Security Interest on any of
                  their assets, tangible or intangible;

         (vi)     any agreement concerning confidentiality or noncompetition
                  except those entered into in the Ordinary Course of Business
                  with Employees of the Company;

         (vii)    any agreement involving the Shareholders to which the Company
                  is a party;

         (viii)   any profit sharing, stock option, stock purchase, stock
                  appreciation, deferred compensation, severance, or other plan
                  or arrangement for the benefit of any of its current or former
                  directors, officers, and employees;

         (ix)     any agreement under which the Company has advanced or loaned
                  any amount in excess of US$20,000 to any of its directors,
                  officers, and employees;

         (x)      any agreement under which the consequences of a default or
                  termination would have a Material Adverse Effect or an
                  obligation in the amount of US$20,000 or more; or

         (xi)     any other agreement (or group of related agreements) the
                  performance of which involves consideration in excess of
                  US$20,000.

            The Company has delivered to the Parent a true, correct and complete
            copy of each written agreement listed in Section 3(r) of the Company
            Disclosure Schedule (as amended to date) and a written summary
            setting forth the terms and conditions of each oral agreement
            referred to in Section 3(r) of the Company Disclosure Schedule. With
            respect to each such agreement: (A) the agreement is legal, valid,
            binding, enforceable, and in full force and effect, subject to (i)
            applicable bankruptcy, insolvency, reorganization, moratorium or
            other laws of general application affecting the enforcement of
            creditors' rights generally and (ii) general principles of equity,
            regardless of whether asserted in a proceeding in equity or at law;
            (B) to the Knowledge of the Company and the Principal Shareholders,
            the agreement will continue to be legal, valid, binding,
            enforceable, and in full force and effect on identical terms
            following the consummation of the transactions contemplated hereby,
            subject to (i) applicable bankruptcy, insolvency, fraudulent
            conveyance or transfer, reorganization, arrangement, moratorium or
            other similar laws from time to time affecting creditor's rights
            generally and (ii) general principals of equity, regardless of
            whether asserted in a proceeding in equity or at law; (C) the
            Company is not, and to the Knowledge of the Company and the
            Principal Shareholders, no other party, is in material breach or
            default, and no event has occurred which with notice or lapse of
            time would constitute a material breach or default, or permit
            termination, modification, or acceleration, under the agreements;
            (D) no party has repudiated or waived any provision of the
            agreement; (E) such agreement does not prohibit or require consent
            in the event of

                                     - 32 -
<PAGE>

            a change of control of the Company; (F) no agreement requires
            performance the cost of which will exceed payments scheduled to be
            received; and (G) to the Knowledge of the Company and the Principal
            Shareholders, no claim or setoff has been or is expected to be
            asserted under or against such agreement; and (H) no renegotiations,
            attempts to renegotiate have occurred and there are no outstanding
            rights to renegotiate.

      (s)   Powers of Attorney. To the Knowledge of the Company and the
            Principal Shareholders, there are no outstanding powers of attorney
            executed on behalf of the Company.

      (t)   Insurance. Section 3(t) of the Company Disclosure Schedule sets
            forth the following information with respect to each insurance
            policy (including policies providing property, casualty, liability,
            and workers' compensation coverage and bond and surety arrangements)
            to which the Company has been a party, a named insured, or otherwise
            the beneficiary of coverage at any time during the past three years:

            (i)   the name, address, and telephone number of the agent;

            (ii)  the name of the insurer, the name of the policyholder, and the
                  name of each covered insured;

            (iii) the policy number and the period of coverage;

            (iv)  the scope (including an indication of whether the coverage was
                  on a claims made, occurrence, or other basis) and amount
                  (including a description of how deductibles and ceilings are
                  calculated and operate) of coverage;

            (v)   a description of any retroactive premium adjustments or other
                  loss-sharing arrangements; and

            (vi)  a summary of the loss experience under the policy and a
                  statement describing each claim brought under the policy,
                  which sets forth the name of the claimant and a description of
                  the claim.

            With respect to each such insurance policy: (A) all policy premiums
            due to date have been paid in full, and to the Knowledge of the
            Company and the Principal Shareholders, the policy is legal, valid,
            binding, enforceable, and in full force and effect with respect to
            the periods for which it purports to provide coverage subject to (i)
            applicable bankruptcy, insolvency, reorganization, moratorium and
            other laws of general application affecting the enforceability of
            creditors' rights generally and (ii) general principles of equity,
            regardless of whether asserted in a proceeding in equity or at law;
            (B) the Company or, to the Knowledge of the Company and the
            Principal Shareholders, any other party to the policy, is in breach
            or default (including with respect to the payment of premiums or the
            giving of notices), and no event has occurred which, with notice or
            the lapse of

                                     - 33 -
<PAGE>

            time, would constitute such a breach or default, or permit
            termination, modification, or acceleration, under the policy; and
            (C) no party to the policy has repudiated any provision thereof.
            Section 4(t) of the Company Disclosure Schedule describes any
            self-insurance arrangements affecting the Company.

      (u)   Litigation. The Company:

            (i)   is not subject to any outstanding injunction, judgment, order,
                  decree, ruling, or charge; and

            (ii)  is not a party and, to the Knowledge of the Company and the
                  Principal Shareholders, has not been threatened to be made a
                  party to any action, suit, proceeding, hearing, or
                  investigation of, in, or before any court or quasi-judicial or
                  administrative agency of any federal, state, local, or foreign
                  jurisdiction or before any arbitrator.

      (v)   Product Liability. There are no existing or, to the Knowledge of the
            Company and the Principal Shareholders, threatened, claims against
            the Company arising out of any injury to individuals or property as
            a result of the ownership, possession, or use of any product
            manufactured, sold, leased, or delivered by the Company which could
            result in Liability to the Company and the Company has no Knowledge
            of a reasonable basis for any such claim.

      (w)   Employees. Section 3(w) of the Company Disclosure Schedule sets
            forth (i) the name and the current annual salary (or hourly wage),
            including any bonus or commitment to pay any other amount or benefit
            in connection with a termination of employment, if applicable, (ii)
            the date of execution of each employee's invention disclosure and
            confidentiality agreement and (iii) the specific identity of the
            employing entity, of all present employees, consultants, and
            independent contractors employed by the Company. To the Knowledge of
            the Company and the Principal Shareholders, no executive, key
            employee, or group of employees has any plans to terminate
            employment with the Company. The Company is not a party to or bound
            by any collective bargaining agreement, nor has it experienced any
            strikes, grievances, claims of unfair labour practice. The Company
            and the Principal Shareholders have no Knowledge of any
            organizational effort presently being made or threatened by or on
            behalf of any labour union with respect to the Company's employees.
            There are no written employment or similar agreements for a fixed
            term between any employee of the Company and the Company.

                                     - 34 -
<PAGE>

      (x)   Employee Benefits.

         (i)      Except for members of the Targeted Affiliated Group, no other
                  corporation, trade, business, or other entity, would, together
                  with the Company constitute a single employer within the
                  meaning of Code Section 414.

         (ii)     Section 3(x) of the Company Disclosure Schedule contains a
                  true and complete list of all of the Employee Benefit Plans
                  which are presently in effect or which have previously been in
                  effect (the "COMPANY PLANS").

         (iii)    Each Company Plan has been administered in all material
                  respects in accordance with its terms and is in compliance in
                  all material respects with the applicable provisions of U.S.
                  federal and state law. All reports, returns and similar
                  documents required to be filed with any governmental agency or
                  distributed to any participant of each Company Plan have been
                  duly and timely filed or distributed in all material respects.

         (iv)     No actions, suits or claims (other than routine claims for
                  benefits in the ordinary course) are pending or, to the
                  Knowledge of the Company and the Principal Shareholders,
                  threatened, with respect to any Company Plan and no event or
                  condition exists or may be reasonably expected to occur which
                  would result in the Company having any liability in respect of
                  any Company Plan not reflected on the Financial Statements.

         (v)      No statement either written or oral, has been made by the
                  Company to any individual with regard to any Company Plan that
                  was not in accordance with the respective Company Plan and
                  that could create Tax or Liability for the Company or Company
                  Plan.

         (vi)     The Company has made all contributions or payments to or under
                  each Company Plan required by law, or by the terms of such
                  Company Plan.

         (vii)    There is no lien outstanding upon any assets of the Company
                  pursuant to Code Section 412(n) in favour of any Company Plan.

         (viii)   The Company does not have any past, present or future
                  obligation or liability to contribute to any multiemployer
                  plan as defined in ERISA Section 3(37).

         (ix)     the Company is not obligated, contingently or otherwise, under
                  any agreement to pay any amount which would be treated as a
                  "parachute payment," as defined in Code Section 280G(b)
                  (determined without regard to Code Section 280G(b)(2)(A)(ii)).

         (x)      With respect to each of the Company Plans:

                                     - 35 -
<PAGE>

                  (A)   each of the Company Plans has been established,
                        maintained, funded and administered in all material
                        respects in accordance with its governing documents, and
                        any applicable provisions of ERISA, the Code, other
                        applicable law, and all regulations promulgated
                        thereunder;

                  (B)   none of the Company Plans nor any Fiduciary has engaged
                        in a Prohibited Transaction as defined in ERISA Section
                        406 or Code Section 4975 (for which no individual or
                        class exemption exist under ERISA Section 408 or Code
                        Section 4975, respectively);

                  (C)   all filings and reports as to each of the Company Plans
                        required to have been made on or before the Closing Date
                        to the Internal Revenue Service, or to the United States
                        Department of Labor or to the Pension Benefit Guaranty
                        Corporation, have been or will be duly made by that
                        date;

                  (D)   each of the Company Plans which is intended to qualify
                        as a tax-qualified retirement plan under Code Section
                        401(a) has received a favourable determination letter(s)
                        from the Internal Revenue Service as to qualification of
                        such Company Plan for the period from its adoption
                        through the Closing Date; nothing has occurred, whether
                        by action or failure to act, which has resulted in or
                        would cause the loss of such qualification; and each
                        trust thereunder is exempt from tax pursuant to Code
                        Section 501(a);

                  (E)   each of the Company Plans which is required to satisfy
                        Code Sections 401(k)(3) or 401(m)(2) has been tested for
                        compliance with, and has satisfied the requirements of,
                        Code Sections 401(k)(3) and 401(m)(2) for each plan year
                        ending prior to the Closing Date;

                  (F)   no event has occurred and no condition exists relating
                        to any of the Company Plans that would subject the
                        Company to any Tax or Liability under Internal Revenue
                        Service Sections 4971, 4972 or 4979, or to any Liability
                        under ERISA Sections 502 or 4071; and

                  (G)   to the extent applicable, each of the Company Plans has
                        been funded in accordance with its governing documents,
                        ERISA and the Code or other applicable law, has not
                        experienced any accumulated funding deficiency (whether
                        or not waived) and has not exceeded its full funding
                        limitation (within the meaning of Code Section 412) at
                        any time.

         (xi)     With respect to the Company Plans which provide group health
                  benefits to employees of the Company and are subject to the
                  requirements of Code Section 4980B and Part 6, Subtitle B of
                  Title I of ERISA ("COBRA"),

                                     - 36 -
<PAGE>

                  such group health plan has been administered in every material
                  respect in accordance with its governing documents and COBRA
                  and with the group health plan requirements of Subtitle K,
                  Chapter 100 of the Code and ERISA Sections 701 et. seq.

         (xii)    With respect to the Company Plans which provide group health
                  benefits to employees of the Company and are subject to the
                  requirements of the Health Insurance Portability and
                  Accountability Act ("HIPAA") and its implementing regulations,
                  such group health plan has been administered in every material
                  respect in accordance with its governing documents and HIPAA
                  and with the group health plan requirements of 45 CFR parts
                  160 through 164.

         (xiii)   With respect to employee benefit matters generally:

                  (A)   neither the Company, nor any person, firm or corporation
                        which is or has been under common control of the Company
                        within the meaning of Section 4001(b) of ERISA,
                        maintains or contributes to or has ever maintained or
                        contributed to any Employee Benefit Plan subject to
                        Title IV of ERISA, or ERISA Section 302 or Code Section
                        412 or 4971;

                  (B)   other than the acceleration of stock options pursuant to
                        Section 2.7(i), the consummation of the transactions
                        contemplated hereby will not accelerate or increase any
                        Liability under any of the Company Plans because of an
                        acceleration or increase of any of the rights or
                        benefits to which Company Plan participants or
                        beneficiaries may be entitled thereunder;

                  (C)   the Company does not have any obligation to any retired
                        or former employee or any current employee of the
                        Company upon retirement or termination of employment
                        under any Company Plans, other than such obligations
                        imposed by COBRA; and

                  (D)   any of the Company Plans which is an "employee welfare
                        benefit plan," within the meaning of ERISA Section 3(1),
                        may be terminated prospectively without Liability to the
                        Company or the Parent, including, without limitation,
                        Liability for unreported (e.g., run-off) benefit claims,
                        premium adjustments or termination charges of any kind.

         (xiv)    If any Employee Benefit Plan subject to Title IV of ERISA were
                  terminated by the Company the fair market value of the assets
                  of such plan as of the plan termination date would equal or
                  exceed the plan's "benefit liabilities," as such term is
                  defined in Section 4001(a)(16) of ERISA, assuming such funding
                  status is determined using actuarial factors and

                                     - 37 -
<PAGE>

                  applying such other principles that are legally required to be
                  given effect in the context of the termination of a plan
                  subject to Title IV of ERISA.

      (y)   Guaranties. The Company is not a guarantor or otherwise liable for
            any Liability or obligation (including Indebtedness) of any other
            Person.

      (z)   Environment, Health, and Safety.

            (i)   The Company has complied with all Environmental, Health, and
                  Safety Laws, the failure to comply with which could result in
                  Adverse Consequences in an amount in excess of US$20,000
                  individually or in the aggregate, and no action, suit,
                  proceeding, hearing, investigation, charge, complaint, claim,
                  demand, or notice has been filed or commenced against the
                  Company alleging such failure.

            (ii)  The Company has no Liability (and the Company has not handled,
                  used, stored, treated, recycled or disposed of any Hazardous
                  Substance, arranged for the disposal of any Hazardous
                  Substance, exposed any employee or other individual to any
                  Hazardous Substance or condition, or owned or operated any
                  property or facility in any manner that could form the basis
                  for any present or future action, suit, proceeding, hearing,
                  investigations, charge, complaint, claim or demand giving rise
                  to any Liability) for penalties, investigations of or damage
                  to any site, location, body of water (surface or subsurface),
                  or other natural resources, for any illness of or personal
                  injury to any employee or other individual, or for any reason
                  under any Environmental, Health, and Safety Laws.

            (iii) Except as set forth in Section 4(z)(iii) of the Company
                  Disclosure Schedule, all properties and equipment used in the
                  Business are and in the past have been free of any amounts of
                  asbestos, PCB's, methylene chloride, trichlorethylene,
                  1,2-trans-dichloroethylene, dioxins, dibenzofurans, and
                  Extremely Hazardous Substances, the presence of which could
                  result in Adverse Consequences.

      (aa)  Certain Business Relationships with the Company. No Related Person
            of the Company has or has had, any interest in any property (whether
            real, personal, or mixed and whether tangible or intangible) used in
            or pertaining to the Company, or the Business. No Related Person of
            the Company owns or has owned (of record or as a beneficial owner)
            an equity interest or any other financial or profit interest in, a
            Person that has had business dealings or a material financial
            interest in any transaction with the Company, or the Business.

      (bb)  Certain Payments. Neither the Company, nor any of its directors,
            officers, agents, or employees, nor to the Knowledge of the Company
            and the Principal Shareholders, any other person associated with or
            acting for or on behalf of the Company, has directly or indirectly
            (i) made any contribution, gift, bribe, rebate, payoff, influence
            payment, kickback, or other payment to any Person, private or

                                     - 38 -
<PAGE>

            public, regardless of form, whether in money, property or services
            (A) to obtain favourable treatment in securing business, (B) to pay
            for favourable treatment for business secured, (C) to obtain special
            concessions or for special concessions already obtained, for or in
            respect of the Company or any affiliate, or (D) in violation of any
            Legal Requirement, or (ii) established or maintained any fund or
            asset that has not been recorded in the books and records of the
            Company.

      (cc)  Access. The Company and the Principal Shareholders have provided the
            Parent and the Parent's representatives with full and complete
            access to all of the Company's records and other documents and data.

      (dd)  Vote Required. The affirmative vote of the holders of two-thirds
            (2/3) of the outstanding shares of the Company's common stock and
            preferred stock voting together as a single class is the only vote
            of the holders of any class or series of the Company's capital stock
            or other securities necessary to adopt this Agreement and to approve
            the Merger and other transactions contemplated by this Agreement.

4.    REPRESENTATIONS AND WARRANTIES OF THE PARENT AND MERGER SUB.

      The Parent and Merger Sub jointly and severally represent and warrant to
      the Company and the Shareholders that the statements contained in this
      Section 4 are true, correct and complete as of the date hereof and will be
      true, correct and complete as of the Closing Date:

      (a)   Organization. The Parent is a corporation duly organized, validly
            existing, and in good standing under the laws of the jurisdiction of
            its incorporation. The Merger Sub is a corporation duly organized,
            validly existing and authorized to do business in a corporate form
            in Washington State. Each of the Parent and Merger Sub is duly
            qualified as a corporation to do business in every jurisdiction
            where such qualification is required, except where the lack of
            qualification would not have a Material Adverse Effect.

      (b)   Authorization of Transaction. Each of the Parent and Merger Sub has
            full corporate power and authority to execute and deliver this
            Agreement and, with respect to the Parent, the Convertible
            Debenture, and to perform its respective obligations hereunder and
            thereunder. This Agreement constitutes the valid and legally binding
            obligation of the Parent and Merger Sub, enforceable in accordance
            with its terms and conditions except as limited by (i) applicable
            bankruptcy, insolvency, reorganization, moratorium and other laws of
            general application affecting the enforcement of creditors' rights
            generally and (ii) general principles of equity, regardless of
            whether asserted in a proceeding in equity or at law. Upon the
            execution and delivery of the Convertible Debenture, the Convertible
            Debenture will constitute the valid and legally binding obligation
            of the Parent, enforceable in accordance with its terms and
            conditions, subject to applicable bankruptcy, insolvency, fraudulent
            conveyance or transfer,

                                     - 39 -
<PAGE>

            reorganization arrangement or moratorium or other similar laws from
            time to time affecting creditors' rights generally. As of the
            Closing Date, the Parent and Merger Sub will have obtained any
            authorization, consent, or approval of any government or
            governmental agencies that they require in order for the Parties to
            consummate the transactions contemplated by this Agreement.

      (c)   Noncontravention. Neither the execution and the delivery of this
            Agreement, nor the Convertible Debenture, nor the consummation of
            the transactions contemplated hereby or thereby will (i) violate any
            constitution, statute, law, regulation, rule, injunction, judgment,
            order, decree, ruling, charge, or other restriction of any
            government, governmental agency, or court to which the Parent and
            Merger Sub is subject or any provision of the constating documents,
            board resolutions or shareholder resolutions of the Parent and
            Merger Sub or (ii) conflict with, result in a violation of, result
            in a breach of, constitute a default under, result in the
            acceleration of, create in any party the right to accelerate,
            terminate, modify, or cancel, or require any notice under any
            agreement, contract, lease, license, instrument, or other
            arrangement to which the Parent and Merger Sub is a party or by
            which it is bound or to which any of its assets is subject (or
            result in the imposition of any Security Interest upon any of its
            assets, other than that imposed by the Security Agreement) or (iii)
            give any Governmental Body or other Person a valid right to
            challenge this Agreement or any of the transactions contemplated
            hereby or to exercise any remedy or obtain any relief under any
            Legal Requirement or any Order to which the Parent and Merger Sub or
            any of its assets are subject.

      (d)   Broker's Fees. Neither the Parent, nor Merger Sub has incurred any
            Liability or obligation to pay any fees or commissions to any
            broker, finder, or agent with respect to the transactions
            contemplated by this Agreement or the Convertible Debenture for
            which the Shareholders could become liable or obligated.

      (e)   The Parent Shares. Assuming the representations and warranties of
            the Shareholders contained in the relevant Representation and
            Support Agreement are true and correct, upon issuance thereof to the
            Shareholders in accordance with Section 2.7(c), the Parent Shares
            will be duly and validly authorized, allotted and issued as
            fully-paid and non-assessable common shares in the capital of the
            Parent in compliance with all applicable laws including federal and
            provincial securities laws.

      (f)   Convertible Debenture and Convertible Debenture Shares. Upon
            issuance thereof to the Shareholders in accordance with Section
            2.7(c)(vi), the Convertible Debenture will be duly and validly
            created, authorized, allotted and issued in compliance with all
            applicable laws including federal and provincial securities laws,
            and the Convertible Debenture Shares will, if issued, be duly and
            validly authorized, allotted and issued as fully-paid and
            non-assessable common shares in the capital of the Parent in
            compliance with all applicable laws including federal and provincial
            securities laws.

                                     - 40 -
<PAGE>

      (g)   Foreign Issuer. The Parent is a "foreign issuer" as such term is
            defined in Regulation S promulgated under the U.S. Securities Act.

      (h)   Public Disclosure Record. All documents filed by the Parent on the
            System for Electronic Document Analysis and Retrieval (SEDAR) as of
            the applicable date of such documents contained no untrue statement
            of a material fact and did not omit to state a material fact that
            was required to be stated or that was necessary to prevent a
            statement that was made from being false or misleading in the
            circumstances in which it was made. Each of the financial statements
            filed by Parent on SEDAR is true, correct, complete and consistent
            with the books and records of Parent. Each of such financial
            statements has been prepared in accordance with Canadian GAAP
            applied on a consistent basis throughout the periods covered thereby
            and presents fairly the financial condition and results of
            operations and cash flows of Parent at the dates and for the periods
            specified, subject, in the case of unaudited financial statements,
            to the absence of notes and the absence of normal recurring year-end
            adjustments and procedures (none of which require material
            adjustment or are inconsistent with past practice). Neither Parent,
            nor its Board of Directors or its Audit Committee has received a
            report from Parent's auditors noting the existence of a material
            weakness nor a significant deficiency with respect to Parent's
            internal controls. No securities commission in any jurisdiction in
            which Parent is a reporting issuer has commented as to the
            disclosure contained in Parent's public reports, unless such
            comments have been resolved and are currently reflected in Parent's
            public reports. Parent does not currently anticipate amending or
            restating any of its public reports.

5.    CONDITIONS TO OBLIGATION TO CLOSE.

      (a)   Conditions to Obligation of the Parent and Merger Sub. The
            obligation of the Parent and Merger Sub to consummate the
            transactions to be performed by them in connection with the Closing
            is subject to satisfaction of the following conditions:

         (i)      the representations and warranties set forth in Section 3
                  above (considered collectively) and each of the
                  representations and warranties (considered individually) shall
                  be true and correct in all material respects at and as of the
                  date of this Agreement and at and as of the Closing Date;

         (ii)     the Company and the Principal Shareholders shall have
                  performed and complied with all of their covenants and
                  obligations hereunder (considered collectively) and each of
                  such covenants and obligations hereunder (considered
                  individually) in all material respects through the Closing;

         (iii)    the Company shall have procured all of the third party
                  consents specified on Schedule B hereto;

                                     - 41 -
<PAGE>

         (iv)     no action, suit, or proceeding shall be pending or threatened
                  before any court or quasi-judicial or administrative agency of
                  any federal, state, local, or foreign jurisdiction or before
                  any arbitrator wherein an unfavourable injunction, judgment,
                  order, decree, ruling, or charge would (A) prevent
                  consummation of any of the transactions contemplated by this
                  Agreement, (B) cause any of the transactions contemplated by
                  this Agreement to be rescinded following consummation, or (C)
                  affect adversely the right of the Company Shares and other
                  Equity Rights to be cancelled upon the Merger, or Merger Sub
                  to own the assets of the Company, or to operate the Business
                  (and no such injunction, judgment, order, decree, ruling, or
                  charge shall be in effect);

         (v)      all filings that are required to have been made by the Parties
                  with any Canadian, United States or other Governmental Body in
                  order to carry out the transactions contemplated by this
                  Agreement shall have been made and all authorizations,
                  consents and approvals from any Canadian, United States or
                  other Governmental Body required to carry out the transactions
                  contemplated by this Agreement shall have been received and
                  any applicable waiting periods (and any extensions thereof)
                  shall have expired provided, that Parent and Merger Sub shall
                  not be relieved of their obligations to consummate the
                  transactions if they have not used reasonable best efforts to
                  complete filings and seek the consents within their control;

         (vi)     the Company shall have delivered to the Parent a certificate,
                  executed by the Company to the effect that the conditions
                  specified above in Sections 5(a)(i)-5(a)(v) have been
                  satisfied in all respects;

         (vii)    each of Alan Hardwick and Suzanne Schneider shall have entered
                  into a definitive Employment Agreement with the Surviving
                  Corporation (each, an "EMPLOYMENT AGREEMENT"), each containing
                  provisions relating to non-compete obligations satisfactory to
                  the Parent and each in form and substance and with a term
                  reasonably satisfactory to the Parent and the same shall be in
                  full force and effect.

         (viii)   [This section has been intentionally deleted.]

         (ix)     [This section has been intentionally deleted.]

         (x)      other than the funding pursuant to Sections 6(d) and (e) the
                  Company shall have delivered to the Parent payoff letters with
                  respect to all other amounts due under the Indebtedness of the
                  Company, to release Security Interests in respect to the
                  Company and otherwise obtain clear title to the Company
                  Shares, in form and substance reasonably satisfactory to the
                  Parent, and the Company and the Principal Shareholders shall
                  have satisfied all Indebtedness of the Company (including the
                  conversion of any and all Indebtedness owing by the Company to
                  any member of the

                                     - 42 -
<PAGE>

                  Targeted Affiliated Group into contributed capital of the
                  Company), and the Company shall have delivered to the Parent,
                  in form satisfactory to the Parent, evidence of the same;

         (xi)     the Parent, the Company and the Shareholder Representative
                  shall have executed and delivered the Milestone Payment
                  Agreement (the "MILESTONE PAYMENT AGREEMENT") in form and
                  substance as set forth in Exhibit C attached hereto, and the
                  same shall be in full force and effect;

         (xii)    the Parent, the Company and Targeted shall have executed the
                  Transition Services Agreement (the "TRANSITION SERVICES
                  AGREEMENT") in form and substance as set forth in Exhibit D
                  attached hereto, and the same shall be in full force and
                  effect;

         (xiii)   the Parent shall have received from Dorsey & Whitney LLP,
                  counsel to Targeted, opinions with respect to Targeted
                  Genetics, the transactions contemplated hereby in form and
                  substance as set forth in Exhibit E attached hereto, addressed
                  to the Parent, and dated as of the Closing Date;

         (xiv)    the Parent shall have received from Graham & Dunn PC, counsel
                  to the Company, opinions with respect to the Company and the
                  transactions contemplated hereby in form and substance set
                  forth in Exhibit F attached hereto, addressed to the Parent,
                  and dated as of the Closing Date;

         (xv)     the Company shall have delivered to the Parent evidence
                  reasonably satisfactory to the Parent of the termination of
                  all Equity Rights and the release of all Liability with
                  respect to the Equity Rights;

         (xvi)    Targeted and the Company shall have taken all corporate action
                  necessary to terminate the Company's participation in,
                  effective no later than the day before the Closing Date, all
                  Company Plans which are intended to qualify as tax-qualified
                  retirement plans under Code Section 401(a), and evidence of
                  the same shall have been delivered to the Parent;

         (xvii)   the Company and the Principal Shareholders shall have executed
                  a funds flow and settlement statement reflecting the
                  transactions contemplated by this Agreement;

         (xviii)  the Company shall have delivered to the Parent a certificate
                  of the Secretary of the Company as to the incumbency of its
                  officers, a copy of a certificate evidencing the incorporation
                  and its authorization to conduct business in the State of
                  Washington, a copy of the articles and bylaws of the Company,
                  and a copy of the resolutions adopted by the board of
                  directors and the Shareholders of the Company authorizing the
                  Merger and the transactions contemplated by this Agreement;

         (xix)    all actions to be taken by the Company in connection with
                  consummation of the transactions contemplated hereby and all
                  certificates, opinions,

                                     - 43 -
<PAGE>

                  instruments, and other documents required to effect the
                  transactions contemplated hereby will be reasonably
                  satisfactory in form and substance to the Parent;

         (xx)     any orders or approvals which may be required from
                  shareholders of the Parent, and regulatory and governmental
                  authorities required to carry out the transactions
                  contemplated by this Agreement shall have been received and
                  any applicable waiting periods shall have expired, including,
                  without limitation, approvals from the Toronto Stock Exchange,
                  including conditional listing approval of the Parent Shares
                  and the Convertible Debenture Shares to be issued in
                  connection with this Agreement and under the Convertible
                  Debenture on the Toronto Stock Exchange, subject to the filing
                  of customary documentation;

         (xxi)    no Person shall have made or threatened any claim asserting
                  that such Person may be the holder or the beneficial owner of,
                  or may have the right to acquire or obtain beneficial
                  ownership of, any capital stock or other securities of the
                  Company;

         (xxii)   the Shareholder Representative shall have executed and
                  delivered the Convertible Debenture in form and substance as
                  set forth in Exhibit A attached hereto, and the same shall be
                  in full force and effect;

         (xxiii)  the Shareholder Representative shall have executed and
                  delivered the Security Agreement (the "SECURITY AGREEMENT") in
                  form and substance as set forth in Exhibit G hereto, and the
                  same shall be in full force and effect;

         (xxiv)   there shall have been no Material Adverse Effect with respect
                  of the Company since the date of this Agreement;

         (xxv)    this Agreement and the transactions contemplated hereby shall
                  have been duly and validly approved by all of the Shareholders
                  of the Company and none of the holders of the outstanding
                  Company Shares shall have exercised statutory dissenters'
                  rights under Washington law in connection with the Merger;

         (xxvi)   each Shareholder shall have duly executed and delivered to the
                  Parent a representation and support agreement (the
                  "REPRESENTATION AND SUPPORT AGREEMENT") in form and substance
                  set forth in Exhibit H hereto;

         (xxvii)  each person who as at the Closing Date has elected to exercise
                  options to purchase the common shares of the Company shall
                  have duly executed and delivered to the Parent a
                  representation agreement (the "OPTIONHOLDER REPRESENTATION
                  AGREEMENT") in form and substance set forth in Exhibit I
                  hereto;

         (xxviii) the Company shall have obtained shareholder approval of any
                  payment or benefit that a Company employee or consultant may
                  receive in connection

                                     - 44 -
<PAGE>

                  with the Merger that would be considered a "parachute payment"
                  under Section 280G of the Code. Such shareholder approval
                  shall comply with the "Shareholder Approval Requirements" of
                  Section 280(b)(5) of the Code and related Treasury
                  regulations; and

         (xxix)   the Parent shall be satisfied, in its sole discretion, with
                  its due diligence investigation of the Company and the
                  Company's ongoing working capital requirements.

            The Parent may waive any condition specified in this Section 5(a) if
            it executes a writing so stating at or prior to the Closing.

      (b)   Conditions to Obligation of the Company and the Shareholders. The
            obligations of the Company and the Shareholders to consummate the
            transactions to be performed by it in connection with the Closing is
            subject to satisfaction of the following conditions:

         (i)      the representations and warranties set forth in Section 4
                  above (considered collectively), and each representation and
                  warranty (considered individually) shall be true and correct
                  in all material respects at and as of the date of this
                  Agreement and at and as of the Closing Date;

         (ii)     the Parent shall have performed and complied with all of its
                  covenants and obligations hereunder (considered collectively)
                  and each of this covenants and obligations hereunder
                  (considered individually) in all material respects through the
                  Closing;

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

         (iv)     all filings that are required to have been made by the Parties
                  prior to Closing with any United States or other Governmental
                  Body in order to carry out the transactions contemplated by
                  this Agreement shall have been made and all authorizations,
                  consents and approvals from any United States or other
                  Governmental Body required to carry out the transactions
                  contemplated by this Agreement shall have been received and
                  any applicable waiting periods (or any extensions thereof)
                  shall have expired provided that the Company and the Principal
                  Shareholders shall not be relieved of their obligations to
                  consummate the transactions contemplated by this Agreement if
                  they have not used reasonable best efforts to complete filings
                  and seek consents within their control;

                                     - 45 -
<PAGE>

         (v)      the Parent shall have delivered to the Company and the
                  Shareholder Representative a certificate to the effect that
                  the conditions specified above in Sections 5(b)(i)-5(b)(v)
                  have been satisfied in all respects;

         (vi)     the Parent shall have executed and delivered the Milestone
                  Payment Agreement in form and substance as set forth in
                  Exhibit C attached hereto, and the same shall be in full force
                  and effect;

         (vii)    the Shareholder Representative shall have received from (i)
                  Fasken Martineau DuMoulin LLP, Canadian counsel to the Parent,
                  an opinion in form and substance as set forth in Exhibit J
                  attached hereto, and (ii) Davis Wright Tremaine LLP, United
                  States counsel to the Parent and Merger Sub, an opinion in
                  form and substance as set forth in Exhibit K attached hereto,
                  each addressed to the Shareholder Representative, and dated as
                  of the Closing Date;

         (viii)   the Parent shall have delivered to the Company and the
                  Shareholder Representative a certificate of the Secretary of
                  the Parent as to the incumbency of the officers of the Parent,
                  a copy of certificates evidencing the incorporation and good
                  standing of the Parent, a copy of the articles and bylaws of
                  the Parent, and a copy of the resolutions adopted by the board
                  of directors of the Parent with respect to the transactions
                  contemplated by this Agreement;

         (ix)     all actions to be taken by the Parent in connection with
                  consummation of the transactions contemplated hereby and all
                  certificates, opinions, instruments, and other documents
                  required to effect the transactions contemplated hereby will
                  be reasonably satisfactory in form and substance to the
                  Company;

         (x)      the Parent shall have executed and delivered the Convertible
                  Debenture in the form and substance as set forth in Schedule A
                  hereto, and the same shall be in full force and effect;

         (xi)     the Shareholder Representative shall have executed and
                  delivered the Security Agreement in form and substance as set
                  forth in Exhibit G hereto, and the same shall be in full force
                  and effect; and

         (xii)    this Agreement and the transactions contemplated hereby shall
                  have been duly and validly approved by not less than
                  two-thirds (2/3) of the outstanding shares of the Company's
                  common stock and preferred stock voting together as a single
                  class.

            The Shareholder Representative may waive any condition specified in
            this Section 5(b) if it executes a writing so stating at or prior to
            the Closing.

                                     - 46 -
<PAGE>

6.    PRE-CLOSING COVENANTS.

      The Parties agree as follows with respect to the period prior to the
      Closing or termination of this Agreement:

      (a)   Access and Investigation. Between the date hereof and the Closing
            Date, the Company and the Principal Shareholders will, and will
            cause their representatives to:

            (i)   afford the Parent, their attorneys, accountants, and other
                  representatives (collectively, the "PARENT'S ADVISORS")
                  reasonable access to the Company, and their personnel,
                  properties (including for purposes of environmental testing),
                  contracts, books and records, financial statements, and other
                  documents and data so as to not unreasonably interfere with
                  the conduct of the Business;

            (ii)  furnish the Parent with copies of all such contracts, books
                  and records, and other existing documents and data as the
                  Parent may reasonably request;

            (iii) furnish the Parent and the Parent's Advisors with such
                  additional financial, operating and other data and information
                  as the Parent may reasonably request; and

            (iv)  use its best efforts to cause each firm acting as independent
                  auditors to the Company (a) to deliver any other information
                  required to be filed by the Parent pursuant to the rules and
                  policies of applicable United States or Canadian securities
                  laws, and (b) to cooperate with the Parent and its auditors to
                  provide "comfort" letters with respect to financial
                  information about the Company that may be required to be
                  included in the Parent's filings with the United States or
                  Canadian securities regulatory authorities.

      (b)   Operation of the Businesses of the Company. Between the date hereof
            and the Closing Date, the Company, and the Principal Shareholders
            will, and the Company will cause its representatives to:

            (i)   conduct the Business only in the Ordinary Course of Business,
                  or otherwise with the written consent of the Parent;

            (ii)  use their best efforts to preserve intact the current business
                  organization of the Company, keep available the services of
                  the current officers, employees, and agents of the Company,
                  maintain the relations and good will with suppliers,
                  customers, landlords, creditors, employees, agents, and others
                  having business relationships with the Company, and maintain
                  such amount of working capital necessary for the Company to
                  conduct the Business in the Ordinary Course of Business; and

            (iii) confer with the Parent concerning operational matters of a
                  material nature and the status of business operations and
                  finances.

                                     - 47 -
<PAGE>

      (c)   Negative Covenant. Except as otherwise expressly permitted by this
            Agreement, between the date of this Agreement and the Closing Date,
            the Company, and the Principal Shareholders will not, without the
            prior consent of the Parent, take any affirmative action, or fail to
            take any reasonable action within their or its control, which would
            cause or result in an inaccuracy or breach of any of the
            representations, warranties or covenants of the Company and the
            Principal Shareholders set forth in this Agreement, including,
            without limitation, any action specified in Section 3(i) of this
            Agreement. Without limiting the generality of the foregoing, the
            Company agrees that it shall not take any of the following actions
            without the prior written consent of the Parent:

         (i)      amend the articles of incorporation or bylaws of the Company;
                  make any change in its authorized, issued or outstanding
                  shares or any other equity security; issue, sell, pledge,
                  assign or otherwise encumber or dispose of, or purchase,
                  redeem or otherwise acquire, any of the shares or other equity
                  securities of the Company or enter into any agreement, call or
                  commitment of any character so to do; grant or issue any stock
                  option or warrant relating to, right to acquire, or security
                  convertible into, shares or other equity security of the
                  Company; purchase, redeem, retire or otherwise acquire any
                  shares of, or any security convertible into, shares or other
                  equity security of the Company, or agree to do any of the
                  foregoing set forth in this Section 6(c)(i);

         (ii)     acquire, directly or indirectly, substantially all of the
                  assets of, or a controlling equity interest in, any
                  corporation or other entity, or enter into any commitment to
                  do the same;

         (iii)    propose, declare, set aside or pay any dividend or other
                  distribution in respect of any of its shares (including,
                  without limitation, any stock dividend or distribution);

         (iv)     incur any Indebtedness, other than normal, Ordinary Course of
                  Business trade payables and accruals;

         (v)      repay any Indebtedness of the Company owing to any member of
                  the Targeted Affiliated Group;

         (vi)     make any distribution outside of the Ordinary Course of
                  Business or any distributions in excess of US$5,000, except
                  upon prior written notice to and written consent of the
                  Parent;

         (vii)    commit to or expend funds for any capital expenditure in
                  excess of US$5,000, except upon prior written notice to and
                  written consent of the Parent;

         (viii)   enter into any agreement, commitment or similar transaction
                  with the Shareholders;

                                     - 48 -
<PAGE>

         (ix)     enter into any employment contract or collective bargaining
                  agreement, written or oral, or modify the terms of any
                  existing such contract or agreement, except as disclosed in
                  the Company Disclosure Schedule;

         (x)      grant any increase in the base compensation of any of its
                  directors, officers, and employees outside the Ordinary Course
                  of Business;

         (xi)     adopt, amend, modify, or terminate any bonus, profit-sharing,
                  incentive, severance, or other plan, contract, or commitment
                  for the benefit of any of its directors, officers, and
                  employees (or take any such action with respect to any other
                  Company Plan), except as disclosed in the Company Disclosure
                  Schedule;

         (xii)    breach, violate, or contravene any provisions of any agreement
                  or commitment to which the Company is a party; and

         (xiii)   make any other change in employment terms for any of its
                  directors, officers, and employees outside the Ordinary Course
                  of Business.

      (d)   Obligation to Fund the Company. If the Company requires working
            capital to fund its operations until the Closing Date in addition to
            the Deposit, Targeted shall advance to the Company the amount
            required. Prior to making any such advances, Targeted shall obtain
            the Parent's prior written consent, which consent shall not be
            unreasonably withheld.

      (e)   Repayment of Advances Made by Targeted. If the Closing Date occurs
            on or before July 27, 2004, then up to United States Fifty Thousand
            Dollars (US $50,000) of any amounts advanced under Section 6(d)
            above shall be excluded from Section 6(f) below and shall be repaid
            in cash by the Parent to Targeted on the Closing Date. The amounts
            repaid pursuant to this Section 6(e) shall not constitute a portion
            of the Merger Consideration.

      (f)   Intercompany Indebtedness. At or prior to the Closing Date, the
            Company and Targeted shall convert any and all Indebtedness owing by
            the Company to any member of the Targeted Affiliated Group (other
            than amounts to be repaid under Section 6(e)) to contributed capital
            of the Company, and evidence of the same shall be delivered by the
            Company and Targeted to the Parent.

      (g)   Termination of Plans. Prior to the Closing Date, the Company will
            terminate all plans or agreements permitting the issuance of Company
            Shares or the shares of the Company; options to acquire Company
            Shares or shares of the Company; and/or other rights to acquire
            Company Shares or shares of the Company, that are valued in whole or
            in part by reference to Company Shares or shares of the Company or
            that may be settled in Company Shares or shares of the Company (such
            option and other rights are hereafter collectively referred to as
            "EQUITY RIGHTS"). Prior to the Closing Date, the Company shall take
            such action as is necessary to cancel, effective no later than the
            Closing Date, all outstanding Equity Rights in a manner that is
            binding upon the holders of such Equity Rights

                                     - 49 -
<PAGE>

            and without liability to the Company that has not been fully
            satisfied on the Closing Date. Prior to the Closing Date, Targeted
            and the Company shall take all corporate action necessary to
            terminate the Company's participation in, effective no later than
            the day before the Closing Date, all Company Plans which are
            intended to qualify as tax-qualified retirement plans under Code
            Section 401(a).

      (h)   No Solicitation.

            (i)   From the date hereof until the earlier of (A) the termination
                  of this Agreement in accordance with Section 9 hereof and (B)
                  the Closing Date, Targeted and the Company will not (subject
                  to the exceptions described herein), directly or indirectly,
                  and will not authorize or permit any affiliate, officer,
                  director, employee, shareholder, representative or agent of
                  Targeted or the Company to, directly or indirectly, (x)
                  solicit, initiate, invite, assist, facilitate, promote or
                  encourage proposals or offers from, or entertain or enter into
                  discussions or negotiations with any other person relating to
                  the acquisition of the Company common shares or any other
                  securities of the Company, any amalgamation, merger or other
                  form of business combination involving the Company, any sale,
                  lease, exchange or transfer of all or a substantial portion of
                  the assets of the Company, or any takeover bid,
                  reorganization, recapitalization, liquidation or winding-up of
                  or other business combination or transaction involving the
                  Company with any person other than Parent or any of its
                  affiliates (each, an "ACQUISITION TRANSACTION" and any offer
                  or proposal relating to any transaction or series of related
                  transactions involving an Acquisition Transaction, an
                  "ACQUISITION PROPOSAL") or (y) enter into any letter of intent
                  or similar document or any contractual agreement or commitment
                  contemplating or otherwise relating to any Acquisition
                  Proposal. Targeted and the Company will ensure that its
                  affiliates, officers, directors, employees, shareholders,
                  representatives and agents, including any financial or other
                  advisors or representatives retained by it are aware of the
                  provisions of this Section 6(h) and Targeted and the Company
                  will be responsible for any breach of this Section 6(h) by any
                  of the foregoing and any such breach shall be considered a
                  breach by Targeted and the Company.

            (ii)  Notwithstanding the foregoing, provided that there has been no
                  breach of this Section 6(h) and the Company or Targeted has
                  received an unsolicited written Acquisition Proposal from a
                  third party, the Board of Directors of Targeted ("TARGETED
                  BOARD"), the Board of Directors of the Company ("COMPANY
                  BOARD"), Targeted and the Company are not prohibited by this
                  Section 6(h) from:

                  (A)   considering, negotiating and providing information and
                        disclosure in respect of the Company if the Targeted
                        Board and the Company Board determine in good faith
                        (after appropriately considering all relevant factors)
                        that such unsolicited Acquisition Proposal is, or is
                        reasonably likely to result in, a "SUPERIOR
                        TRANSACTION". For

                                     - 50 -
<PAGE>

                        purposes of this Agreement "SUPERIOR TRANSACTION" shall
                        mean an Acquisition Proposal: (I) pursuant to which (1)
                        75% of the then outstanding Company common shares would
                        be transferred, (2) the holders of Company common shares
                        immediately prior to such transaction would, following
                        such transaction, receive in exchange for such common
                        shares an amount of securities (if any) of the surviving
                        or resulting entity (or its direct or indirect parent,
                        as applicable) constituting less than 50% of the voting
                        power of the surviving or resulting entity (or its
                        direct or indirect parent, as applicable) or (3) in
                        which all or substantially all of the assets of the
                        Company would be transferred; (II) on terms which are
                        more favourable from a financial point of view to the
                        Shareholders than the Merger (taking into account all of
                        the terms, conditions and aspects of such proposal and
                        the Merger); (III) with a minimum aggregate net
                        consideration payable to the Shareholders of the product
                        of (x) the product of the 20-day weighted average price
                        of the Parent Shares for the period ended two (2)
                        business days before the date of this Agreement and
                        3,480,520, plus the amount of Cdn.$375,000, and (y)
                        1.25; and (V) for which any necessary financing is
                        committed; provided:

                        a.    the Company promptly (and in any event at least
                              two business days prior to taking any such action)
                              notifies Parent orally and in writing of the
                              identity of a party to whom it is providing
                              information or with whom it is discussing or
                              negotiating and the material terms and conditions
                              of any Acquisition Proposal;

                        b.    the Company receives from such person or group an
                              executed confidentiality agreement containing
                              limitations on the use and disclosure of all
                              nonpublic written and oral information furnished
                              to such person or group by or on behalf of the
                              Company which are no less favourable to the
                              Company than the Confidentiality Agreement entered
                              into with Parent; and

                        c.    contemporaneously with furnishing any such
                              nonpublic information to such person or group, the
                              Company furnishes such nonpublic information to
                              Parent (to the extent such nonpublic information
                              has not been previously furnished by the Company
                              to Parent; or

                  (B)   accepting, approving, recommending to its shareholders
                        or entering into an unsolicited bona fide agreement or
                        arrangement regarding such unsolicited Acquisition
                        Proposal if the Targeted Board and the Company Board
                        determines in good faith (after appropriately
                        considering all relevant factors) that such

                                     - 51 -
<PAGE>

                        Acquisition Proposal would, if consummated in accordance
                        with its terms (but taking into account the risk of
                        non-completion), result in a Superior Transaction;
                        provided that immediately prior to any entry into an
                        agreement or arrangement pursuant to this Section
                        6(h)(ii)(B), the Company terminates this Agreement
                        pursuant to Section 9(a) and at or prior to such
                        termination pays the Termination Fee pursuant to Section
                        9(a)(v);

            (iii) The Company will not enter into any agreement, arrangement or
                  understanding regarding a Superior Transaction (a "PROPOSED
                  AGREEMENT") and will not modify its recommendation to the
                  Shareholders regarding the Merger (a "BOARD APPROVAL
                  MODIFICATION") relating to a Superior Transaction without
                  first providing Merger Sub and Parent with an opportunity to
                  amend the Merger provisions contemplated by this Agreement as
                  described below in Section 6(h)(iv). The Company will in any
                  event:

                  (A)   provide Parent with a copy of any Proposed Agreement in
                        the final form proposed by the person making the
                        proposal, as soon as possible and in any event not less
                        than five business days prior to its proposed execution
                        by the Company,

                  (B)   provide Parent not less than five business days prior
                        written notice of any such Board Approval Modification
                        together with a description of the material terms of the
                        Superior Transaction related thereto, and

                  (C)   provide written advice or other mutually agreed upon
                        form of written evaluation from Duff & Phelps LLC, or
                        such other independent advisor to be chosen by Ernst &
                        Young LLP (a "VALUATION LETTER"), confirming that the
                        evaluation by the Company Board that the Acquisition
                        Proposal satisfies clauses 6(h)(ii)(A)(II) and (III) of
                        the definition of Superior Transaction is reasonable.

                  If the Company does not provide a Valuation Letter as set
                  forth in Section 6(h)(iii)(C) above, the Parent shall have the
                  right, within the five (5) business day notice period set
                  forth above, to challenge the good faith determination made by
                  the Targeted Board or the Company Board that the Acquisition
                  Proposal constitutes a Superior Transaction, in which case,
                  the Parent shall give written notice to the Targeted Board or
                  the Company Board, as applicable, of such disagreement and
                  require that the Targeted Board obtain a Valuation Letter
                  before proceeding with the Superior Transaction. Should the
                  Parent fail to notify the Targeted Board or the Company Board,
                  as applicable, of such a disagreement within such five (5)
                  business day notice period, the Parent shall be deemed to
                  agree with the Targeted Board's or the Company Board's good
                  faith determination

                                     - 52 -
<PAGE>

                  with respect to the Acquisition Proposal. Once delivered, the
                  Valuation Letter will be conclusive and binding upon the
                  Parent and the Targeted Board and the Company Board. If the
                  Valuation Letter states that the Acquisition Proposal
                  constitutes a Superior Transaction in accordance with the
                  terms of this Section 6(h), then the Targeted Board and the
                  Company Board may proceed with the Superior Transaction after
                  the expiry of the five (5) day notice period if there is no
                  Amended Transaction (defined below), and the Parent shall bear
                  the fees of Duff & Phelps LLC associated with the delivery of
                  the Valuation Letter. If the Valuation Letter states that the
                  Acquisition Proposal does not constitute a Superior
                  Transaction in accordance with the terms of this Section 6(h),
                  then the Targeted Board and the Company Board shall not
                  proceed with the Superior Transaction and the Targeted Board
                  shall bear the fees of Duff & Phelps LLC associated with the
                  delivery of the Valuation Letter.

            (iv)  If Merger Sub and Parent agree to amend the Merger provisions
                  contemplated by this Agreement (an "AMENDED TRANSACTION")
                  within the five (5) business day notice period such that in
                  the good faith determination of the Targeted Board and the
                  Company Board in the exercise of their fiduciary duties, the
                  Amended Transaction, if consummated, is reasonably likely to
                  result in a transaction which is as favourable from a
                  financial point of view to the Shareholders as the Superior
                  Transaction (taking into account all of the terms, conditions
                  and aspects of such Amended Transaction and Superior
                  Transaction), the Company will not enter into the Proposed
                  Agreement or, as applicable, effect the Board Approval
                  Modification, and will agree to the Amended Transaction. Any
                  amendment to an Acquisition Proposal will be deemed for
                  purposes hereof to be a new Acquisition Proposal which will be
                  subject to the provisions of this Section 6(h).

      (i)   Satisfaction of Indebtedness. At or prior to the Closing Date, the
            Company shall satisfy any and all Indebtedness of the Company, to
            otherwise cause the release of all Security Interests in respect to
            the Company and obtain clear title to the Company Shares, and
            evidence of the same shall be delivered by the Company and the
            Shareholder Representative to the Parent.

      (j)   Tax Matters.

            (i)   Without the prior written consent of the Parent, Targeted
                  shall not, nor shall it permit the Company to, make or change
                  any election, change an annual accounting period, adopt or
                  change any accounting method, file any amended Return, enter
                  into any closing agreement, settle any Tax claim or
                  assessment, surrender any right to claim a refund of Taxes,
                  consent to any extension or waiver of the limitation period
                  applicable to any Tax claim or assessment, or take any other
                  similar action relating to the filing of any Return or the
                  payment of any Tax, if such election, adoption, change,
                  amendment, agreement, settlement, surrender, consent

                                     - 53 -
<PAGE>

                  or other action would have the effect of increasing the
                  liability for Taxes of the Company for any period ending after
                  the Closing Date or decreasing any Tax attribute of Company
                  existing on the Closing Date.

            (ii)  All tax sharing agreements to which the Company is a party,
                  including without limitation any tax sharing agreement between
                  Targeted and the Company shall be terminated as of the Closing
                  Date and will have no further effect for any taxable year
                  (whether the current year, a future year, or a past year).

      (k)   Approval of Company Shareholders; Information Statement. As promptly
            as practicable after the execution of this Agreement, and in no
            event later than ten business days after the date of this Agreement,
            the Company shall prepare in consultation with the Parent an
            information statement relating to the adoption of this Agreement and
            the approval of the Merger and other transactions contemplated
            hereby by the Shareholders and the exercise of statutory dissenters'
            rights under Washington law in connection therewith (the
            "INFORMATION STATEMENT"). The Company shall provide and include in
            the Information Statement such information relating to the Company
            and the Shareholders as may be required pursuant to the provisions
            of applicable securities and corporate laws. The Company shall also
            provide and include in the Information Statement such information
            relating to the Parent as Parent shall deem necessary to satisfy the
            provisions of applicable securities and corporate laws. The Company
            shall, in accordance with its articles of incorporation and bylaws
            and the applicable requirements of the Washington Business
            Corporation Act, call and hold a special meeting of the Shareholders
            as promptly as practicable, and in any event not later than July 6,
            2004, for the purpose of permitting them to consider and to vote
            upon the adoption of this Agreement (the "COMPANY SHAREHOLDER
            MEETING"). The Company shall cause a copy of the Information
            Statement to be delivered to each Shareholder and to each option
            holder of the Company. As promptly as practicable after the delivery
            of copies of the Information Statement to all Shareholders and
            optionholders, the Company shall use its commercially reasonable
            efforts

            (i)   to solicit from each such Shareholder a proxy in favour of
                  approval of adoption of this Agreement and the approval of the
                  Merger and other transactions contemplated hereby,

            (ii)  to solicit from each Shareholder a proxy in favour of approval
                  of items necessary to prevent any payment or benefit that a
                  Company employee or consultant may receive in connection with
                  the Merger from being considered a "parachute payment" under
                  Section 280G of the Code; and

            (iii) to cause each Shareholder to execute and deliver to Parent a
                  Representation and Support Agreement substantially in the form
                  of Exhibit H hereto.

                                     - 54 -
<PAGE>

            In lieu of calling and holding the Company Shareholder Meeting, the
            Company may solicit written consents (to be effective on or prior to
            July 6, 2004) in accordance with its articles of incorporation and
            Washington Law. Parent will promptly provide all information
            relating to its business and operations necessary for inclusion in
            the information statement to satisfy all requirements of applicable
            state and federal securities and corporate laws.

      (l)   Dissenting Shares. Prior to the Closing Date, the Company shall
            furnish the Parent with the name and address of each Shareholder of
            the Company who, prior to the Closing, has requested appraisal
            rights pursuant to Washington Law and the number of Dissenting
            Shares owned by such Shareholder.

7.    POST-CLOSING COVENANTS. The Parties agree as follows with respect to the
      period following the Closing:

      (a)   General.

            (i)   In case at any time after the Closing any further action is
                  necessary to carry out the purposes of this Agreement, the
                  Principal Shareholders and the Parent will take such further
                  action (including the execution and delivery of such further
                  instruments and documents) as any other Party reasonably may
                  request, at the sole cost and expense of the requesting Party
                  (unless the requesting Party is entitled to the
                  indemnification hereunder). The Principal Shareholders
                  acknowledge and agree that from and after the Closing the
                  Parent will have the right to possession of all documents,
                  books, records (including Tax records), agreements, and
                  financial data of any sort relating to the Company and the
                  Principal Shareholders will deliver to the Parent all such
                  documents, books, records (including Tax records), agreements
                  and financial data of any sort relating to the Company such
                  which may be reasonably requested and which cannot be
                  otherwise located or duplicated without unreasonable effort or
                  expense, except as may specifically be excluded in this
                  Agreement and its Schedules; provided, however, that the
                  Shareholders shall have the right to obtain access to such
                  documents, books, records (including Tax records), agreements,
                  and financial data to the extent related to the period prior
                  to the Closing and make photocopies thereof for a proper
                  purpose, such as in connection with the preparation of their
                  Tax Returns.

            (ii)  Each Principal Shareholder will use its best efforts to cause
                  each firm acting as independent auditors to the Company (A) to
                  deliver to the Parent financial statements audited and
                  prepared in accordance with GAAP, (B) to deliver an auditor's
                  report and consents with respect to financial statements of
                  the Company, and other information required to be filed by the
                  Parent pursuant to the rules and policies of applicable
                  Canadian securities laws, and (C) to cooperate with the Parent
                  and its auditors to provide "comfort" letters with respect to
                  financial information about the

                                     - 55 -
<PAGE>

                  Company that may be required to be included in the Parent's
                  filings with the Canadian securities regulatory authorities.

            (iii) If any Security Interest registered against Targeted shall
                  extend to any of the assets used in the operation of the
                  Business, Targeted shall take all steps necessary to remove
                  and discharge any such Security Interest.

      (b)   Litigation Support. In the event and for so long as any Party
            actively is contesting or defending against any action, suit,
            proceeding, hearing, investigation, charge, complaint, claim or
            demand in connection with (i) any transaction contemplated under
            this Agreement or (ii) any fact, situation, circumstance, status,
            condition, activity, practice, plan, occurrence, event, incident,
            action, failure to act, or transaction on or prior to the Closing
            Date involving the Parent or the Shareholders, each of the other
            Parties will reasonably cooperate with the contesting or defending
            Party and his or its counsel in the contest or defence, make
            available his or its personnel, and provide such testimony and
            access to his or its books and records as shall be necessary in
            connection with the contest or defence, all at the sole cost and
            expense of the contesting or defending Party (unless the contesting
            or defending Party is entitled to such indemnification under Section
            8 below).

      (c)   Transition. The Principal Shareholders will use their reasonable
            commercial efforts not to take any action that is designed or
            intended to have the effect of discouraging any lessor, licensor,
            customer, supplier, or other business associate of the Company, or
            the Parent from maintaining the same business relationships with the
            Parent after the Closing as it maintained with the Company prior to
            the Closing.

      (d)   Confidentiality. The Principal Shareholders will treat and hold as
            confidential all of the Confidential Information of the Company,
            refrain from using any of the Confidential Information and deliver
            promptly to the Parent or destroy, at the request and option of the
            Parent, all tangible embodiments (and all copies) of the
            Confidential Information which are in his or her possession. In the
            event that any Principal Shareholder is requested or required (by
            oral question or request for information or documents in any legal
            proceeding, interrogatory, subpoena, civil investigative demand, or
            similar process) to disclose any Confidential Information, such
            Principal Shareholder will notify the Parent promptly of the request
            or requirement so that the Parent may seek an appropriate protective
            order or waive compliance with the provisions of this Section 7(d).
            If, in the absence of a protective order or the receipt of a waiver
            hereunder, such Shareholder is, on the advice of counsel, compelled
            to disclose any Confidential Information to any tribunal or else
            stand liable for contempt, such Principal Shareholder may disclose
            the Confidential Information to the tribunal; provided, however,
            that such Principal Shareholder shall use its reasonable efforts to
            obtain, at the reasonable request of the Parent and at the Parent's
            sole expense, an order or other assurance that confidential
            treatment will be accorded to such portion of the Confidential
            Information required to be disclosed as the Parent shall designate.

                                     - 56 -
<PAGE>

      (e)   Noncompetition.

            (i)   Noncompetition Covenant.

                  (A)   In connection with the purchase of the Company by the
                        Parent as provided in this Agreement, Targeted hereby
                        agrees that, except as otherwise expressly provided in
                        this Section 7(e), neither it, nor any of member of the
                        Targeted Affiliated Group, shall, at any time within a
                        period of eighteen (18) months from and after the
                        Closing Date (the "NONCOMPETITION PERIOD"), directly or
                        indirectly, engage in any Competitive Business, or
                        operate, manage or control any person, firm,
                        corporation, partnership, limited liability company,
                        trust or other business entity (whether as an agent,
                        partner, member, joint venture, shareholder,
                        beneficiary, creditor, consultant, advisor or otherwise,
                        as the case may be) that engages in any Competitive
                        Business in the State of Washington, the Province of
                        British Columbia, the United States of America, Canada
                        or any other country. The provisions of this Section
                        7(e) shall not prohibit the aggregate ownership by the
                        Targeted Affiliated Group of up to ten percent (10%) of
                        the issued and outstanding capital stock of a
                        publicly-held corporation that operates a Competitive
                        Business, so long as no member of the Targeted
                        Affiliated Group participates in the control thereof,
                        takes an active part in the management or direction
                        thereof, acts as a consultant or advisor thereto or in
                        any other way renders services thereto.

                  (B)   If Targeted is alleged by the Parent to have materially
                        breached or threatened to breach its noncompetition
                        covenants described in Section 7(e)(i) hereof, the
                        Parent shall have the right, in addition to any other
                        rights or remedies which it may have hereunder, or at
                        law or in equity, to seek and obtain specific
                        performance thereof and/or to enjoin such breach or
                        threatened breach. The Parties hereto acknowledge and
                        agree that any such breach or threatened breach shall
                        cause irreparable injury to the Parent and the Parent
                        could not be reasonably or adequately compensated in
                        damages at law. The equitable remedies provided for in
                        this Section 7(e)(ii) are not exclusive of any other
                        remedy, and such remedies shall be cumulative and shall
                        be in addition to every other remedy provided for herein
                        or now or hereafter at law or in equity or by statute or
                        otherwise.

                  (C)   If, in any judicial proceeding, any court or arbitrator
                        determines that any noncompetition covenant included in
                        Section 7(e) hereof, or any part thereof, is
                        unenforceable because of the duration of such provision
                        or the area covered thereby, such covenant shall be
                        considered divisible with respect to scope, duration and
                        geographic

                                     - 57 -
<PAGE>

                        area such court or arbitration shall have the power to
                        reduce the scope duration or geographic area of such
                        provision and, in its reduced form, such provision shall
                        then be enforceable and shall be enforced.

            (ii)  Employee Noncompetition Matters. Parent and Company hereby
                  acknowledge that Targeted has entered into certain
                  confidential information, invention assignment, noncompetition
                  and nonsolicitation agreements (the "CONFIDENTIAL INFORMATION
                  AGREEMENTS") with the current and former employees of the
                  Company covering, among other things, the confidentiality of
                  information used in their employment with the Company.
                  Further, Parent and Company each agree that they shall neither
                  (A) take any actions to induce such employees to violate the
                  terms of the Confidential Information Agreements, nor (B) use,
                  distribute, disclose or otherwise make use of or disseminate
                  any information obtained, directly or indirectly, as a result
                  of a breach of any such Confidential Information Agreement;
                  provided, however, that this clause shall not apply to any
                  information used in the ordinary course of business of the
                  Company as it was conducted immediately prior to the Closing.

      (f)   Tax Matters.

         (i)      The Principal Shareholders, severally and not jointly, shall
                  indemnify the Company the Parent and Merger Sub, and hold them
                  harmless from and against, any loss, claim, liability,
                  expense, or other damage attributable to (A) all Taxes (or the
                  non-payment thereof) of the Company for all Taxable periods
                  ending on or before the Closing Date and the portion through
                  the end of the Closing Date for any Taxable period that
                  includes (but does not end on) the Closing Date ("PRE-CLOSING
                  TAX PERIOD"), (B) all Taxes of any member of an affiliated,
                  consolidated, combined or unitary group of which the Company
                  (or any predecessor of any of the foregoing) is or was a
                  member on or prior to the Closing Date, including pursuant to
                  Treasury Regulation Section 1.1502-6 or any analogous or
                  similar state, local, or foreign law or regulation, and (C)
                  any and all Taxes of any person (other than the Company)
                  imposed on the Company as a transferee or successor, by
                  contract or pursuant to any law, rule, or regulation, which
                  Taxes relate to an event or transaction occurring before the
                  Closing Date; provided however, that in the case of clauses
                  (A), (B), and (C) above, the Shareholders shall be liable only
                  to the extent that such Taxes exceed the amount, if any,
                  reserved for such Taxes (excluding any reserve for deferred
                  Taxes established to reflect timing differences between book
                  and Tax income) on the face of the balance sheet that is part
                  of the Financial Statements (rather than in any notes
                  thereto).

         (ii)     In the case of any Taxable period that includes (but does not
                  end on) the Closing Date (a "STRADDLE PERIOD"), the amount of
                  any Taxes based on or measured by income or receipts of the
                  Company for the Pre-Closing Tax

                                     - 58 -
<PAGE>

                  Period shall be determined based on an interim closing of the
                  books as of the close of business on the Closing Date and the
                  amount of other Taxes of the Company for a Straddle Period
                  which relate to the Pre-Closing Tax Period shall be deemed to
                  be the amount of such Tax for the entire Taxable period
                  multiplied by a fraction the numerator of which is the number
                  of days in the Taxable period ending on the Closing Date and
                  the denominator of which is the number of days in such
                  Straddle Period.

         (iii)    For all taxable periods ending on or before the Closing Date,
                  Targeted shall cause the Company to join in Targeted's
                  consolidated federal Income Tax Return and comparable
                  consolidated or combined state Income Tax Returns and, in
                  jurisdictions requiring reporting of the income of the Company
                  separate from that of Targeted, to file separate Company state
                  and local Income Tax Returns. Targeted shall include the
                  income of the Company (including any deferred items triggered
                  into income by Treasury Regulation Section 1.1502-13, Treasury
                  Regulation Section 1.1502-14 and any excess loss account taken
                  into income by Treasury Regulation Section 1.1502-19 or
                  comparable provisions of state and local Income Tax
                  regulations) on Targeted's consolidated federal Income Tax
                  Returns and comparable consolidated or combined state Income
                  Tax Returns for all periods through the Closing Date and pay
                  any federal, state, and local Income Taxes attributable to
                  such income. All such Returns shall be prepared and filed in a
                  manner consistent with prior practice, except as required by a
                  change in applicable law. The Parent shall have the right to
                  review and comment on any such Returns prepared by Targeted.
                  The Parent shall cause the Company to furnish information to
                  Targeted as reasonably requested by Targeted to allow Targeted
                  to satisfy its obligations under this section in accordance
                  with past custom and practice. The Company and the Parent
                  shall consult and cooperate with Targeted as to any elections
                  to be made on returns of the Company for periods ending on or
                  before the Closing Date. The Parent shall cause the Company to
                  file income Tax Returns for all periods other than periods for
                  which Targeted has responsibility to do so pursuant to this
                  Section 7(f).

         (iv)     (A)   The Parent, the Company, and the Principal Shareholders
                        shall cooperate fully, as and to the extent reasonably
                        requested by the other Party, in connection with the
                        filing of Tax Returns pursuant to Section 7(f)(iv) and
                        any audit, litigation or other proceeding with respect
                        to Taxes. Such cooperation shall include the retention
                        and (upon the other Party's request) the provision of
                        records and information which are reasonably relevant to
                        any such audit, litigation or other proceeding and
                        making employees available on a mutually convenient
                        basis to provide additional information and explanation
                        of any material provided hereunder. The Company and the
                        Principal Shareholders agree (i) to retain all books and
                        records with respect to Tax matters pertinent to the
                        Company relating to any taxable period beginning before
                        the Closing Date

                                     - 59 -
<PAGE>

                        until the expiration of seven (7) years following the
                        Closing Date or if later, the expiration of the statute
                        of limitations (and, to the extent notified by the
                        Parent to Targeted, any extensions thereof) of the
                        respective taxable periods, and to abide by all record
                        retention agreements entered into with any taxing
                        authority, and (ii) to give the other Party reasonable
                        written notice prior to transferring, destroying or
                        discarding any such books and records and, if the other
                        Party so requests, the Company or Principal
                        Shareholders, as the case may be, shall allow the other
                        Party to take possession of such books and records.

                  (B)   the Parent and each Principal Shareholder further agree,
                        upon request, to use their best efforts to obtain any
                        certificate or other document from any governmental
                        authority or any other Person as may be necessary to
                        mitigate, reduce or eliminate any Tax that could be
                        imposed (including, but not limited to, with respect to
                        the transactions contemplated hereby).

         (v)      Following the Closing, Targeted will allow the Company and
                  their counsel to participate, at the Parent's expense, in any
                  audits of Targeted consolidated U.S. federal Income Tax
                  Returns to the extent that such Returns relate to the Company.
                  Targeted will not settle any such audit in a manner which
                  would adversely affect the Company after the Closing Date
                  without the prior written consent of the Parent, which consent
                  shall not be unreasonably withheld.

         (vi)     All transfer, documentary, sales, use, stamp, registration and
                  other such Taxes, and all conveyance fees, recording charges
                  and other fees and charges (including any penalties and
                  interest) incurred in connection with consummation of the
                  transactions contemplated by this Agreement shall be paid by
                  the Shareholders when due, and the Shareholders will, at their
                  own expense, file all necessary Tax Returns and other
                  documentation with respect to all such Taxes, fees and
                  charges, and, if required by applicable law, the Shareholders
                  will join in the execution of any such Returns and other
                  documentation.

         (vii)    the Parent agrees to indemnify Targeted for any additional Tax
                  owed by Targeted (including tax owed by Targeted due to this
                  indemnification payment) resulting from any transaction
                  engaged in by the Company not in the Ordinary Course of
                  Business occurring after the Closing Date and after the
                  Merger.

         (viii)   the Parent and Targeted agree to report all transactions not
                  in the Ordinary Course of Business occurring after the Closing
                  Date and after the Merger on the Parent's federal Income Tax
                  Return to the extent permitted by Regulation
                  1.1502-76(b)(1)(ii)(B) and any similar state or local tax
                  provision.

                                     - 60 -
<PAGE>

         (ix)     At the Parent's option, the Shareholder Representative and the
                  Parent shall join in making an election under Code Section
                  338(h)(10) (and any corresponding elections under state,
                  local, or foreign tax law) (collectively, a "SECTION
                  338(h)(10) ELECTION") with respect to the purchase and sale of
                  the stock of the Company. Parent will pay any Tax attributable
                  to the making of the Section 338(h)(10) Election and will
                  indemnify Targeted against any losses arising out of any
                  failure to pay such Tax. Parent will also pay any state,
                  local, or foreign Tax (and indemnify Targeted against any
                  losses arising out of any failure to pay such Tax)
                  attributable to an election under state, local, or foreign law
                  similar to the election available under Code Section 338(g)
                  (or which results from the making of an election under Code
                  Section 338(g) with respect to the purchase and sale of the
                  stock of the Company hereunder.

         (x)      The Parties agree that the Merger Consideration and the
                  liabilities of the Company (plus other relevant items) will be
                  allocated to the assets of the Company for all purposes
                  (including Tax and financial accounting purposes) as shown on
                  the Allocation Schedule attached hereto, in a manner
                  consistent with Code Section 338 and 1060 and the regulations
                  thereunder. The Parent and Targeted shall file all Tax Returns
                  (including amended returns and claims for refund) and
                  information reports in a manner consistent with such
                  allocation.

         (xi)     For each year that it is a "passive" foreign investment
                  company, within the meaning of the Code, the Parent shall
                  provide to the Shareholders all information that a United
                  States shareholder making a "mark to market" election (as
                  defined in the Code) is required to obtain for United States
                  federal income tax purposes, and will take any other steps as
                  are reasonably necessary to facilitate such election by the
                  Shareholder.

         (xii)    The parties agree to treat any indemnity payment made pursuant
                  to this Agreement as an adjustment to the Merger Consideration
                  for all federal, state, local and foreign Tax purposes, to the
                  extent permitted by law.

      (g)   Non-Solicitation. Until the date that ends one year after the
            Closing Date, no member of the Targeted Affiliated Group, nor any
            member of the Parent's Affiliated Group shall directly or
            indirectly, through any officer, director, employee, representative
            or agent of such person, on its own behalf or on behalf of others,
            solicit, divert or hire away, or attempt to solicit, divert, or hire
            away, any independent contractor or any person employed by any
            member of the other's Affiliated Group or persuade or attempt to
            persuade any such individual to terminate his or her employment with
            any member of the other's Affiliated Group; provided, however,
            nothing shall prohibit the employment of an unsolicited individual
            responding to a general advertisement for employment.

                                     - 61 -
<PAGE>

      (h)   Foreign Private Issuer Status. The Parent shall use its best efforts
            to remain a "foreign issuer" as such term is defined in Regulation S
            promulgated under the U.S. Securities Act for two years following
            the Closing Date.

      (i)   Listing of Parent Shares. The Parent shall use its best efforts to
            maintain the listing of its common shares on the Toronto Stock
            Exchange, or on a U.S. national securities exchange or Nasdaq for
            three years following the Closing Date.

      (j)   Observer. Effective as of the Closing, the Principal Shareholders
            shall, as long as amounts owing under the Convertible Debenture
            remain outstanding, be entitled to have an individual (who may
            change from time to time) (an "OBSERVER") attend meetings of the
            Board of Directors of the Parent from time to time. If requested by
            the Board of Directors of the Parent, an Observer must sign a
            non-disclosure agreement in a form satisfactory to the Parent

8.    REMEDIES FOR BREACHES OF THIS AGREEMENT.

      (a)   Survival of Representations and Warranties. All of the
            representations and warranties of the Company and the Principal
            Shareholders contained in Sections 3(b), 3(d)(ii), 3(e), 3(h)
            through 3(l) and Sections 3(n) through 3(cc) of this Agreement and
            all of the other representations, warranties, covenants,
            indemnities, and other agreements of the Parent, Merger Sub, the
            Principal Shareholders and the Company contained in this Agreement
            (collectively, the "OPERATIONAL MATTERS") shall survive the Closing
            and continue in full force and effect for a period of two (2) years
            thereafter; all of the representations and warranties contained in
            Section 3(m) shall survive the Closing and continue in full force
            and effect until reparation of the applicable statute of
            limitations; all of the representations and warranties contained in
            Sections 3(a), 3(c), 3(d)(i) and (iii), 3(f), 3(g) and 3(dd), and
            Section 4 (collectively, the "FUNDAMENTAL MATTERS")) shall survive
            the Closing and continue in full force and effect for a period of
            five (5) years thereafter, or such shorter period provided by any
            applicable statutes of limitations. No action, claim, or proceeding
            may be brought by any Party hereto against any other Party resulting
            from, arising out of, or caused by a breach of a representation or
            warranty contained herein, or the failure to perform any covenant or
            other obligations hereunder, after the time such representation,
            warranty or covenant ceases to survive pursuant to the preceding
            sentence, unless written notice of such claim setting forth with
            specificity the basis for such claim is delivered to the applicable
            Party prior to such time in accordance with the notice provisions
            set forth in Section 10(g) of this Agreement.

      (b)   Indemnification Provisions for Benefit of the Parent. In the event
            any Principal Shareholder or the Company breaches (or in the event
            any third party alleges facts that, if true, would mean any
            Principal Shareholder or the Company has breached) any of his
            representations, warranties, and covenants contained in this
            Agreement, and, if there is an applicable survival period pursuant
            to Section 8(a) above, provided that the Parent provides written
            notice of a claim for indemnification setting forth the basis for
            such claim against the Shareholders within such survival

                                     - 62 -
<PAGE>

            period, then the Principal Shareholders, jointly and severally,
            agree to defend, indemnify and hold harmless the Parent, subject to
            the limitations set forth herein, from and against the entirety of
            any Adverse Consequences the Parent may suffer through and after the
            date of the claim for indemnification (including any Adverse
            Consequences the Parent may suffer after the end of any applicable
            survival period) resulting from, arising out of, or caused by the
            breach (or the alleged breach); provided, however, that:

            (i)   the Principal Shareholders shall not have any obligation to
                  indemnify the Parent from and against any Adverse Consequences
                  resulting from, arising out of, or caused by the breach (or
                  alleged breach) of any representation or warranty with respect
                  to Operational Matters or tax matters set forth in Section
                  3(m) beyond a maximum aggregate amount of Cdn.$850,000 (the
                  "INDEMNIFICATION AMOUNT"). No such restriction shall be
                  applicable with respect to Fundamental Matters;

            (ii)  the Principal Shareholders shall not have any indemnification
                  obligation for breaches (or alleged breaches) with respect to
                  Operational Matters until the Parent has suffered Adverse
                  Consequences by reason thereof in excess of United States
                  Twenty Five Thousand Dollars (US $25,000), but in such event,
                  Principal Shareholders shall be liable for the full amount of
                  such Adverse Consequences. No such restriction shall be
                  applicable with respect to (A) the Undisclosed Liability
                  listed in Section 3(j) Paragraph 1 of the Company Disclosure
                  Schedule and (B) all valid and enforceable claims for deferred
                  compensation established against the Company by employees of
                  the Company with respect to any and all deferred compensation
                  owing to such employees upon any form of disposition or sale
                  of the Company to a third party; and

            (iii) the Principal Shareholders shall not have any obligation to
                  indemnify the Parent from and against any Adverse Consequences
                  resulting from, arising out of, or caused by the breach (or
                  alleged breach) of any representation or warranty with respect
                  to Fundamental Matters or Operational Matters which, in
                  aggregate, exceed the Merger Consideration, and further that
                  no Principal Shareholder shall be liable for any such Adverse
                  Consequences whether resulting from, arising out of, or caused
                  by the breach (or alleged breach) of any representation or
                  warranty with respect to Fundamental Matters or Operational
                  Matters which, in aggregate, exceed that portion of the Merger
                  Consideration which such Principal Shareholder is entitled to
                  receive pursuant to Section 2.7(c) of this Agreement.

            Any claim for indemnification made by the Parent setting forth the
            basis for such claim against the Shareholders shall be provided in
            accordance with the notice provisions set forth in Section 10(g) of
            this Agreement.

                                     - 63 -
<PAGE>

      (c)   Indemnification Holdback. If the Parent makes a written claim for
            indemnification to a Principal Shareholder in accordance with
            Section 8(b) above prior, to the expiry date of the Convertible
            Debenture:

            (i)   if such claim is in respect of Operational Matters, the Parent
                  shall be entitled to withhold from and setoff against any
                  amounts owing under the Convertible Debenture and scheduled to
                  be paid on the Maturity Date (as defined in the Convertible
                  Debenture) the amount of such claim, to a maximum of the
                  Indemnification Amount pending determination of such claim; or

            (ii)  if such claim is in respect of Fundamental Matters, the Parent
                  shall be entitled to withhold from and setoff against any
                  amounts owing under the Convertible Debenture the amount of
                  such claim. Amounts owing under the Convertible Debenture
                  shall be a nonexclusive source of indemnification with respect
                  to any Fundamental Matters, and, subject to the provisions set
                  forth in Section 8(b) above, shall not otherwise limit the
                  liability of the Shareholders with respect to indemnification
                  under this Agreement.

            For clarification, the Parent shall first withhold from and setoff
            against amounts owing under the Convertible Debenture the amount of
            any indemnification claim before making any indemnification claim
            against the Shareholders relating to that other portion of the
            Merger Consideration received by the Shareholders on Closing.

            Any disagreement with respect to the determination of any claim for
            indemnification shall be resolved in the manner set forth in Section
            10(p) below. The arbitrator shall issue its report as to the
            validity of such claim for indemnification within sixty (60) days
            after such dispute is referred to such arbitrator. The Principal
            Shareholders on the one hand, and the Parent on the other hand,
            shall bear all costs and expenses incurred by it in connection with
            such arbitration, except that the fees and expenses of the
            arbitrator hereunder shall be borne by the Principal Shareholders
            and the Parent in such proportion as such arbitrator shall determine
            based on the relative merit of the position of the parties. This
            provision for arbitration shall be specifically enforceable by the
            Parties and the decision of such arbitrator in accordance with the
            provisions hereof shall be final and binding with respect to the
            matters so arbitrated and there shall be no right of appeal
            therefrom. If a claim for indemnification by the Parent is finally
            determined to be valid pursuant to this Section 8(c), the balance
            payable by the Parent pursuant to the Convertible Debenture shall be
            deemed to be reduced accordingly.

      (d)   Indemnification Provisions for Benefit of the Principal
            Shareholders. In the event the Parent breaches (or in the event any
            third party alleges facts that, if true, would mean the Parent has
            breached) any of their representations, warranties, and covenants
            contained in this Agreement, and, if there is an applicable survival

                                     - 64 -
<PAGE>

            period pursuant to Section 8(a) above, provided that the Shareholder
            Representative provides written notice of a claim for
            indemnification setting forth with specificity the basis for such
            claim against the Parent within such survival period, then the
            Parent agrees to defend, indemnify and hold harmless the Principal
            Shareholders from and against the entirety of any Adverse
            Consequences (up to but not in excess of the aggregate Merger
            Consideration received by the Principal Shareholders) the Principal
            Shareholders may suffer through and after the date of the claim for
            indemnification (including any Adverse Consequences the Principal
            Shareholders may suffer after the end of any applicable survival
            period) resulting from, arising out of, or caused by the breach (or
            the alleged breach). Any claim for indemnification made by the
            Principal Shareholders setting forth the basis for such claim
            against the Parent shall be provided in accordance with the notice
            provisions set forth in Section 10(g) of this Agreement.

      (e)   Matters Involving Third Parties.

            (i)   If any third party shall notify any Party (the "INDEMNIFIED
                  PARTY") with respect to any matter (a "THIRD PARTY CLAIM")
                  which may give rise to a claim for indemnification against any
                  other Party (the "INDEMNIFYING PARTY") under this Section 8,
                  then the Indemnified Party shall promptly notify each
                  Indemnifying Party thereof in writing; provided, however, that
                  no delay on the part of the Indemnified Party in notifying any
                  Indemnifying Party shall relieve the Indemnifying Party from
                  any obligation hereunder unless (and then solely to the
                  extent) the Indemnifying Party thereby is prejudiced.

            (ii)  Any Indemnifying Party will have the right to defend the
                  Indemnified Party against the Third Party Claim with counsel
                  of its choice satisfactory to the Indemnified Party so long as
                  (A) the Indemnifying Party notifies the Indemnified Party in
                  writing within fifteen (15) days after the Indemnified Party
                  has given notice of the Third Party Claim that the
                  Indemnifying Party will indemnify the Indemnified Party from
                  and against the entirety of any Adverse Consequences the
                  Indemnified Party may suffer resulting from, arising out of,
                  relating to, in the nature of, or caused by the Third Party
                  Claim, (B) the Indemnifying Party provides the Indemnified
                  Party with evidence reasonably acceptable to the Indemnified
                  Party that the Indemnifying Party will have the financial
                  resources to defend against the Third Party Claim and fulfill
                  its indemnification obligations hereunder, (C) the Third Party
                  Claim involves only money damages and does not seek an
                  injunction or other equitable relief, (D) settlement of, or an
                  adverse judgment with respect to, the Third Party Claim is
                  not, in the good faith judgment of the Indemnified Party,
                  likely to establish a precedential custom or practice
                  materially adverse to the continuing business interest of the
                  Indemnified Party, and (E) the Indemnifying Party conducts the
                  defence of the Third Party Claim actively and diligently.

                                     - 65 -
<PAGE>

            (iii) So long as the Indemnifying Party is conducting the defence of
                  the Third Party Claim in accordance with Section 8(e)(ii)
                  above, (A) the Indemnified Party may retain separate
                  co-counsel at its sole cost and expense and participate in the
                  defence of the Third Party Claim, (B) the Indemnified Party
                  will not consent to the entry of any judgment or enter into
                  any settlement with respect to the Third Party Claim without
                  the prior written consent of the Indemnifying Party (which
                  consent shall not be unreasonably withheld).

            (iv)  In the event any of the conditions in 8(e)(ii) above is or
                  becomes unsatisfied, however, (A) the Indemnified Party may
                  defend against, and consent to the entry of any judgment or
                  enter into any settlement with respect to, the Third Party
                  Claim in any manner it may deem appropriate (and the
                  Indemnified Party need not consult with, or obtain any consent
                  from, any Indemnifying Party in connection therewith), (B) the
                  Indemnifying Party will reimburse the Indemnified Party
                  promptly and periodically for the costs of defending against
                  the Third Party Claim (including reasonable attorneys' fees
                  and expenses), and (C) the Indemnifying Party will remain
                  responsible for any Adverse Consequences the Indemnified Party
                  may suffer resulting, arising out of, relating to, in the
                  nature of, or caused by the Third Party Claim to the fullest
                  extent provided in this Section 8.

      (f)   Determination of Adverse Consequences. The Parties shall take into
            account the time cost of money (using the prime rate of the Royal
            Bank of Canada as the discount rate) and shall make appropriate
            adjustments for tax benefits and insurance coverage in determining
            Adverse Consequences for purposes of this Section 8. All
            indemnification payments under this Section 8 shall be deemed
            adjustments to the Merger Consideration.

      (g)   Post-Closing. Following the Closing, the remedy of the Principal
            Shareholders, on the one hand, and the Parent on the other hand,
            with respect to any breach or threatened breach of a representation,
            warranty or covenant contained herein or with respect to any event,
            circumstance or condition occurring on or before the Closing shall
            be limited to the enforcement of the indemnification obligations set
            forth in Section 8; provided, however, that nothing provided in this
            Section 8(g) shall limit the right of any Party to seek any
            equitable remedy available to enforce his or its rights hereunder in
            accordance with Section 10(n).

9.    TERMINATION AND EXTENSION.

      (a)   Termination. This Agreement may be terminated at any time prior to
            or on the Closing Date:

            (i)   by the mutual consent of the Shareholder Representative and
                  the Parent;

            (ii)  by the Parent:

                                     - 66 -
<PAGE>

                  (A)   if any one of the conditions for the benefit of the
                        Parent and Merger Sub set forth in Section 5(a) have not
                        been satisfied or waived by the Parent or Merger Sub on
                        or before the Closing, or

                  (B)   in the event that the Company or the Shareholders have
                        not complied with or performed, in all material
                        respects, their respective covenants and obligations
                        under this Agreement or the applicable Representation
                        and Support Agreement to be complied with or performed
                        at or prior to the Closing Date, or any of the
                        representations and warranties of any of the Company or
                        Shareholders under this Agreement or the applicable
                        Representation and Support Agreement are not true and
                        correct in all material respects at or prior to the
                        Closing Date;

            (iii) by the Shareholder Representative;

                  (A)   if any one of the conditions for the benefit of the
                        Company or the Shareholders set forth in Section 5(b)
                        have not been satisfied or waived by the Company or
                        Shareholder Representative on or before the Closing, or

                  (B)   in the event that the Parent or Merger Sub shall not
                        have complied with or performed, in all material
                        respects, its respective covenants and obligations under
                        this Agreement to be complied with or performed at or
                        prior to the Closing Date, or any of the representations
                        and warranties of either of them under this Agreement
                        are not true and correct in all material respects at or
                        prior to the Closing Date;

            (iv)  by either Parent or the Shareholder Representative if the
                  Closing shall not have occurred by the Closing Date, unless
                  the Closing Date is postponed pursuant to Section 9(e);
                  provided, however, that the right to terminate this Agreement
                  under this Section 9(a)(iv) shall not be available to any
                  Party whose action or failure to act has been a principal
                  cause of the failure of the Closing to occur on or before such
                  date and such action or failure to act constitutes a breach of
                  this Agreement; and

            (v)   by the Shareholder Representative in order to immediately
                  enter into a Proposed Agreement or in order to recommend to
                  its shareholders acceptance or approval of a Superior
                  Transaction that does not involve or contemplate a Proposed
                  Agreement, each in accordance with the terms of Section 6(h)
                  of this Agreement; provided, in either case, that the Company
                  has paid the Termination Fee described in Section 9(c).

            Neither the Parent nor the Shareholder Representative may exercise
            any termination right pursuant to this Section 9(a) unless the
            Parent or the Shareholder Representative, as the case may be, has
            delivered a written notice to the other

                                     - 67 -
<PAGE>

            parties hereto specifying in reasonable detail all breaches of
            covenants, representations and warranties or other matters which the
            Parent or the Shareholder Representative, as the case may be, is
            asserting as the basis for the exercise of the termination right, as
            the case may be. If any such notice is delivered in respect of the
            exercise of a termination right under Sections 9(a)(ii), (iii) or
            (iv), provided that the Parent or the Shareholder Representative, as
            the case may be, is proceeding diligently to cure such matter, if
            such matter is susceptible to being cured, the other parties hereto
            may not terminate this Agreement as a result thereof until the
            expiration of a period of fifteen (15) days from such notice.

      (b)   Termination Fee Payable to Parent.

            (i)   Notwithstanding any other provisions hereof, if this Agreement
                  is terminated or the transactions contemplated hereunder are
                  not consummated because the Parent has terminated this
                  Agreement pursuant to Section 9(a)(ii) hereof, the Shareholder
                  Representative shall pay to the Parent, within 5 business days
                  of such termination, a fee equal to the amount of (1) the
                  Deposit paid by the Company prior to such termination date,
                  plus (2) United States Three Hundred Thousand Dollars (US
                  $300,000) (this payment in Section 9(b)(i)(2), the "SECTION
                  9(b)(i)(2) PAYMENT"), as liquidated damages, in immediately
                  available funds to an account designated by the Parent,
                  provided that such fee shall not be payable if the Parent is
                  in breach of any obligation hereunder and such breach renders
                  compliance with the conditions in Section 5(b) for the benefit
                  of the Shareholders of the Company incapable of fulfillment,
                  and provided further that the Section 9(b)(i)(2) Payment shall
                  not be payable to the Parent if the Parent shall have
                  terminated this Agreement pursuant to Section 9(a)(ii) due to
                  a failure on the part of the Company or the Shareholders to
                  satisfy the obligations referred to therein under
                  circumstances where: (1) such failure was a direct result of
                  circumstances that were beyond the control of the Company or
                  the Shareholders, and (2) the Company and the Shareholders
                  each used best efforts to satisfy such obligations.

                  For clarification, if (x) the Shareholders fail to approve
                  this Agreement and the transactions contemplated hereby
                  pursuant to the conditions set forth in Section 5(a)(xxvi)
                  hereof, the Shareholder Representative shall pay the Section
                  9(b)(i)(2) Payment to the Parent in accordance with the terms
                  of this Section 9(b)(i); and (y) the Company, despite the use
                  of its best efforts to obtain such consents, fails to obtain
                  any third party consents pursuant to Section 5(a)(iii) hereof,
                  the Shareholder Representative shall not be obligated to pay
                  the Section 9(b)(i)(2) Payment to the Parent.

            (ii)  Notwithstanding any other provisions hereof, if this Agreement
                  is terminated or the transactions contemplated hereunder are
                  not consummated because the Shareholder Representative shall
                  have terminated this Agreement pursuant to Section 9(a)(v),
                  the Shareholder

                                     - 68 -
<PAGE>

                  Representative shall pay to the Parent, concurrently with such
                  termination, a fee equal to the sum of:

                  (A)   the amount of the Deposit paid to the Company prior to
                        such termination date; plus

                  (B)   the amount of United States Five Hundred Thousand
                        Dollars (US $500,000),

                  as liquidated damages in immediately available funds to an
                  account designated by the Parent.

            (iii) For clarification, any amounts paid by the Parent to the
                  Company pursuant to Section 9(f) of this Agreement become part
                  of the Deposit and shall be repaid as such under this Section
                  9(b) in the circumstances outlined above.

      (c)   Termination Fee Payable to the Company.

            (i)   Notwithstanding any other provisions hereof, if this Agreement
                  is terminated or the transactions contemplated hereunder are
                  not consummated because the Shareholder Representative shall
                  have terminated this Agreement pursuant to Sections 9(a)(iii),
                  the Parent shall:

                  (A)   not be entitled to repayment of the Deposit prior to
                        such date which Deposit shall be forfeited as liquidated
                        damages,

                  (B)   pay to the Company the amount of United States Three
                        Hundred Thousand Dollars (US $300,000) (this payment in
                        Section 9(c)(i)(B), the "SECTION 9(c)(i)(B) PAYMENT"),
                        as liquidated damages, in immediately available funds to
                        an account designated by the Parent, and

                  (C)   pay to Targeted any funds which were to be repaid to
                        Targeted by the Parent on the Closing Date pursuant to
                        Section 6(e) hereof;

                  provided that such liquidated damages set forth in Sections
                  9(c)(i)(A) and (B) shall not be payable if either the Company
                  or the Shareholders is in breach of any obligation hereunder
                  and such breach renders compliance with the conditions in
                  Section 5(a) for the benefit of the Parent and Merger Sub
                  incapable of fulfillment, and provided further that the
                  Section 9(c)(i)(B) Payment shall not be payable to the
                  Shareholder Representative if the Shareholder Representative
                  shall have terminated this Agreement pursuant to Section
                  9(a)(iii) due to a failure on the part of the Parent to
                  satisfy the obligations referred to therein under
                  circumstances where: (1) such failure was a direct result of
                  circumstances that were beyond the control of the Parent, and
                  (2) the Parent used best efforts to satisfy such obligations.

                                     - 69 -
<PAGE>

                  For clarification, the Parent shall (x) pay the Section
                  9(c)(i)(B) Payment to the Shareholder Representative if the
                  condition set forth in Section 5(a)(xxix) has not been
                  satisfied or waived, and (y) not pay the Section 9(c)(i)(B)
                  Payment to the Shareholder Representative in accordance with
                  the terms of this Section 9(c)(i) if despite the use of its
                  best efforts to obtain such approvals, the Parent fails to
                  obtain the required regulatory approvals for the transactions
                  contemplated by this Agreement pursuant to the condition set
                  forth in Section 5(a)(xx) hereof.

            (ii)  For clarification, any amounts paid by the Parent to the
                  Company pursuant to Section 9(f) of this Agreement become part
                  of the Deposit and, as such, shall not be repaid under this
                  Section 9(c) in the circumstances outlined above.

      (d)   Effect of Termination. In the event of termination of this Agreement
            by the Shareholder Representative, on the one hand, or the Parent,
            on the other, as provided in Section 9(a), all provisions of this
            Agreement shall terminate and there shall be no liability on the
            part of any of the Principal Shareholders or the Parent or their
            respective shareholders, officers, or directors, except that Section
            10(h) and 10(k) hereof shall survive indefinitely, except that the
            Parties shall remain liable for willful breaches of this Agreement
            prior to the time of such termination, and except that liability for
            payments due under Sections 9(b) and (c) shall survive.

      (e)   Extension of Closing Date by Parent. If the Closing has not occurred
            on or before July 27, 2004, the Parent may at its option postpone
            the Closing Date for up to an additional 45 days by delivering
            written notice to the Shareholder Representative advising of the
            reason for the extension.

      (f)   Payment of Additional Deposit by Parent. If option to extend the
            Closing Date is exercised by the Parent,

            (i)   if any one of the conditions for the benefit of the Company or
                  the Principal Shareholders set forth in Section 5(b)(i)
                  through (xi) have not been satisfied or waived by the Company
                  or Shareholder Representative on or before the Closing, or

            (ii)  in the event that the Parent or Merger Sub shall not have
                  complied with or performed, in all material respects, its
                  respective covenants and obligations under this Agreement to
                  be complied with or performed at or prior to the Closing,

            then the Parent shall pay to the Company the cash amount of Canadian
            Two Hundred and Fifty Thousand Dollars (Cdn. $250,000), which amount
            shall be an increase to the Deposit, such that the aggregate Deposit
            then paid by Chromos will be Canadian One Million Dollars (Cdn
            $1,000,000). The additional Deposit shall be used by the Company to
            fund its operations and may not be applied to

                                     - 70 -
<PAGE>

            repay any Indebtedness owed by the Company to any member of the
            Targeted Affiliated Group.

      (g)   Treatment of Termination Fees. Parties acknowledge that the amount
            set out in this Section 9(b) and 9(c) represent liquidated damages
            which are a genuine pre-estimate of the damages, including
            opportunity costs, which respective Parties will suffer or incur as
            a result of the event giving rise to such damages and resultant
            termination of this Agreement (except for the provisions relating to
            willful breach in Section 9(d)), and are not penalties. Parties
            irrevocably waive any right they may have to raise as a defence that
            such liquidated damages are excessive or punitive.

10.   MISCELLANEOUS.

      (a)   Press Releases and Public Announcements. Neither the Company, nor
            the Principal Shareholders shall issue any press release or make any
            public announcement relating to the subject matter of this Agreement
            without the prior written approval of the Parent. The Parent, upon
            prior notice to the Company, may make any public disclosure it
            believes in good faith is required or permitted by applicable law or
            any listing or trading agreement concerning its publicly-traded
            securities.

      (b)   No Third-Party Beneficiaries. This Agreement shall not confer any
            rights or remedies upon any Person other than the Parties and their
            respective successors and permitted assigns.

      (c)   Entire Agreement. This Agreement (including the documents referred
            to herein) constitutes the entire agreement between the Parties and
            supersedes any prior understandings, agreements, or representations
            by or between the Parties, written or oral, to the extent they
            related in any way to the subject matter hereof.

      (d)   Succession and Assignment. This Agreement shall be binding upon and
            inure to the benefit of the Parties named herein and their
            respective successors and permitted assigns. No Party may assign
            either this Agreement or any of its rights, interests, or
            obligations hereunder without the prior written approval of each
            other Party; provided, however, that the Parent may (i) assign any
            or all of its rights and interests hereunder to one or more of its
            affiliates and (ii) designate one or more of its affiliates to
            perform its obligations hereunder (in any or all of which cases the
            Parent nonetheless shall remain responsible for the performance of
            all of its obligations hereunder).

      (e)   Counterparts. This Agreement may be executed in one or more
            counterparts, each of which shall be deemed an original but all of
            which together will constitute one and the same instrument.

      (f)   Headings. The section headings contained in this Agreement are
            inserted for convenience only and shall not affect in any way the
            meaning or interpretation of this Agreement.

                                     - 71 -
<PAGE>

      (g)   Notices. All notices, requests, demands, claims (including, but not
            limited to, claims for indemnification made by the parties hereto
            pursuant to Section 8 of this Agreement), and other communications
            hereunder will be in writing. Any notice, request, demand, claim, or
            other communication hereunder shall be deemed duly given if (and
            then two business days after) it is sent by registered or certified
            mail, return receipt requested, postage prepaid, and addressed to
            the intended recipient as set forth below:

      If to the Parent (or the Company, following the Closing):

<TABLE>
<S>                                       <C>
CHROMOS MOLECULAR                         Copy to:
SYSTEMS INC.                              FASKEN MARTINEAU DuMOULIN
                                          LLP
8081 Lougheed Highway                     2100 - 1075 West Georgia Street
Burnaby, BC, Canada                       Vancouver, BC, Canada, V6E 3G2
Attention:  Alistair Duncan               Attention:  Iain Mant
Facsimile:  604.415.7151                  Facsimile:  604.631.3232
</TABLE>

      If to the Shareholders (or the Company, prior to the Closing):

<TABLE>
<S>                                              <C>
TARGETED GENETICS                                Copy to:
CORPORATION, as Shareholder                      DORSEY & WHITNEY LLP
Representative
100 - 1100 Olive Way                             3400 - 1420 Fifth Avenue
Seattle, WA  98101                               Seattle, WA  98101-4010
Attention:  H. Stewart Parker                    Attention:  Chris Barry
Facsimile:  206.223.0288                         Facsimile:  206.903.8820

                                                 Copy to:
                                                 GRAHAM & DUNN PC

                                                 Pier 70
                                                 Suite 300 - 2801 Alaskan Way
                                                 Seattle, Washington  98121-1128
                                                 Attention: Daren Nitz
                                                 Facsimile: 206.340.9599
</TABLE>

            Any Party may send any notice, request, demand, claim, or other
            communication hereunder to the intended recipient at the address set
            forth above using any other means (including personal delivery,
            expedited courier, messenger service, telecopy, telex, ordinary
            mail, or electronic mail), but no such notice, request, demand,
            claim, or other communication shall be deemed to have been duly
            given unless and until it actually is received by the intended
            recipient. Any Party may change the address to which notices,
            requests, demands, claims, and other

                                     - 72 -
<PAGE>

            communications hereunder are to be delivered by giving the other
            Party notice in the manner herein set forth.

      (h)   Governing Law. This Agreement shall be governed by and construed
            exclusively in accordance with the laws of the State of Washington
            and the laws of the United States applicable therein, without regard
            to conflict of law provisions thereof.

      (i)   Amendments and Waivers. No amendment of any provision of this
            Agreement shall be valid unless the same shall be in writing and
            signed by each of the Parties. No waiver by any Party of any
            default, misrepresentation, or breach of warranty or covenant
            hereunder, whether intentional or not, shall be deemed to extend to
            any prior or subsequent default, misrepresentation, or breach of
            warranty or covenant hereunder or affect in any way any rights
            arising by virtue of any prior or subsequent such occurrence.

      (j)   Severability. Any term or provision of this Agreement that is
            invalid or unenforceable in any situation in any jurisdiction shall
            not affect the validity or enforceability of the remaining terms and
            provisions hereof or the validity or enforceability of the offending
            term or provision in any other situation or in any other
            jurisdiction.

      (k)   Expenses.

            (i)   The Parent will bear its own costs and expenses (including but
                  not limited to financial, advisory, accounting, legal, and
                  environmental fees and expenses) incurred in connection with
                  this Agreement and the transactions contemplated hereby.

            (ii)  Each Shareholder shall bear his own costs and expenses
                  (including but not limited to financial, advisory, accounting,
                  legal, and environmental fees and expenses).

            (iii) The Company shall bear, to a maximum of United States Dollars
                  Twenty Thousand (US$20,000), the costs and expenses (including
                  but not limited to financial, advisory, accounting, legal, and
                  environmental fees and expenses) of the Company, incurred in
                  connection with this Agreement and the transactions
                  contemplated hereby (the "COMPANY'S TRANSACTIONAL EXPENSES").
                  For clarification, the Company's Transactional Expenses will
                  constitute a liability of the Company in the calculation of
                  the Net Assets of the Company performed for the purposes of
                  determining the Merger Consideration Adjustment, if any.

      (l)   Construction. Any reference to any federal, state, local, or foreign
            statute or law shall be deemed also to refer to all rules and
            regulations promulgated thereunder, unless the context requires
            otherwise. The word "including" shall mean including without
            limitation. Items set forth in the Company Disclosure Schedule shall
            be deemed an exception only to the representations and warranties
            for which they are identified and any other representations or
            warranties to which the Company

                                     - 73 -
<PAGE>

            Disclosure Schedule with respect to representations and warranties
            contain in appropriate cross-reference.

      (m)   Incorporation of Exhibits and Schedules. The Exhibits and Schedules
            identified in this Agreement are incorporated herein by reference
            and made a part hereof.

      (n)   Specific Performance. Each of the Parties acknowledges and agrees
            that the other Party would be damaged irreparably in the event any
            of the provisions of this Agreement are not performed in accordance
            with their specific terms or otherwise are breached. Accordingly,
            each of the Parties agrees that the other Party shall be entitled to
            an injunction or injunctions to prevent breaches of the provisions
            of this Agreement and to enforce specifically this Agreement and the
            terms and provisions hereof in any action instituted in any court
            having, in accordance with the terms of this Agreement, jurisdiction
            over the Parties and the matter, in addition to any other remedy to
            which it may be entitled, at law or in equity.

      (o)   Submission to Jurisdiction. Each of the Parties submits to the
            jurisdiction of any court sitting in King County in the State of
            Washington in any action or proceeding arising out of or relating to
            this Agreement and agrees that all claims in respect of the action
            or proceeding may be heard and determined in any such court. Each
            Party also agrees not to bring any action or proceeding arising out
            of or relating to this Agreement in any other court. Each of the
            Parties waives any defence of inconvenient forum to the maintenance
            of any action or proceeding so brought and waives any bond, surety,
            or other security that might be required of any other Party with
            respect thereto. The Shareholders appoint the Shareholder
            Representative as his, her, or its agent to receive on his, her, or
            its behalf service of copies of the summons and complaint and any
            other process that might be served in the action or proceeding. Any
            Party may make service on any other Party by sending or delivering a
            copy of the process (i) to the Party to be served at the address and
            in the manner provided for the giving of notices in Section 10(g)
            above or (ii) if to the Shareholders, in care of the Shareholder
            Representative at the address and in the manner provided for the
            giving of notices in Section 10(g) above. Each Party agrees that a
            final judgment in any action or proceeding so brought shall be
            conclusive and may be enforced by suit on the judgment or in any
            other manner provided by law or in equity.

      (p)   Arbitration. In the event of any controversy or claim arising out of
            or relating to any provision of this Agreement or the breach
            thereof, the sole recourse shall be to demand arbitration of the
            matter in accordance with the rules of the American Arbitration
            Association or its successor; provided, that either party may have
            recourse to a court of law for purposes of seeking injunctive or
            other extraordinary relief. The demand for arbitration shall be
            filed within a reasonable time after the controversy or claim has
            arisen, and in no event after the date upon which institution of
            legal proceedings based on such controversy or claim would be barred
            by the applicable statute of limitations. Selection of the
            arbitrator and all procedural aspects of the arbitration will be
            pursuant to the rules of the American Arbitration Association for
            commercial disputes, with the exception

                                     - 74 -
<PAGE>

            that the parties will in good faith attempt to agree upon the
            arbitrator from the list of arbitrators then available. The
            arbitration shall occur in Seattle, Washington, as soon as
            reasonably possible. It is the intent of the parties that discovery
            be expeditious and not overly burdensome and shall be generally done
            under the Federal Rules of Civil Procedure as limited by the
            arbitrator in time, volume and scope. The arbitrator will have the
            power to interpret, but not add to, modify, or not apply, any
            portion of this Agreement. The decision of the arbitrator shall be
            rendered within fifteen (15) days of the close of the hearing and
            shall be conclusive and binding on the parties in the arbitration.
            The decision of the arbitrator may be entered and shall be
            enforceable in a court of competent jurisdiction. The parties
            irrevocably consent to the jurisdiction of the State of Washington
            for purposes of this Section. The substantially prevailing party
            shall be reimbursed all reasonable costs and expenses, including all
            reasonable attorneys' fees, incurred in connection with the
            application of this Section.

      [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]

                                     - 75 -
<PAGE>

         IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on
the date first above written.

                                     CHROMOS MOLECULAR SYSTEMS INC.

                                     By:     /s/ Alistair Duncan
                                             -----------------------------------

                                     Name:   Alistair Duncan

                                     Title:  President & Chief Executive Officer

                                     CHROMOS, INC.

                                     By:     /s/ Alistair Duncan
                                             -----------------------------------

                                     Name:   Alistair Duncan

                                     Title:  President & Chief Executive Officer

                                     CELLEXSYS, INC.

                                     By:     /s/ H. Stewart Parker
                                             -----------------------------------

                                     Name:   H. Stewart Parker

                                     Title:  Chairman

                                     TARGETED GENETICS CORPORATION

                                     By:     /s/ H. Stewart Parker
                                             -----------------------------------

                                     Name:   H. Stewart Parker

                                     Title:  President & Chief Executive Officer

      /s/ Philip B. Maples                   /s/ David M. Schubert
      ------------------------------         -----------------------------------
      Witness                                DAVID SCHUBERT

                                     - 76 -
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                                   SCHEDULE A

                           COMPANY DISCLOSURE SCHEDULE

                                 (SEE ATTACHED)

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                                   SCHEDULE B

                                REQUIRED CONSENTS

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                                    EXHIBIT A

                          FORM OF CONVERTIBLE DEBENTURE

                                 (SEE ATTACHED)

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                                    EXHIBIT B

                               ARTICLES OF MERGER

                                 (SEE ATTACHED)

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                                    EXHIBIT C

                       FORM OF MILESTONE PAYMENT AGREEMENT

                                 (SEE ATTACHED)

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                                    EXHIBIT D

                      FORM OF TRANSITION SERVICES AGREEMENT

                                 (SEE ATTACHED)

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                                    EXHIBIT E

                     FORM OF OPINION OF DORSEY & WHITNEY LLP

                                 (SEE ATTACHED)

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                                    EXHIBIT F

                       FORM OF OPINION OF GRAHAM & DUNN PC

                                 (SEE ATTACHED)

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                                    EXHIBIT G

                           FORM OF SECURITY AGREEMENT

                                 (SEE ATTACHED)

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                                    EXHIBIT H

                  FORM OF REPRESENTATION AND SUPPORT AGREEMENT

                                 (SEE ATTACHED)

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                                    EXHIBIT I

                  FORM OF OPTIONHOLDER REPRESENTATION AGREEMENT

                                 (SEE ATTACHED)

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                                    EXHIBIT J

                FORM OF OPINION OF FASKEN MARTINEAU DUMOULIN LLP

                                 (SEE ATTACHED)

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                                    EXHIBIT K

                  FORM OF OPINION OF DAVIS WRIGHT TREMAINE LLP

                                 (SEE ATTACHED)

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