ASSET PURCHASE AGREEMENT AND PLAN OF REORGANIZATION

Exhibit 10.1
Execution Copy

ASSET PURCHASE AGREEMENT AND

PLAN OF REORGANIZATION

BY AND BETWEEN

ORTHOLOGIC CORP.

AND

AzERx, Inc.

February 23, 2006

Table of Contents

Table of Contents
(continued)

Table of Contents
(continued)

Table of Contents
(continued)

EXHIBITS

ASSET PURCHASE AGREEMENT AND PLAN OF REORGANIZATION

     THIS ASSET PURCHASE AGREEMENT AND PLAN OF REORGANIZATION is entered into as of the 23rd day of February, 2006, by and between OrthoLogic Corp., a Delaware corporation (“ OrthoLogic ”), and AzERx, Inc., a Delaware corporation (“ AzERx ”). OrthoLogic and AzERx are referred to collectively herein as the “ Parties ” and individually as “ Party .”

RECITALS

     WHEREAS, AzERx is a biopharmaceutical company engaged in the development of peptide drugs for disorders involving smooth muscle tone and fibrosis (the “ Business ”);

     WHEREAS, AzERx desires to sell to OrthoLogic, and OrthoLogic desires to purchase from AzERx, substantially all of the assets and properties of AzERx, and in connection therewith, OrthoLogic is willing to assume certain specified liabilities of AzERx relating thereto, all upon the terms and subject to the conditions and provisions set forth herein; and

     WHEREAS, for United States federal income tax purposes, it is intended that the purchase contemplated by this Agreement will qualify as a reorganization under the provisions of Section 368(a)(1)(C) of the Code (as defined below), and that this Agreement constitutes a plan of reorganization within the meaning of Section 1.368-2(g) of the income tax regulations promulgated under the Code (the “ Treasury Regulations ”).

AGREEMENT

     NOW THEREFORE, in consideration of the premises and the mutual promises hereinafter set forth, and in consideration of the representations, warranties and covenants herein contained, the Parties hereby agree as follows.

ARTICLE I

DEFINITIONS

     1.1 Definitions .

     “ AAA ” has the meaning set forth in Section 7.5(c) .

     “ Accredited Investor ” has the meaning set forth in Rule 501 of Regulation D, promulgated under the Securities Act.

     “ Acquired Assets ” has the meaning set forth in Section 2.1 .

     “ Affiliate ” has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act.

     “ Affiliated Group ” means any affiliated group within the meaning of Code §1504(a) or any similar group defined under a similar provision of state, local or foreign law.

     “ Agreement ” means this Asset Purchase Agreement and Plan of Reorganization, as amended or supplemented from time to time, together with all exhibits and schedules delivered pursuant hereto.

     “ Assumed Contracts ” has the meaning set forth in Section 2.1(e) .

     “ Assumed Liabilities ” has the meaning set forth in Section 2.3(a) .

     “ AzERx ” has the meaning set forth in the preface above.

     “ AzERx’s Knowledge ” means actual knowledge of Terry Winters, Colleen Brophy, Alyssa Panitch, Elizabeth Furnish, Ellen Shaver, Randolph Steer and Dennis Goldberg.

     “ AzTE ” has the meaning set forth in Section 2.1(c) .

     “ AzTE Agreement ” has the meaning set forth in Section 2.1(c) .

     “ AzTE License ” has the meaning set forth in Section 2.1(c) .

     “ AzTE Option Agreement ” has the meaning set forth in Section 2.1(c) .

     “ Basis ” means any past or present fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act or transaction that forms or could form the basis for any specified consequence.

     “ Business ” has the meaning set forth in the recitals above.

     “ Business Day ” shall mean any day other than a Saturday, a Sunday or a day on which banks in New York, New York are authorized or obligated by law or executive order to close.

     “ Cash ” means cash and cash equivalents (including marketable securities and short term investments) calculated in accordance with GAAP and applied on a basis consistent with the preparation of the Financial Statements.

     “ Closing ” has the meaning set forth in Section 2.6 .

     “ Closing Date ” has the meaning set forth in Section 2.6 .

     “ Closing Date Shares ” has the meaning set forth in Section 2.4(b) .

     “ Closing Date Stock Price ” shall mean the average closing sale price of OrthoLogic’s common stock as reported by the Nasdaq National Market for the 15 trading days immediately preceding the Closing Date.

     “ Code ” means the Internal Revenue Code of 1986, as amended.

     “ Consent Action ” shall have the meaning set forth in Section 5.8 .

     “ DEA ” means the United States Drug Enforcement Administration.

     “ Debt ” with respect to a Person means all liabilities or obligations of such Person, whether primary or secondary or absolute or contingent: (a) for borrowed money; (b) that are evidenced by notes, bonds, debentures or similar instruments; or (c) relating to the guaranty, creation or assumption of any liability or obligation of any other Person.

     “ Disclosure Schedule ” has the meaning set forth in ARTICLE III.

     “ Dispute ” has the meaning set forth in Section 7.5 .

     “ Employee Benefit Plan ” means any “employee benefit plan” (as such term is defined in ERISA §3(3)) and any other employee benefit plan, program or arrangement of any kind.

     “ Employee Pension Benefit Plan ” has the meaning set forth in ERISA §3(2).

     “ Employee Welfare Benefit Plan ” has the meaning set forth in ERISA §3(1).

     “ Environmental, Health and Safety Requirements ” shall mean all federal, state, local and foreign statutes, regulations, ordinances and other provisions having the force or effect of law, all judicial and administrative orders and determinations, all contractual obligations and all common law concerning public health and safety, worker health and safety, and pollution or protection of the environment, including without limitation all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control or cleanup of any hazardous materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise or radiation, each as amended and as now or hereafter in effect.

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

     “ Escrow Agent ” means Wells Fargo Bank, N.A., a national banking association.

     “ Escrow Agreement ” means the agreement between OrthoLogic, AzERx, Representative and the Escrow Agent in substantially the form of Exhibit A .

     “ Excluded Assets ” has the meaning set forth in Section 2.2 .

     “ FDA ” means the United States Food and Drug Administration.

     “ Financial Statements ” has the meaning set forth in Section 3.7 .

     “ GAAP ” means United States generally accepted accounting principles as in effect from time to time.

     “ HIPAA ” means the Health Insurance Portability and Accountability Act of 1996, as amended.

     “ HIPAA Privacy Rules ” has the meaning set forth in Section 9.1 .

     “ Intellectual Property ” means (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions and reexaminations thereof, (b) all 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 copyrights and all applications, registrations, and renewals in connection therewith, (d) all trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing, production and research processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information and business and marketing plans and proposals), (e) all computer software (including data and related documentation), (f) all licenses through which any person holds rights to any technology or other intellectual property, and in the case of AzERx, including but not limited to the AzTE Agreement and the Washington University Agreement, (g) all other proprietary rights and (h) all copies and tangible embodiments of the foregoing (in whatever form or medium).

     “ Inventory ” has the meaning set forth in Section 2.1(b) .

     “ Leased Real Property ” means all leasehold or subleasehold estates and other rights to use or occupy any land, buildings, structures, improvements, fixtures or other interest in real property held by AzERx.

     “ Leases ” means all leases, subleases, licenses, concessions and other agreements (written or oral), including all amendments, extensions, renewals, guaranties and other agreements with respect thereto, pursuant to which AzERx holds any Leased Real Property, including the right to all security deposits and other amounts and instruments deposited by or on behalf of AzERx thereunder.

     “ 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.

     “ Lockup Agreement ” shall mean a Lockup Agreement substantially in the form of Exhibit D attached hereto.

     “ Lockup Stockholder ” shall have the meaning set forth in Section 2.5(c) .

     “ Losses ” has the meaning set forth in Section 7.1 .

     “ Material Adverse Change ” with respect to a Party means any adverse event, condition, change, circumstance or effect that, individually or in the aggregate, is or is reasonably likely to materially adversely affect (i) the condition (financial or otherwise), properties, business, results of operations, assets (including intangible assets), or Liabilities of such Party, taken as a whole, or (ii) the ability of such Party to consummate the transactions contemplated hereby.

     “ Most Recent Balance Sheet ” means the audited balance sheet of AzERx dated as of December 31, 2005.

     “ Most Recent Fiscal Month End ” means the month ended prior to the date of this Agreement.

     “ Most Recent Fiscal Year End ” has the meaning set forth in Section 3.7 .

     “ Multiemployer Plan ” has the meaning set forth in ERISA §4001(a)(3).

     “ NDA ” means a new drug application with the FDA.

     “ Non-Compete Area ” has the meaning set forth in Section 9.2(c) .

     “ Non-Compete Term ” has the meaning set forth in Section 9.2(b) .

     “ Notes and Accounts Receivable ” means all notes and accounts receivable of AzERx, including, without limitation, all amounts receivable from the stockholders of AzERx and amounts receivable through the Closing Date pursuant to agreements with respect to the Small Business Technology Transfer (STTR) Program.

     “ Ordinary Course of Business ” means the ordinary course of business consistent with past custom and practice of AzERx as a biopharmaceutical research company .

     “ OrthoLogic ” has the meaning set forth in the preface above.

     “ OrthoLogic Common Stock ” means OrthoLogic common stock, par value $.0005 per share.

     “ OrthoLogic Reports ” has the meaning set forth in Section 4.6(a) .

     “ Owned Real Property ” means all land, together with all buildings, structures, improvements and fixtures located thereon, including all electrical, mechanical, plumbing and other building systems, fire protection, security and surveillance systems, telecommunications, computer, wiring and cable installations, utility installations, water distribution systems and landscaping, together with all easements and other rights and interests appurtenant thereto (including air, oil, gas, mineral and water rights) owned by AzERx.

     “ Parties ” has the meaning set forth in the preface above.

     “ Party ” has the meaning set forth in the preface above.

     “ PBGC ” means the Pension Benefit Guaranty Corporation.

     “ Person ” means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a governmental entity (or any department, agency or political subdivision thereof).

     “ Phase 3 Trial ” has the meaning set forth in Section 9.5 .

     “ PHI ” has the meaning set forth in Section 9.1 .

     “ Purchase Price ” has the meaning set forth in Section 2.4 .

     “ Registration Rights Agreement ” has the meaning set forth in Section 2.5(b) .

     “ Replacement ” has the meaning set forth in Section 7.5(e)(vii) .

     “ Representative ” has the meaning set forth in Section 7.6 .

     “ Request ” has the meaning set forth in Section 7.5(c) .

     “ Securities Act ” means the Securities Act of 1933, as amended.

     “ Securities Exchange Act ” means the Securities Exchange Act of 1934, as amended.

     “ Security Interest ” means any mortgage, pledge, lien, encumbrance, charge or other security interest, other than (a) mechanics’, materialmen’s, and similar liens or (b) liens for Taxes not yet due and payable.

     “ Special Meeting ” has the meaning set forth in Section 5.8 .

     “ Tax ” means any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code §59A), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated or other tax of any kind whatsoever, including any interest, penalty or addition thereto, whether disputed or not.

     “ Tax Return ” means any return, declaration, report, claim for refund or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof.

     “ Treasury Regulations ” has the meaning set forth in the recitals above.

     “ Washington University Agreement ” has the meaning set forth in Section 2.1(d) .

ARTICLE II

BASIC TRANSACTION

     2.1 Purchase and Sale of Assets . On and subject to the terms and conditions of this Agreement, OrthoLogic hereby agrees to purchase from AzERx and AzERx hereby agrees to sell, transfer, convey, assign and deliver to OrthoLogic, free and clear of any Security Interest, all of the Acquired Assets at the Closing for the consideration specified in Section 2.4 below. The Acquired Assets shall mean all of the assets specified below in this Section and all other tangible and intangible assets owned by AzERx, other than the Excluded Assets, including, without limitation:

          (a) Tangible Assets . Subject to Section 2.2 , all of the tangible assets of AzERx, including, without limitation, the items described in Exhibit E ;

          (b) Inventory . All of the inventories and supplies of AzERx, as of the Closing Date (the “ Inventory ”);

          (c) Rights in AzTE Agreement . All of AzERx’s rights in, under and pursuant to and relating to the Option Agreement dated March 25, 2004, between Arizona Science and Technology Enterprises, LLC (“ AzTE ”) and AzERx, as amended, revised or supplemented in connection with the consummation of the transactions contemplated hereby (the “ AzTE Option Agreement ”), and any license or other agreement arising therefrom or pursuant thereto or contemplated thereby, as amended and restated in accordance with the terms of the side letter referred to in Section 6.1(b) of this Agreement (the “ AzTE License ” and together with the AzTE Option Agreement, the “ AzTE Agreement ”);

          (d) Rights in Washington University Agreement . All of AzERx’s rights in, under and pursuant to the Nonexclusive License Agreement between The Washington University and AzERx, dated August 1, 2004 (the “ Washington University Agreement ”);

          (e) Contracts . All of AzERx’s rights in, to and under the additional contracts set forth on Exhibit F , together with the AzTE Agreement and the Washington University Agreement, as well as such other contracts as AzERx may subsequently enter into prior to the Closing, which OrthoLogic shall elect to assume (the “ Assumed Contracts ”);

          (f) Intellectual Property . All of AzERx’s rights, title and interest in and to any Intellectual Property as of the Closing Date, goodwill associated therewith, licenses and sublicenses granted and obtained with respect thereto, and rights thereunder, remedies against infringements thereof, rights to protection of interests therein under the laws of all jurisdictions and the right to sue for past infringement thereof; and

          (g) Miscellaneous . To the extent transferable, any and all approvals, permits, licenses, orders, registrations, certificates, variances and similar rights obtained from governments and governmental agencies related to the Business. Subject to Section 2.2 , any and all books, records, ledgers, files, documents, correspondence, lists, plats, architectural plans, drawings and specifications, creative materials, advertising and promotional materials, studies, evaluations, study results, reports and other printed or written materials related to the Business.

     2.2 Excluded Assets . On and subject to the terms and conditions of this Agreement, the Parties hereby agree that OrthoLogic will not purchase and AzERx will retain all right, title and interest in and to the following (collectively, the “ Excluded Assets ”):

          (a) AzERx’s rights under this Agreement and any other agreement ancillary hereto and delivered by AzERx to OrthoLogic in connection herewith;

          (b) All of AzERx’s Cash;

          (c) AzERx’s bank accounts, checkbooks and cancelled checks;

          (d) AzERx’s insurance policies;

          (e) AzERx’s corporate charter (not including the corporate name), minute and stock record books, corporate seal, accounting records and tax returns;

          (f) All Notes and Accounts Receivable; and

          (g) the assets, if any, listed on Exhibit B .

     2.3 Assumption of Liabilities . At the Closing, on and subject to the terms and conditions of this Agreement, OrthoLogic hereby agrees to assume and become responsible for all of the Assumed Liabilities.

          (a) The Assumed Liabilities shall mean:

               (i) all liabilities, obligations and commitments of AzERx pursuant to or relating to the Assumed Contracts arising after the Closing Date;

               (ii) all liabilities, obligations and commitments of AzERx pursuant to or relating to the AzTE Agreement and the Washington University Agreement arising after the Closing Date; and

               (iii) the liabilities, if any, listed on Exhibit C .

          (b) Assumed Liabilities shall not include (by way of example and without limitation):

               (i) any Liabilities of AzERx not assumed as part of the Assumed Liabilities under Section 2.3(a) above;

               (ii) any Debt of AzERx not assumed as part of the Assumed Liabilities under Section 2.3(a) above;

               (iii) any Liability of AzERx for Taxes;

               (iv) any Liability of AzERx for income, transfer, sales, use, and other Taxes arising in connection with the consummation of the transactions contemplated hereby (including any income Taxes arising because AzERx is transferring the Acquired Assets);

               (v) any Liability of AzERx for the unpaid Taxes of any Person (other than AzERx) under Treas. Reg. §1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or successor, by contract, or otherwise;

               (vi) any obligation of AzERx to indemnify any Person by reason of the fact that such Person was a director, manager, officer, employee or agent of AzERx or was serving at the request of AzERx as a partner, manager, trustee, director, officer, employee or agent of another entity (whether such indemnification is for judgments, damages, penalties, fines, costs, amounts paid in settlement, losses, expenses or otherwise, and whether such indemnification is pursuant to any statute, charter document, bylaw, agreement or otherwise);

               (vii) any Liability of AzERx for costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby;

               (viii) any Liability or obligation of AzERx under this Agreement (or under any other agreement between AzERx on the one hand and OrthoLogic on the other hand entered into on or after the date of this Agreement); or

               (ix) any Liability or obligation of AzERx arising out of AzERx’s Employee Benefit Plans or severance agreements with its employees.

     2.4 Purchase Price . On and subject to the terms and conditions of this Agreement, OrthoLogic hereby agrees to pay to AzERx the following consideration (the “ Purchase Price ”):

          (a) on the Closing Date, OrthoLogic will pay to AzERx $390,000 in cash, payable by wire transfer or delivery of other immediately available funds; and

          (b) on the Closing Date, subject to Sections 2.5 and 2.6 hereof, OrthoLogic will issue and deliver to AzERx 1,325,000 shares of OrthoLogic Common Stock (the “ Closing Date Shares ”).

     2.5 Ancillary Documents.

          (a) On the Closing Date, OrthoLogic shall deposit in escrow with the Escrow Agent 10% of the Closing Date Shares, all of which will be held subject to and released in accordance with the Escrow Agreement.

          (b) On the Closing Date, OrthoLogic will have evidenced its agreement hereunder to register for resale the OrthoLogic Common Stock issued to AzERx as part of the Purchase Price in accordance with, and subject to, the terms and conditions specified in the Registration Rights Agreement in the form attached hereto as Exhibit G (the “ Registration Rights Agreement ”).

          (c) AzERx agrees that it will not resell or otherwise dispose of (except for distribution of Closing Date Shares to its stockholders) more than 10% of the Closing Date Shares, in any calendar month prior to the second anniversary of the Closing Date. AzERx further agrees that as a condition to the distribution of Closing Date Shares to AzERx’s stockholders in accordance with the terms hereof, AzERx shall cause each of Alyssa Panitch,

Colleen Brophy, Elizabeth Furnish, Terry Winters, Dennis Goldberg, Randolph Steer and Valley Ventures III, L.P., a Delaware limited partnership (each, a “ Lockup Stockholder ”) to first enter into a Lockup Agreement, pursuant to which each Lockup Stockholder will agree to resell no more than 10% of the Closing Date Shares received by such stockholder in any calendar month prior to the second anniversary of the Closing Date.

     2.6 The Closing . The closing of the purchase and sale transactions contemplated by this Agreement (the “ Closing ”) shall take place at the offices of Quarles & Brady Streich Lang LLP, located at One Renaissance Square, Two North Central Avenue, Phoenix, Arizona, 85004, commencing at 10:00 a.m. local time on February 28, 2006, or such other date as the Parties may mutually determine (the “ Closing Date ”).

     2.7 No Actions to Affect Tax Free Reorganization . The Parties intend, by executing this Agreement, to adopt a plan of reorganization within the meaning of Treasury Regulation §1.368-2(g), and to cause the transactions contemplated hereby to qualify as a “reorganization” under the provisions of Code §368(a)(1)(C). Neither party shall take any action that is inconsistent with the characterization of the transactions contemplated hereby, or would otherwise cause such transactions to fail to qualify as a “reorganization” within the meaning of Code §368(a)(1)(C). Notwithstanding the foregoing, no Party makes any representations as to the Tax consequences of the transactions contemplated by this Agreement.

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF AZERX

     AzERx represents and warrants to OrthoLogic that the statements contained in this ARTICLE III are true, correct and complete as of the date of this Agreement and will be true, correct and complete as of the Closing Date (as though made then and as though the Closing Date were substituted for the date of this Agreement throughout this ARTICLE III), except as set forth in the disclosure schedule accompanying this Agreement (the “ Disclosure Schedule ”). Except where an exhibit is provided for the disclosure of information required under this ARTICLE III, any disclosures to be made on the Disclosure Schedule will be arranged in paragraphs corresponding to the lettered and numbered paragraphs contained in this ARTICLE III. If a disclosure is not provided under a paragraph so numbered, it shall be presumed that AzERx has no such items to disclose in respect of the corresponding section.

     3.1 Organization of AzERx . AzERx is a corporation duly organized, validly existing and in good standing under the laws of Delaware. AzERx has no subsidiaries.

     3.2 Authorization of Transaction . AzERx has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder. Without limiting the generality of the foregoing, to the extent required by law or under the governing documents of AzERx, the board of directors of AzERx and AzERx’s stockholders have duly authorized the execution, delivery and performance of this Agreement by AzERx and the consummation of the transactions contemplated hereby. This Agreement constitutes the valid and legally binding obligation of AzERx, enforceable in accordance with its terms and conditions.

     3.3 Capital Stock . Section 3.3 of the Disclosure Schedule accurately and completely sets forth a complete list of AzERx’s capital structure by listing thereon the number of shares of capital stock of AzERx and rights to acquire such capital stock that are authorized and that are issued and outstanding. All of the issued and outstanding shares of capital stock of AzERx (a) are duly authorized, validly issued, fully paid and nonassessable, (b) free and clear of all mortgages, liens, pledges, Security Interests, charges, claims, restrictions and encumbrances of any nature whatsoever and defects of title whatsoever, (c) are held of record and beneficially owned as set forth on Section 3.3 of the Disclosure Schedule, and (d) were not issued in violation of the preemptive rights of any person or any agreement or laws, statutes, orders, decrees, rules, regulations or judgments of any governmental entity by which AzERx, at the time of issuance, was bound. Except as set forth in Section 3.3 of the Disclosure Schedule, no shares of capital stock of AzERx are reserved for issuance or are held as treasury shares, and except as disclosed on Section 3.3 of the Disclosure Schedule: (i) there are no outstanding options, warrants, rights, calls, commitments, conversion rights, rights of exchange, subscriptions, claims of any character, agreements, obligations, convertible or exchangeable securities or other plans or commitments, contingent or otherwise, relating to the capital stock or other similar interests of AzERx or that could require AzERx to issue, sell or otherwise cause to become outstanding any of its capital stock, other than as contemplated by this Agreement; (ii) there are no outstanding contracts or other agreements of AzERx or any other Person to purchase, redeem or otherwise acquire any outstanding shares of the capital stock of AzERx, or securities or obligations of any kind convertible into any shares of the capital stock of AzERx; (iii) there are no dividends which have accrued or been declared but are unpaid on the capital stock of AzERx; (iv) there are no outstanding or authorized stock appreciation, phantom stock, stock plans or similar rights with respect to AzERx; and (v) there are no voting trusts or similar agreements relating to the voting of AzERx stock in effect with respect to AzERx.

     3.4 Noncontravention . Except as set forth in Section 3.4 of the Disclosure Schedule, neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby (with or without notice or the lapse of time) will: (i) conflict with, 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 AzERx 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); (ii) accelerate, terminate, modify or cancel any contract or agreement related to the patents, patent rights, licenses or license rights underlying the AzTE Agreement and the Washington University Agreement; or (iii) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge or other restriction of any government, governmental agency, or court to which AzERx is subject or any provision of the charter, bylaws or resolutions of the Board of Directors or stockholders of AzERx. AzERx does not need to give any notice to, make any filing with or obtain any authorization, consent or approval of, any government or governmental agency in order for the Parties to consummate the transactions contemplated by this Agreement.

     3.5 Brokers’ Fees . AzERx has no Liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which OrthoLogic could become liable or obligated.

     3.6 Title to Assets . AzERx has good and marketable title to, or a valid license or leasehold interest in, the properties and assets used by it, located on its premises, or shown on the Most Recent Balance Sheet or acquired after the date thereof, free and clear of all Security Interests, except for the Excluded Assets and properties and assets disposed of in the Ordinary Course of Business since the Most Recent Fiscal Year End. Without limiting the generality of the foregoing, AzERx has good and marketable title to all of the Acquired Assets, free and clear of any Security Interest or restriction on transfer.

     3.7 Financial Statements . Attached hereto as Exhibit H are the following financial statements (collectively, the “ Financial Statements ”): (i) unaudited balance sheets and statements of income, as of and for the fiscal years ended December 31, 2004 and 2005 (the fiscal year ended December 31, 2005 being referred to herein as the “ Most Recent Fiscal Year End ”) for AzERx. The Financial Statements have been prepared in accordance with AzERx’s customary practices applied on a consistent basis throughout the periods covered thereby, (which are not in accordance with GAAP, due to absence of footnotes and customary accruals, among other things) present fairly in all material respects in accordance with such practices the financial condition of AzERx as of such dates and the results of operations of AzERx for such periods, are correct and complete in all material respects in accordance with such practices and are consistent with the books and records of AzERx (which books and records are correct and complete in all material respects).

     3.8 Events Subsequent to Fiscal Quarter ended December 31, 2005 . Since December 31, 2005, there has not been any Material Adverse Change and no event has occurred or circumstances exist that may result in a Material Adverse Change. Without limiting the generality of the foregoing, except as set forth in Section 3.8 of the Disclosure Schedule, since that date:

          (a) AzERx has not sold, leased, transferred or assigned any of its assets, tangible or intangible, other than for a fair consideration in the Ordinary Course of Business;

          (b) AzERx has not entered into any agreement, contract, Lease or license (or series of related agreements, contracts, Leases and licenses) either involving more than $10,000 or outside the Ordinary Course of Business;

          (c) no party (including AzERx) has accelerated, terminated, modified or cancelled any agreement, contract, Lease or license (or series of related agreements, contracts, Leases and licenses) involving more than $10,000 to which AzERx is a party or by which any of them is bound;

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

          (e) AzERx has not made any capital expenditure (or series of related capital expenditures) either involving more than $10,000 or outside the Ordinary Course of Business;

          (f) AzERx has not made any capital investment in, any loan to, or any acquisition of, the securities or assets of, any other Person (or series of related capital

investments, loans and acquisitions) either involving more than $5,000 or outside the Ordinary Course of Business;

          (g) AzERx has not issued any note, bond or other debt security or created, incurred, assumed or guaranteed any indebtedness for borrowed money or capitalized lease obligation either involving more than $10,000 singly or $20,000 in the aggregate;

          (h) AzERx has not delayed or postponed the payment of accounts payable and other Liabilities involving more than $10,000 singly or $20,000 in the aggregate;

          (i) AzERx has not cancelled, compromised, waived or released any right or claim (or series of related rights and claims) either involving more than $10,000 or outside the Ordinary Course of Business;

          (j) AzERx has not transferred, encumbered nor granted any license or sublicense of, any rights under or with respect to any Intellectual Property of AzERx;

          (k) AzERx has not licensed or entered into joint development agreements regarding any Intellectual Property owned by or licensed to AzERx, or incurred any material expense, entered into any material transaction or otherwise taken any action outside the Ordinary Course of Business;

          (l) there has been no change made or authorized in the charter or bylaws of AzERx;

          (m) AzERx has not issued, sold or otherwise disposed of any of its capital stock, or granted any options, warrants or other rights to purchase or obtain (including upon conversion, exchange or exercise) any of its capital stock;

          (n) AzERx has not declared, set aside or paid any dividend or made any distribution with respect to its capital stock (whether in cash or in kind) or redeemed, purchased or otherwise acquired any of its capital stock;

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

          (p) AzERx has not entered into any employment contract or collective bargaining agreement, written or oral, or modified the terms of any existing such contract or agreement;

          (q) AzERx has not granted any increase in the base compensation of any of its directors, officers, managers or employees;

          (r) AzERx has not made any other change in employment terms for any of its directors, managers, officers or employees;

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

          (t) there has not been any other material occurrence, event, incident, action, failure to act or transaction outside the Ordinary Course of Business involving AzERx; and

          (u) AzERx has not committed to any of the foregoing.

     3.9 Undisclosed Liabilities . AzERx has no Liability (and there is to AzERx’s Knowledge no Basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand against it giving rise to any Liability), except for Liabilities set forth in the Financial Statements or Section 3.9 of the Disclosure Schedule.

     3.10 Legal Compliance.

          (a) AzERx and its respective predecessors and Affiliates have complied in all respects with all applicable laws (including rules, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings and charges thereunder) of federal, state, local and foreign governments (and all agencies thereof), and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand or notice has been filed or commenced against any of them alleging any failure so to comply.

          (b) Without limiting the generality of the foregoing Section 3.10(a) , AzERx is currently in compliance with all applicable provisions of HIPAA and all regulations pertinent to HIPAA, including HIPAA regulations and requirements effective through the date of this Agreement.

     3.11 Pharmaceutical Regulation . Except as set forth in Section 3.11 of the Disclosure Schedule:

          (a) AzERx possesses all required registrations, licenses and other permits from the FDA, United States Drug Enforcement Administration (“ DEA ”), relevant foreign and state agencies, institutional review boards and any other relevant agencies to conduct its business as presently conducted;

          (b) To the extent applicable, AzERx is in compliance with the Prescription Drug Marketing Act, the Federal Controlled Substances Act, the Food, Drug and Cosmetic Act, as amended, applicable state, FDA, DEA and equivalent foreign or state agencies’ regulations, including, but not limited to, requirements for the receipt, security, inventory, and distribution of pharmaceutical products, and record-keeping and reporting requirements;

          (c) No regulatory agency forms, reports (including establishment, rating and inspection reports) or correspondence have been received by AzERx from or with the FDA, DEA or equivalent foreign or state regulatory agencies;

          (d) No warning letters, other regulatory letters, notices of violation, notices of hearing or adverse findings have been received by AzERx identifying potential violations of, or deviations from, FDA, DEA or equivalent foreign or state agency regulatory requirements;

          (e) No regulatory audits have been performed with respect to AzERx by any outside auditor; and

          (f) AzERx has not received any warning letter regarding potential adverse findings involving any drug that currently is or was at any time under development by AzERx, or any of AzERx’s Intellectual Property from the FDA or the equivalent state regulatory agency nor, to AzERx’s Knowledge is there any reasonable Basis for AzERx to receive a warning letter or other regulatory letter, other adverse regulatory communication or become named in an action, or civil or criminal investigation or action.

     3.12 Ethical Practices . Neither AzERx nor any representative thereof has offered or given, and to AzERx’s Knowledge, no Person has offered or given on their behalf, anything of value to: (i) any official of a governmental entity, any political party or official thereof, or any candidate for political office; (ii) any customer or member of a governmental entity; or (iii) any other Person, in any such case where such payment would violate any applicable law or ethical guideline or would constitute a bribe, kickback or illegal or improper payment to assist AzERx in obtaining or retaining business for, or with, or directing business to, any Person.

     3.13 Tax Matters .

          (a) AzERx has timely filed all Tax Returns that it was required to file. All such Tax Returns were correct and complete in all material respects and were prepared in substantial compliance with all applicable laws and regulations. All Taxes owed by AzERx (whether or not shown on any Tax Return) have been paid. AzERx is not currently the beneficiary of any extension of time within which to file any Tax Return. No claim has ever been made by an authority in a jurisdiction where AzERx does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. There are no Security Interests on any of the assets (whether Acquired Assets or Excluded Assets) of AzERx that arose in connection with any failure (or alleged failure) to pay any Tax.

          (b) AzERx has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party and all Forms W-2 and 1099 required with respect thereto have been properly completed and timely filed.

          (c) No stockholder, director or officer (or employee responsible for Tax matters) of AzERx expects any authority to assess any additional Taxes for any period for which Tax Returns have been filed. There is no dispute or claim concerning any Tax Liability of AzERx either (i) claimed or raised by any authority in writing or (ii) as to which any of the stockholders and the directors and officers (and employees responsible for Tax matters) of AzERx has Knowledge based upon personal contact with any agent of such authority. Section 3.13(c) of the Disclosure Schedule lists all federal, state, local, and foreign income Tax Returns filed with respect to AzERx for taxable periods since January 1, 2003, indicates those Tax Returns that have been audited, and indicates those Tax Returns that currently are the subject of audit. AzERx has delivered to OrthoLogic correct and complete copies of all federal income Tax Returns, examination reports, and statements of deficiencies assessed against or agreed to by AzERx since January 1, 2003.

          (d) AzERx 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.

          (e) The unpaid Taxes of AzERx (i) did not, as of the Most Recent Fiscal Month End, 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 Most Recent Balance Sheet (rather than in any notes thereto) and (ii) do not exceed that reserve as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of AzERx in filing its Tax Returns.

          (f) None of the Assumed Liabilities is an obligation to make a payment that will not be deductible under Code Section 280G. AzERx 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. AzERx is not a party to any Tax allocation or sharing agreement. AzERx (i) 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 AzERx) or (ii) has no Liability for the Taxes of any Person under Reg. §1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise.

          (g) Section 3.13(g) of the Disclosure Schedule sets forth the basis of AzERx in its assets as of the most recent practicable date.

          (h) AzERx 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 (i) a change in method of accounting for a taxable period (or portion thereof) ending on or prior to the Closing Date, (ii) any “closing agreement,” as described in Code Section 7121 (or any corresponding provision of state, local or foreign income Tax law), (iii) any Intercompany Transaction (as defined in Treasury Regulation Section 1.1502-13) or any Excess Loss Account (as defined in Treasury Regulation Section 1.1502-19) (or any corresponding or similar provision or administrative rule of federal, state, local or foreign income Tax law), (iv) any installment sale or open transaction made on or prior to the Closing Date or (v) as a result of any prepaid amount received on or prior to the Closing Date.

          (i) AzERx has not distributed stock of any Person, or had its stock distributed by another Person, in a transaction that was purported or intended to be governed in whole or in part by Code Section 355 or Code Section 361.

     3.14 Real Property .

          (a) AzERx has no Owned Real Property and has never had any Owned Real Property.

          (b) AzERx has no Leased Real Property and has never had any Leased Real Property.

     3.15 Intellectual Property .

          (a) AzERx owns or has the right to use pursuant to license, sublicense, agreement or permission all Intellectual Property necessary or desirable for the operation of the Business as presently conducted. Each item of Intellectual Property (including, specifically, the AzTE Agreement and the Washington University Agreement) owned or used by AzERx

immediately prior to the Closing will be owned or available for use by OrthoLogic on identical terms and conditions immediately subsequent to the Closing. AzERx has taken all necessary and desirable action to maintain and protect each item of Intellectual Property that it owns or uses.

          (b) The AzTE Agreement and the Washington University Agreement have been executed and delivered by the relevant parties, are binding on such parties in accordance with their terms and are effective as of the date hereof.

          (c) AzERx has not interfered with, infringed upon, misappropriated or otherwise come into conflict with any Intellectual Property rights of third parties, and AzERx has never received any charge, complaint, claim, demand or notice alleging any such interference, infringement, misappropriation or violation (including any claim that AzERx must license or refrain from using any Intellectual Property rights of any third party) by AzERx. To AzERx’s Knowledge, no third party has interfered with, infringed upon, misappropriated or otherwise come into conflict with any Intellectual Property rights of AzERx.

          (d) No patent or registration has been issued to AzERx with respect to any of its Intellectual Property, and no patent application or application for registration is pending with respect to any of its Intellectual Property. Section 3.15(d) of the Disclosure Schedule identifies each license, agreement or other permission which AzERx has granted to any third party with respect to any of its Intellectual Property (together with any exceptions). AzERx has delivered to OrthoLogic correct and complete copies of all such licenses, agreements and permissions (as amended to date). Section 3.15(d) of the Disclosure Schedule identifies each trade name or trademark used in connection with the Business. With respect to each item of Intellectual Property required to be identified in Section 3.15(d) of the Disclosure Schedule:

               (i) AzERx possesses all right, title, and interest in and to the item, free and clear of any Security Interest, license, or other restriction;

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

               (iii) no action, suit, proceeding, hearing, investigation, charge, complai