DISTRIBUTION AGREEMENT

This is an Agreement dated and effective as of the last date of signature below (“Effective Date”), by and between Ethicon Endo-Surgery, Inc. a corporation organized under the laws of the State of Ohio, having a business address at 4545 Creek Road, Cincinnati, Ohio 45242 (“Ethicon”); and Neoprobe Corporation, a corporation organized under the laws of the State of Delaware, having a business address at 425 Metro Place North, Suite 300, Dublin, Ohio 43017 (“Neoprobe”, together with Ethicon, the “Parties”, and each a “Party”).

1.1   Ethicon manufactures and markets surgical instruments and accessories for minimally invasive surgery, including trocars, staplers, ligation devices, hand-held instruments, retractors, manipulation devices, electrosurgery and diagnostic surgical products.

1.2   Neoprobe manufactures and markets radiation detection devices, including but not limited to, devices for use in intraoperative lymphatic mapping (“ILM”) and gamma radiation guided surgery.

1.3   Ethicon has developed and continues to develop certain technology, know how, intellectual property, devices and instruments for use in ILM and gamma radiation guided surgery.

1.4   The devices manufactured and marketed by Neoprobe complement Ethicon’s surgical instruments and accessories for minimally invasive surgery, ILM and gamma radiation guided surgery and the Parties desire that Ethicon distribute the Products (as defined below) on a worldwide exclusive basis pursuant to the terms of this Agreement.

1.5   The Parties entered into a standstill and rights agreement (the “Standstill and Rights Agreement”) on August 10, 1999, pursuant to which Ethicon paid Neoprobe four hundred thousand dollars ($400,000.00) in consideration of Neoprobe obligations in the Standstill and Rights Agreement.

1.6   In connection with a good faith purchase order placed by Ethicon on August 13, 1999 for Products (the “PO”), Neoprobe placed purchase orders with the appropriate vendors to fill the PO in accordance with the terms thereof.

Therefore, in consideration of the mutual promises, covenants and agreements hereinafter set forth, the Parties agree as follows:

The following terms, when used with initial capital letters, shall have the following meanings:

2.1   “Affiliate” is any entity that directly or indirectly controls, is controlled by, or is under common control with a specified Party, and for such purpose “control” shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the entity, whether through the ownership of voting securities, by contract or otherwise.

2.2   A “Change of Control” shall be deemed to have occurred if (A) any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Neoprobe representing 30% or more of the combined voting power of Neoprobe’s then outstanding securities; or (B) the stockholders of Neoprobe approve a merger or consolidation of Neoprobe with any other corporation, other than a merger or consolidation which would result in the voting securities of Neoprobe outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 80% of the combined voting power of the voting securities of Neoprobe or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of Neoprobe approve a plan of complete liquidation of Neoprobe or an agreement for the sale or disposition by Neoprobe of all or substantially all of Neoprobe’s assets.

2.3   “Commercial Year” shall mean a one (1) year period commencing on January 1 and any anniversary thereof during the term of this Agreement.

2.4   “Control Unit” shall mean a gamma radiation detection device including a microcomputer-based unit which measures the presence of gamma-emitting isotopes, including, but not limited, to the model 2000 Control Unit.

2.5   “First Commercial Year” is the one (1) year period commencing on January 1, 2000. The four (4) years following the First Commercial Year shall be referred to as the “Second”, “Third”, “Fourth” and “Fifth” Commercial Years, respectively.

2.6   “Gross Profit” is the difference between Neoprobe’s cost as indicated in Schedule 5.2 and the Transfer Price indicated in Schedule 5.2.

2.7   “Improved Product” or “Improved Products” shall mean an enhancement or modification to an existing Product.

2.8   “Insolvency Event” shall mean the occurrence of any of the following events:

(a)   Neoprobe shall admit in writing its inability, or be generally unable, to pay its debts as such debts become due; or

(b)   Neoprobe shall (1) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or a substantial part of its property, (2) make a general assignment for the benefit of its creditors, (3) commence a voluntary case under the United States Bankruptcy Code, as now or hereafter in effect (the “Bankruptcy Code”), (4) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or readjustment of debts, (5) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in any involuntary case under the Bankruptcy Code, or (6) take any corporate action for the purpose of effecting any of the foregoing; or

(c)   A proceeding or case shall be commenced by or against Neoprobe in any court of competent jurisdiction, seeking (1) its liquidation, reorganization, dissolution or winding-up, or the composition or readjustment of its debts, (2) the appointment of a trustee, receiver, custodian, liquidator or the like of Neoprobe or of all or any substantial part of its assets, or (3) similar relief in respect of Neoprobe under any law relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect for a period of ninety (90) days; or an order for relief against Neoprobe shall be entered in a case under the Bankruptcy Code.

2.9   “Know-How” shall mean all know-how relating to the design, development, manufacture, sale or use of any Product or Improved Product, including, without limitation, processes, techniques, methods, products, apparatuses, materials and compositions which are reasonably related thereto.

2.10   “New Product” shall mean an instrument or device developed by or for Neoprobe prior to and/or during the term of this Agreement and any extensions thereof other than a Product or Improved Product.

2.11   “Patent Applications” are the U.S. Patent applications listed in Schedule 2.11 hereto; all foreign counterparts of such applications; and all continuations, continuations-in-part, and divisionals of such applications.

2.12   “Patents” are the U.S. Patents listed in Schedule 2.11 hereto and any patents subsequently issuing from the Patent Applications as well as renewals, reissues, reexaminations, extensions, and patents of addition and patents of importation. Furthermore, Patents shall also include each patent, U.S. or foreign, which Neoprobe owns or is empowered to grant a license to Ethicon prior to or during the term of this Agreement or any extension thereof, the practice of which is reasonably necessary for Ethicon to sell the Product.

2.13   “Probe” shall mean a hand-held gamma radiation-sensing device that connects to a Control Unit.

2.14   “Probe Isolation Module” or “PIM” shall mean a device that provides a type BF applied part interface between a 14mm Probe and a Control Unit.

2.15   “Product” or “Products” shall mean instruments and devices used for radiation detection, including but not limited to, Neoprobe portable radioisotope detector systems, probes and related accessories set forth on Schedule 2.15 attached hereto as may be amended from time to time by mutual agreement of the Parties or a New Product added to Schedule 2.15 pursuant to Section 5.7 or Section 6.2.

2.16   “Raw Materials” shall mean the materials, components, and packaging required to manufacture and package any Product in accordance with the Specifications.

2.17   “Regulatory Compliance” shall mean compliance with (i) all applicable statutes, laws, and regulations, including good manufacturing practices (“GMP”) and (ii) Ethicon Endo-Surgery, Inc. Quality Assurance Requirements, which are attached and incorporated into this Agreement as Exhibit 2.17.

2.18   “Specifications” shall mean the requirements with which the Product must conform as specified by 21 CFR §820.181 and include device specifications, production process specifications, quality assurance procedures and specifications, packaging and labeling specifications, and installation, maintenance and servicing procedures and methods that are contained in the Device Master Record for the Product.

2.19   “Trademarks” shall mean the (i) U.S. and foreign marks set forth in Schedule 2.19 hereto; (ii) any unregistered trademarks used in connection with Products; and (iii) all copyrights or distinctive features of the packaging, including but not limited to trade dress, used in connection with the Products.

2.20   “Year 2000 Compliance” shall mean: (a) the Products perform in a consistent manner and functions without interruptions regardless of the date in time on which the Product is delivered, used and/or further distributed, whether before, on or after January 1, 2000 and whether or not the dates are affected by leap years;

(b)   the Product, if computerized, accept, calculate, compare, sort, extract, sequence and otherwise process date inputs and date values, and return and display date values and perform, in a consistent manner regardless of the dates used, whether before, on or after January 1, 2000;

(c)   the Product, if computerized, accept and respond to two-digit year-date input in a manner that resolves any ambiguities as to the century in a defined, predetermined and appropriate manner; and

(d)   the Product, if computerized, store and display date information in ways that are unambiguous as to the determination of the century.

3.1   Distribution Rights . Subject to the terms and conditions of this Agreement, and specifically to the terms and conditions of Sections 3.2 and 3.3 below, Neoprobe hereby appoints Ethicon, and Ethicon hereby accepts the appointment as Neoprobe’s exclusive distributor on a worldwide basis during the term of this Agreement and any extension thereof at the agreed upon Transfer Prices (as defined below).

* Portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.  

3.2   Third Party Rights . The granting to Ethicon by Neoprobe of the rights in Section 3.1 shall be on a country-by-country basis subject to Neoprobe’s termination of distribution and similar rights granted to third parties by Neoprobe or its Affiliates (“Third Party Agreements”). Neoprobe represents and warrants that Schedule 3.2 accurately sets forth all countries where any such Third Party Agreement is in effect. Neoprobe represents and warrants that it has contractual rights which enable it to rightfully terminate such Third Party Agreements in accordance with the time lines set forth in Schedule 3.2 and covenants to take such actions and rightfully terminate all such Third Party Agreements as soon as practicable in a manner that would not prejudice the non-competition provisions imposed on such third parties therein and to deliver exclusive distribution rights pursuant to Section 3.1 to Ethicon on or before the dates set forth Schedule 3.2. Neoprobe agrees to indemnify and hold harmless Ethicon and its Affiliates and their respective officers, directors, employees and agents from and against any liability, loss, costs (including reasonable attorneys’ fees), expenses or damages that are attributable to claims of third parties against Ethicon arising out of Neoprobe’s efforts to terminate the rights of such third parties as contemplated by this Section 3.2. This obligation shall survive termination of this Agreement. Neoprobe agrees that upon the termination of each of the Third Party Agreements, the right to distribute the Products in the territories covered by such Third Party Agreement shall immediately be added to this Agreement and shall be subject to the terms and conditions set forth herein, at no additional license or other fee to Ethicon.

3.3   Supply to Third Parties . Neoprobe grants Ethicon the exclusive right to supply Products to all other distributors of Products or at Ethicon’s request on a case by case basis, assign to Ethicon the underlying Third Party Agreement with such distributor if such distributor consents to such assignment. As used in this Section 3.3 the term “supply” shall mean, filling purchase orders (either to Neoprobe or directly to Ethicon), and shipping, invoicing, and collecting for such orders according to the applicable terms of the Third Party Agreements. Neoprobe agrees to forward any purchase orders for Products it receives to Ethicon promptly (but in any event within five (5) business days of receipt of the purchase order). Ethicon shall pay Neoprobe for Products shipped to such distributors in accordance with Section 5.2 herein. Ethicon’s sales of Products to such distributors (except to Century Medical, Inc. in Japan) shall be included in the calculation of any average selling price and minimum purchase requirements (“MPRs”) of a Product covered by this Agreement.

The initial term of this Agreement (the “Initial Term”) shall commence on the Effective Date and shall continue until December 31, 2004 (the “Initial Term Date”), unless earlier terminated as expressly provided under the terms of this Agreement; provided , however , that Ethicon shall have the option (the “Option”) of extending the term of this Agreement for two (2) subsequent two (2) year periods [*] (in Ethicon’s sole reasonable judgment) than the immediately preceding Commercial Year. Neoprobe shall deliver to Ethicon written notice (the “Renewal Notice”) setting forth the Initial Term Date not less than one (1) year nor more than one (1) year and thirty (30) days prior to such date or the date of the expiration of any such period of extension, as the case may be. In the event that Ethicon exercises the Option, it shall deliver to Neoprobe written notice thereof within ninety (90) days following its receipt of the Renewal Notice.

5.1   Supply of the Product . During the term of this Agreement, Neoprobe shall manufacture and sell the Products and Improved Products exclusively to Ethicon in accordance with the Specifications, and shall not sell, supply or distribute any Products or Improved Products to any third party. Neoprobe shall supply Ethicon (and its Affiliates) with all of those quantities of Products as ordered by Ethicon (and its Affiliates) pursuant to this Agreement.

5.2   Transfer Pricing . The transfer price (the “Transfer Price”) for each type of Product shipped by Neoprobe during the term of this Agreement shall be set forth on Schedule 5.2 hereto. The Transfer Prices set forth therein include all costs of packaging in accordance with the Specifications and all cost of delivery F.O.B. Neoprobe’s manufacturing facility. Ethicon shall pay the Transfer Prices set forth in Schedule 5.2 for delivery of the Products within thirty (30) days from the date of invoice. The date of invoice shall not be earlier than the date of shipment. Ethicon agrees to purchase the demonstration units referenced in Notes 2 and 3 of Article 11 “Demonstration Units” of Schedule 5.2 hereto within thirty (30) days after the units have been returned to Neoprobe and refurbished to the reasonable satisfaction of Ethicon.

5.3   Cost Reduction Programs . Neoprobe hereby agrees that it shall use its best reasonable efforts to minimize the costs of manufacturing the Products to the extent it may do so without compromising the quality and/or regulatory status of the Products or compliance with the terms of this Agreement. Each Party will reasonably cooperate with the other Party in the pursuit of cost reduction programs in the manufacture of the Products. Each Party shall inform the other party of cost reduction initiatives related to the manufacture of Products within fourteen (14) days after cost reduction initiatives have begun. The resulting savings will initially be allocated to the Party that has incurred documented costs until such costs have been recovered. Thereafter, fifty percent (50%) of the savings shall be allocated to the Party which has initiated and funded the cost reduction program.

5.4   Demonstration Unit Pricing . During the term of this Agreement or any extension thereof, the Transfer Price for Products and fully functional demonstration units shall be as listed in Schedule 5.2.

5.5   Risk of Loss . Neoprobe shall ship Products, at Ethicon’s cost, to any location chosen by Ethicon utilizing carriers chosen by Ethicon. The risk of loss with respect to the Products shall remain with Neoprobe until the Product is loaded aboard the common carrier at Neoprobe’s manufacturing facility for a Product, or other location mutually agreed upon by both Parties. Neoprobe will pack the Product in a manner suitable for shipment to enable the Product to withstand the effects of reasonable shipping conditions, including handling during loading and unloading.

5.6   Labeling and Sales Literature . As of the Effective Date, Neoprobe has on hand, the labeling, inserts, sales literature or customer instructions for Products in the quantities and at the respective costs listed on Schedule 5.6. Existing inventories of all labeling, inserts, sales literature, or customer instructions for all Neoprobe Products shall be provided to Ethicon at Ethicon’s request at Neoprobe’s cost. Additional inventories will be provided to Ethicon at Ethicon’s cost. Master art work for all labeling, inserts, sales literature or customers instructions shall be made available to Ethicon should additional quantities be produced by Ethicon or should changes be desired by Ethicon. Neoprobe will provide to Ethicon documented evidence of Neoprobe’s internal copy clearance review and approval; and Ethicon shall have the right to review and accept master art work for all labeling, inserts, sales literature or customer instructions prior to production of such.

5.7   Transfer Price and Forecasts for New Products . Before a New Product the research and development of which is not funded by Ethicon (“Unfunded New Product”) may be added to Schedule 2.15 and become a Product subject to the terms of this Agreement, the Parties must agree to a Provisional Transfer Price (as defined in Schedule 5.2) and to a forecast of Ethicon’s expected purchases of such Unfunded New Product including a schedule of desired delivery dates for the following six (6) months, the first three (3) months of this forecast shall constitute a binding purchase order. Neoprobe shall be under no obligation to deliver and Ethicon shall be under no obligation to accept any Unfunded New Products until a Provisional Transfer Price and forecast is established for such New Product. If the Parties cannot agree upon a Provisional Transfer Price and forecast within ninety (90) days, Neoprobe shall be free to market and distribute the Unfunded New Product (a “Proposed Transaction”) subject to a right of first refusal of Ethicon. Pursuant to Ethicon’s right of first refusal, Neoprobe shall not consummate or agree to consummate a Proposed Transaction with any party without first giving prompt notice thereof to Ethicon in writing (the “Notice”) specifying the pricing, terms, conditions and other material provisions of such Proposed Transaction. In the event that Ethicon elects to consummate a transaction upon the same pricing, terms, conditions and other material provisions as specified in the Notice, Ethicon shall have thirty (30) days to so notify Neoprobe and Neoprobe shall use all reasonable commercial efforts to facilitate the consummation of such a proposed transaction with Ethicon or its Affiliate within ninety (90) days following the receipt of such notification. In the event that Ethicon fails to elect to exercise this right of first refusal within the above mentioned thirty (30) day period, Neoprobe may enter into an agreement with the party identified in the Notice with respect to the Proposed Transaction on terms that are not less favorable to Neoprobe than the terms specified by Neoprobe in the Notice; provided , however , that in the event that (a) Neoprobe and the third party identified in the Notice are unable to consummate such an agreement within sixty (60) days or (b) the pricing, terms, conditions and other material provisions of the Proposed Transaction are modified to be materially less favorable to Neoprobe than were specified in the Notice, then Neoprobe shall be required pursuant to this Section 5.7 to give anew the requisite notice to Ethicon and comply with the right of first refusal set forth herein for an additional thirty (30) business day period following the receipt of such new notice.

5.8   Minimum Purchase Requirements .

(a)   During each of the first three (3) Commercial Years, Ethicon shall purchase from Neoprobe the following minimum numbers of the neo2000 System and/or Products or New Products consisting of a Control Unit and Probe (Neoprobe shall provide accessories to support the aforementioned neo2000 Systems; however, no minimums will be established for these accessories):

As used in this Section 5.8, a “ neo2000 System” consists of a model 2000 Control Unit and a reusable Probe. Subject to the provisions of Sections 3.2 and 3.3, to the extent that there is any delay in Ethicon’s ability to exclusively distribute the neo2000 Systems worldwide on an exclusive basis in any market due to a breach of Neoprobe of any of its representations, warranties, covenants or obligations under this Agreement, the MPR for the Commercial Years set forth above shall be reduced with respect thereto on a pro rata basis based upon the number of days of the delay and the number of days in the applicable Commercial Year. Purchase orders for neo2000 Systems placed by Ethicon prior to the First Commercial Year shall count towards the MPR for the First Commercial Year. The MPRs set forth in this Section 5.8(a) shall be completely satisfied at such time as the purchases of neo2000 Systems by Ethicon exceed fifteen hundred (1,500) units in the aggregate at any time prior to or during the first three (3) Commercial Years during the term of this Agreement. Demonstration units purchased pursuant to Section 5.2 shall not count towards the MPRs.

(b)   The MPR for a Product set forth in Section 5.8(a) is a “take or pay” obligation. In the event Ethicon does not meet its MPR for a Commercial Year as required by Section 5.8(a), Neoprobe shall notify Ethicon of the deficiency and Ethicon shall have forty-five (45) days to either place a purchase order for the neo2000 Systems and/or Products consisting of a Control Unit and Probe to make up the difference between actual purchases and the MPR or pay Neoprobe an amount equal to the Gross Profit on the amount of purchases necessary to satisfy such MPR.

5.9   Ethicon Obligation to Commercially Exploit . Neoprobe shall consider the MPRs of Section 5.8 above as complete satisfaction of any duty, whether express or implied, which could be imposed upon Ethicon to commercially exploit its rights under this Agreement and is accepted by Neoprobe in lieu of any best efforts obligation on the part of Ethicon.

5.10   Reduction of Minimum Purchase Requirements . The MPRs set forth under Section 5.8(a) above shall for any applicable Commercial Year be reduced in the following circumstances:

* Portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.  

(a)   If Neoprobe fails for any reason other than a Major Forces event under Section 17.6 below to deliver the Products to Ethicon in accordance with the terms of this Agreement, or replace Products which are defective under Section 11.1 below, then the MPRs shall be reduced by an amount equal to one and one-half (1 ½) times the number of Products not delivered or replaced.

(b)   If any Products is voluntarily or involuntarily recalled from the market or withdrawn from sale because of a lack of governmental approvals or for reason of safety, efficacy or quality, or if a Major Forces event under Section 17.6 occurs, then the MPRs for the Products shall be waived until a period of six (6) months shall have elapsed after either market re-entry or the Major Forces event is removed, whichever is applicable, and shall then be proportionately reduced.

(c)   If this Agreement is terminated pursuant to Articles 12 or 14 below during any applicable Commercial Year, then the MPRs for all Products shall be proportionately reduced for such Commercial Year, and Ethicon shall be relieved of MPRs for all Products thereafter.

5.11   Forecasts . Within thirty (30) days of the Effective Date, Ethicon shall provide Neoprobe with a forecast of its expected purchases of the Products, including a schedule of desired delivery dates, for the following six (6) months, and the first four (4) months of this forecast shall constitute a binding purchase order. Thereafter, Ethicon shall (a) update the forecasts monthly so that its expected purchases and schedule of desired delivery dates are continually forecast for a six (6) month time period, the first four (4) months of such rolling forecasts constituting a binding purchase order and (b) provide a report of actual monthly Product sales.

5.12   Adjustment of Forecasts . Ethicon may adjust the total number of Products to be delivered pursuant to Section 5.11 above upon sixty (60) days written notice, provided however, that any such adjustment shall not serve to reduce Ethicon’s obligation to purchase the total number of Product indicated in the binding purchase order. In any given month, if Ethicon wants Neoprobe to deliver more than [*] of the total number of the Products indicated in the binding purchase order, then Neoprobe shall not be obligated to supply the excess above [*], but Neoprobe shall nevertheless use its best reasonable efforts to deliver to Ethicon any such excess above one hundred twenty percent (120%) on a priority basis.

5.13   Delivery . Neoprobe shall deliver the Products to Ethicon in accordance with the schedule of delivery dates specified in the binding purchase orders set forth in Section 5.11 above.

* Portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.  

5.14   Provision of Information . No later than seven (7) days after the execution of the Agreement and provided that Neoprobe has such information in its possession or has a legal or contractual right to access to such information, Neoprobe agrees to provide Ethicon with documentation setting forth a complete list of all current Neoprobe customers and potential customer leads (including, but not limited to, outstanding leads and quotations from terminated distributors). Included in this documentation will be customer names, location, Products purchased, date of Product purchase, Product service history, and specific contact information in the case of customer leads.

5.15   Product Changes . Neoprobe shall not change the form, fit, function, components or materials of any of the Products (or any change or modification to the Specifications), the process by which the Products are manufactured or the Raw Materials, without the prior written consent of Ethicon, such consent not to be unreasonably withheld. Neoprobe shall provide Ethicon notice of all other changes at least fourteen (14) days prior to making any such changes. If the Parties agree on any such change, improvement or modification, they shall modify the Specifications to reflect the same. Ethicon shall have the right to review and amend any qualification protocol(s) initiated by Neoprobe prior to the execution of such protocol(s), and shall have the right to review and agree upon the subsequent results of the protocol prior to releasing change into production. In the event of any change, Ethicon and Neoprobe may jointly establish an appropriate qualification protocol, and Ethicon and Neoprobe shall determine an appropriate inventory level for the pre-change Product in order to cover on-going requirements during the qualification process.

5.16   Purchase of Neoprobe 1500 Units . Ethicon agrees to purchase existing inventories of Neoprobe 1500 Control Units each accompanied by a 14mm reusable Probe, noise adjustment fixture, battery charger, cord set, carrying case, operation manual, detector probe cable and Probe collimator (“Neoprobe 1500 Systems”) up to a maximum unit quantity of fifty (50) Neoprobe 1500 Systems respectively, provided that , Ethicon has received all prior agreed upon inventory stocking and sales Demonstration Units orders for the neo2000 System. The agreed upon cost to Ethicon for a Neoprobe 1500 System cost is $5,881.00 or less. In the event the Neoprobe 1500 Systems are sold to Ethicon customers, Ethicon agrees to rebate to Neoprobe the appropriate gross margin on the sale of these Units in accordance with the agreed upon Transfer Prices outlined for neo2000 Systems as referenced in Schedule 5.2, provided that , any Neoprobe 1500 Systems sold will be credited against the MPRs for that Calendar Year accordingly.

5.17   Sales of Product . All [*] distributed under this Agreement, shall be within the sole discretion of [*].

5.18   Neoprobe Sales and Marketing [*] . Neoprobe shall [*] for Neoprobe’s sales and marketing organization (the “Sales and Marketing Organization”) which include, but is not limited to, Neoprobe employees and programs, consulting agreements, etc. as referenced heretofore in Schedule 5.18 for a [*] from the Effective Date. [*] at its sole discretion, may continue the [*] directly or indirectly of these Sales and Marketing Organization activities.

* Portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.  

5.19   Training Assistance . Neoprobe shall provide Ethicon with all information in its possession reasonably necessary or appropriate to enable Ethicon to market the Products, and Neoprobe agrees further to consult with and advise Ethicon in such matters, including without limitation, the preparation of promotional, advertising and sales materials and presentations.

Provided that it has the personnel on staff and subject to the availability of the Sales and Marketing Organization, Neoprobe shall provide reasonable sales training to Ethicon and its Affiliates at reasonable locations selected by Ethicon (travel expenses to be paid by Ethicon) and consented to by Neoprobe, such consent not to be unreasonably withheld. Thereafter Neoprobe will provide similar sales training from time to time in connection with any Products that become available at times and locations reasonably selected by Ethicon and consented to by Neoprobe, such consent not to be unreasonably withheld.

5.20   [*] Program . The Parties agree to develop and negotiate the terms for an [*] and to implement such [*] within [*] after the Parties complete their marketing and customer assessments. The revenues for such program will be shared according to the gross revenues, less the selling [*], as agreed to for Transfer Pricing of Products in Schedule 5.2.

5.21   [*] Expenses . Ethicon will fund the costs related to the [*] pursuant to Section 11.1 and the [*] Program only with respect to Products sold by [*] to its customers but not to the third party distributors listed on Schedule 3.2 up to a limit of [*] of Products of the immediately preceding Commercial Year sold by [*] but not to the [*]. Net sales shall mean the revenue received by [*] from the sale of the Products to an independent third party less the following amounts: (i) discounts, including cash discounts, or rebates actually allowed or granted; (ii) credits or allowances actually granted upon claims or returns, regardless of the party requesting the return; (iii) freight charges paid for customer delivery; and (iv) taxes or other governmental charges levied on or measured by the invoiced amount whether absorbed by the billing or billed party.

5.22   Disposition of Defective Product . Without prejudice to any other remedy which Ethicon may have, Neoprobe shall replace at its own cost and expense, including reimbursement of freight and disposition costs incurred by Ethicon, Products that fail to comply with the Specifications or other warranties made in Article 11. Ethicon shall notify Neoprobe of the existence and nature of any non-compliance or defect which comes to its attention and Neoprobe shall have a reasonable opportunity, [*], to inspect such defective Product and provide Ethicon with detailed written instructions to return or dispose of such defective Product. Ethicon shall [*]. If Neoprobe fails to so inspect and instruct Ethicon as to the disposition of such defective Product, Ethicon may dispose of such defective Product as it sees fit and Neoprobe shall promptly (i) reimburse Ethicon for all direct, out-of-pocket costs incurred by Ethicon in respect of such disposition, and (ii) replace such defective Product at its own cost and expense.

5.23   Independent Testing . If, after Neoprobe’s inspections of any Product, the parties disagree as to whether such Product conforms to the Specifications and other warranties made in Article 11 or whether the Product has such a defect, either party may deliver the item to an independent third-party laboratory, mutually and reasonably acceptable to both parties, for analytical testing to confirm such item’s conformance to the Specifications and other warranties made in Article 11 or the presence or absence of defects. All costs associated with such third-party testing shall be at Ethicon’s expense unless the tested item is deemed by such third-party to be defective or not in compliance with the Specifications and other warranties made in Article 11, in which case all such costs, including reimbursement of freight and disposition costs, shall be promptly paid by Neoprobe. No inspection or testing of or payment for Product by Ethicon or any third-party agent of Ethicon shall constitute acceptance by Ethicon thereof, nor shall any such inspection or testing be in lieu or substitution of any obligation of Neoprobe for testing, inspection and quality control as provided in the Specifications and other warranties made in Article 11 or under applicable local, state, or federal laws, rules, regulations, standards, codes or statutes.

5.24   Transfer Price Reporting .

(a)   Ethicon shall, within ninety (90) days from the end of December 31 of each calendar year during the term of this Agreement, deliver to Neoprobe a report of the actual Transfer Price for the Initial Period (as defined in Schedule 5.2) or the preceding Commercial Year, including a schedule calculating the actual Transfer Price. Ethicon shall keep for a period of at least three (3) years after the date of entry, accurate books and records reasonably necessary to verify the accuracy of the information used to establish the actual Transfer Price as described in Schedule 5.2.

(b)   Neoprobe shall have the right after thirty (30) days advance written notice to Ethicon, to appoint an independent certified accountant at its own expense, acceptable and approved by Ethicon (which approval shall not be unreasonably withheld) who shall have access to Ethicon’s records during reasonable business hours for the sole purpose of verifying the accuracy of the calculation of the Transfer Prices for the Products for a period not more than the previous four (4) calendar quarters, but this right may not be exercised more than once in any calendar year. Ethicon shall be entitled to withhold approval of an accountant which Neoprobe nominates unless the accountant duly executes a confidentiality agreement with Ethicon which shall obligate such accountant to keep the information it receives from Ethicon in confidence.

(c)   Unless otherwise agreed to by the Parties, if as a result of the audit performed pursuant to Section 5.24(b), the independent certified accountant determines that Ethicon has under-reported any information (e.g., the information used to calculate Net Selling Price) used to calculate the Transfer Price for a Product and as a result Neoprobe has received less than it should have under the Agreement, Ethicon shall, no later than forty-five (45) business days after receiving notice of such underpayment, remit to Neoprobe the amount of the underpayment. If as a result of the audit performed pursuant to Section 5.24(b), the independent certified accountant determines that Ethicon has over-reported any information (e.g., the information used to calculate Net Selling Price) used to calculate the Transfer Price for a Product and as a result Neoprobe has received more than it should have under the Agreement, Neoprobe shall, no later than forty-five (45) business days after receiving notice of such overpayment, remit to Ethicon the amount of the overpayment less the reasonable fees of the independent

* Portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.  

certified accountant, but in no case shall Ethicon be required to remit any amount to Neoprobe if the fees of the independent certified accountant exceed the amount of the Ethicon overpayment.

(d)   If as a result of an audit performed pursuant to Section 5.24(b), it is determined by the independent certified accountant that Ethicon has underpaid any payment due to Neoprobe by more than [*], in addition to remitting the amount of the underpayment as described in Section 5.24(c), Ethicon shall pay Neoprobe interest on such amount at the rate per annum of “prime” (interest changing as and when the “prime” changes); such interest being payable on demand. As used herein, the term “prime” refers to the prime rate of interest per annum announced, from time to time, by major money center banks in the United States and as published daily in The Wall Street Journal ; provided, however, that if The Wall Street Journal should ever cease, for any reason, to publish such rate on a daily basis, then the prime rate shall be at the rate of interest designated and in effect from time to time, by Citibank, N.A., in New York, New York as its prime rate.

(e)   In the event the audit conducted pursuant to Section 5.24(b) reveals an inaccuracy in the information reported to Neoprobe which results in an underpayment by Ethicon and if Ethicon disagrees with the results of such audit and further in the event the parties can not resolve such disagreement, the Parties shall mutually choose an independent accountant acceptable to both to conduct a second audit. The Parties agree to be bound by the results of the second independent audit. The cost of an audit conducted pursuant to this Section 5.24(e) shall be borne by Neoprobe if the independent accountant finds no underpayment and by Ethicon if an underpayment is found.

5.25   14mm Probe Accessory Marketing Implementation Program . Neoprobe agrees to implement the 14mm Probe accessory program attached hereto as Schedule 5.25 in accordance with the deadlines set forth therein.

5.26   PIM .   (a) Neoprobe shall, at its sole expense, develop and release an external Probe Isolation Module (“EPIM”) and associated labeling and end-user communications subject to the provisions of Sections 5.15 and 8.12. Neoprobe agrees to use its best efforts to obtain all necessary market clearances from appropriate regulatory authorities as soon as practicable and to replace and in-service all 14mm reusable adaptor cables (model #2007) currently in distribution with the EPIM in countries where there are Third Party Agreements in effect within sixty (60) days thereof. Neoprobe agrees to use its best efforts to obtain all necessary market clearances from appropriate regulatory authorities as soon as practicable and to provide Ethicon with sufficient quantities of the EPIM to replace all 14mm reusable adaptor cables (model #2007) currently in distribution in the U.S. by January 15, 2000 and outside the U.S. by February 14, 2000.

(b)   Neoprobe agrees to use its best efforts to provide EPIM’s to Ethicon for all sales and training demonstration units in Ethicon’s possession at cost to Ethicon by January 15, 2000.

* Portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.  

(c)   Neoprobe shall use its best efforts to provide EPIM’s for all finished goods and work-in-progress neo2000 Systems at Neoprobe warehousing facilities by January 15, 2000.

(d)   Neoprobe, at its sole expense, shall use its best efforts to develop and release an internal Probe Isolation Module (“IPIM”), by March 15, 2000 compatible with all Probe Products.

(e)   Neoprobe agrees to review all designs and modifications to the control unit, Probes and accessories during design and manufacturing phases of the EPIM and IPIM with Ethicon in accordance to Section 5.15.

5.27   Should Ethicon develop and sell an instrument or device (a “Competing Ethicon Product”) which is a direct clinical replacement of a Product, Ethicon shall agree to provide Neoprobe financial consideration of [*] of Net Sales of the Competing Ethicon Product during the term of this Agreement.

6.1   Research & Development Payments . Ethicon agrees to fund at the end of each calendar quarter during the first three (3) years of the Agreement, a total of one hundred twenty-five thousand dollars ($125,000.00) per calendar quarter for the four (4) technical research and development personnel in the job positions listed on Schedule 6.1 hereto, provided that, (a) Neoprobe retains the identified research and development personnel or persons in Ethicon’s reasonable judgment adequately skilled and trained personnel to fill the job positions listed on Schedule 6.1 (“R&D Personnel”) to the entire calendar quarter; (b) the R&D Personnel are utilized at Ethicon’s sole discretion for continued Product support and (c) the R&D Personnel are available to support to Ethicon identified and funded R&D programs. The one hundred twenty-five thousand dollars ($125,000.00) per calendar quarter as stated above shall be prorated in the event that less than four (4) individuals are available. The four hundred thousand dollars ($400,000.00) paid in consideration for the Standstill and Rights Agreement shall be credited against the research and development payments with any excess promptly returned to Ethicon within ten (10) days if no further research and development payments are to be made pursuant to this Section 6.1. A copy of the retention programs for the R&D Personnel shall be provided to Ethicon prior to the Effective Date.

6.2   Improved Product and Ethicon [*] New Products . With respect to Improved Products and New Products the research and development [*], once the Parties agree to a Provisional Transfer Price and to a forecast of [*] of the Improved Product or [*] including a schedule of desired delivery dates for the following six (6) months, the first three (3) months of this forecast shall constitute a binding purchase order for such Improved Product [*], such Improved Product [*] shall be added to the Agreement and shall become a Product within the meaning of Section 2.15.

* Portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.  

6.3   Existing [*] R&D Programs . Within, [*] days after the Effective Date, [*] agrees to review existing [*] research and development programs as described in Schedule 6.3 (the “R&D Programs.”) and in its sole discretion, agree to fund any or none of the R&D Programs in addition to the research and development payments made pursuant to Section 6.1. [*] shall have sixty (60) days to make its determination and to inform [*] of the result. The Parties agree to negotiate in good faith within [*] days from the Effective Date an agreement setting forth: (i) development work plan(s) for the R&D Programs (ii) the transfer pricing for such any products resulting from the funded R&D Programs and (iii) ownership of intellectual property developed under such programs. In no event shall the [*] products developed under such R&D [*] set forth in Schedule 5.2.

6.4   Ethicon Identified Research Programs . Ethicon may request that Neoprobe conduct certain R&D activities on behalf of Ethicon (“Ethicon Identified R&D”). In the event that Ethicon requests that Neoprobe conduct such Ethicon Identified R&D, Ethicon and Neoprobe shall, in good faith, negotiate an agreement setting forth: a) responsibility for costs associated with such Ethicon Identified R&D; b) ownership of designs, prototypes, or intellectual property; and (c) royalties, if any, payable to Neoprobe on instruments developed under such Ethicon Identified R&D and sold by Ethicon.

6.5   Reports . Upon Ethicon’s written request, but no more than once per month, Neoprobe shall promptly provide Ethicon written research and development progress reports and activity reports relating to Products and Improved Products that are identified in the Specifications or Schedule 6.3.

7.1   Execution and Performance of Agreement . Neoprobe and Ethicon each represents and warrants to the other that it has full right, power and authority to enter into and perform its respective obligations under this Agreement. Neoprobe and Ethicon each further represents and warrants to the other that the performance of its obligations under this Agreement will not result in a violation or breach of, and will not conflict with or constitute a default under any agreement, contract, commitment or obligation to which such Party or any of its Affiliates is a party or by which it is bound or infringe upon the rights of any third party and that it has not granted and will not grant during the term of this Agreement or any renewal thereof, any conflicting rights, license, consent or privilege with respect to the rights granted herein.

7.2   Intellectual Property . Neoprobe represents and warrants to Ethicon that (a) Neoprobe owns all of the rights, title and interest in and to the Patents, Neoprobe Trademarks, Know-How and all other intellectual property that appear on or are otherwise used in connection with the Products; (b) no academic institution, member of an academic institution, corporation or other entity, or any local, state or federal government holds any property rights through it in any Product; (c) Neoprobe is able to consummate this Agreement in the capacity of a free agent; (d) the manufacture, use and sale of the Products in accordance with the terms of this Agreement does not present any issue of infringement of Neoprobe’s or any third party’s rights under any issued patent or license; (e) it has no outstanding encumbrances or agreements, whether written, oral or implied, which would be inconsistent with the licenses granted herein; (f) the use of the Neoprobe Trademarks by Ethicon hereunder does not and will not infringe the rights of any third party; and (g) Neoprobe is presently aware of no infringement or dispute by any third party of any Neoprobe Patent or any Neoprobe Trademark.

7.3   Year 2000 Compliance . Neoprobe hereby represents and warrants to Ethicon that:

(a)   it is able to demonstrate Year 2000 Compliance in full production versions of the Products and all of its services related to its performance hereunder, with accompanying documentation;

(b)   Neoprobe’s information systems and other business systems for estimates, performance schedules, orders, confirmations, manufacture and delivery, invoicing, crediting of payments and other business operations are able to accept and properly process input for dates before, on or after January 1, 2000; and

(c)   Neoprobe is now planning and taking action to implement and will continue to implement, in a commercially reasonable manner, any and all measures to continue to perform its obligations under this Agreement with respect to Year 2000 Compliance strictly according to its terms and otherwise to meet the needs of its relationship with Ethicon;

(d)   Neoprobe will promptly provide to Ethicon, in response to Ethicon’s periodic requests for updates, information concerning its Year 2000 Compliance program to the extent it affects performance of this Agreement and might impair its performance hereunder.

7.4   Neoprobe expressly represents and warrants that a) it owns all of the right, title and interest in and to the Products listed on Schedule 2.15 as of the Effective Date; b) it is empowered to supply the Products to Ethicon; c) it has no outstanding encumbrances or agreements, contracts, understandings or arrangements of any kind pursuant to which any entity may purchase from Neoprobe, or has the right to sell or market, the Product or any component of such Product except for the Third Party Agreements; e) it is empowered to grant Ethicon licenses of the scope set forth in Articles 12, 13 and 14 below and f) it has the financial capacity to supply the Product to Ethicon in view of the terms and conditions set forth in this Agreement.

8.1   Inspections . Ethicon shall have the right, upon reasonable notice to Neoprobe and during regular business hours, to inspect and audit manufacturing processes and procedures, quality assurance/control processes and procedures, inventory, work-in-process, Quality System Regulations (“QSRs”) records in the countries where any Product is marketed, Raw Materials and the facilities being used by Neoprobe (or any third party) for production and storage of Products to assure compliance by Neoprobe (and its suppliers) with (a) all applicable statutes, laws and regulatory requirements and standards, including, without limitation, QSRs enforced by the United States Food and Drug Administration (the “FDA”), (b) Ethicon Endo-Surgery, Inc. Quality Assurance Requirements, (c) the terms and provisions of this Agreement. To the extent it has the right to do so, Neoprobe agrees to give Ethicon access during normal working hours to such records as are reasonably necessary to enable Ethicon to conduct its audit, including quality control records, test records, Device History Record and Device Master Records. Ethicon’s right of access to Neoprobe (or its agent’s) Confidential Information shall be restricted to those matters necessary to verify the compliance of Neoprobe (or its agents) with (a) all applicable statutes, laws and regulatory requirements and standards, including, without limitation, QSRs enforced by the FDA, (b) Ethicon Endo-Surgery, Inc. Quality Assurance Requirements, (c) the terms and provisions of this Agreement. Ethicon personnel exercising this right of inspection shall comply with applicable rules and regulations in place at the manufacturing facility when such personnel or representatives are made aware of such rules and regulations.

8.2   Results of Ethicon’s Audit . Ethicon shall promptly (no more than ten (10) business days after conclusion of any audit conducted pursuant to Section 8.1) share the results of the audit with Neoprobe. If Ethicon believes that a deficiency exists, it shall inform Neoprobe and Neoprobe shall within ten (10) business days remedy or cause the remedy of any deficiencies that were noted in such audit, or if any such deficiency can not reasonably be remedied within ten (10) business days, present to Ethicon a written plan to remedy such deficiencies as soon as possible. Failure by Neoprobe to remedy or cause the remedy of a deficiency in the agreed upon time period shall be deemed a material breach of this Agreement; provided however, that if in Neoprobe’s reasonable judgement it disagrees with Ethicon’s conclusion that a deficiency exists and if the Parties continue to disagree after reasonable discussion, Neoprobe shall have the right to have an independent regulatory expert conduct the same audit as Ethicon. If the independent expert agrees with Neoprobe that no deficiency exists, Ethicon shall bear the cost of such audit. If the independent expert agrees with Ethicon’s assessment, Neoprobe shall bear the cost of the independent expert and shall correct all deficiencies as provided in this Section 8.2. Neoprobe acknowledges that the provisions of this Article Eight granting Ethicon certain audit rights shall in no way relieve Neoprobe of any of its obligations under this Agreement, nor shall such provisions require Ethicon to conduct any such audits.

8.3   510(k) Clearance . Neoprobe represents and warrants that it has obtained 510(k) to the extent it is required to do so clearance from the FDA to manufacture and sell the Products; and that the submissions which Neoprobe made to the FDA were made in good faith and contained accurate and complete data and information regarding the Product as required by applicable laws, rules and regulations. Neoprobe shall maintain for the term of this Agreement or any extension thereof all 510(k) clearances for the Products. Furthermore, Neoprobe shall file, and maintain at its own cost for the Products listed on Schedule 2.15 as of the Effective Date, all appropriate registrations with the FDA and similar regulatory authorities in the United States and in foreign countries which have the authority to approve the sale of the Product for use in humans. Neoprobe shall review all Product changes agreed to pursuant to Section 5.15 for regulatory impact in the United States and other countries where any Product is marketed, and shall provide Ethicon with copies of all regulatory impact review documentation.

8.4   Regulatory Compliance . Neoprobe represents and warrants that all Products sold or delivered to Ethicon during the term of this Agreement or any extension thereof shall be manufactured and delivered in accordance with Regulatory Compliance, and that continually during the term of this Agreement or any extension thereof no Products delivered by Neoprobe to Ethicon will be adulterated or misbranded at the time of delivery within the meaning of the Federal Food, Drug and Cosmetic Act. Neoprobe shall notify Ethicon in accordance with Section 8.8 below after receiving notice of any claim or action by the FDA relating to non-compliance with this Article or any notice with respect to any violation of any applicable laws, rules or regulations. In addition, Neoprobe shall notify Ethicon of any adverse reaction, malfunction, injury or other similar claims with respect to the Products of which it becomes aware in accordance with Section 8.8 below.

8.5   Regulatory Inspections . Neoprobe shall notify Ethicon of any FDA inspection, or any inspection from any other regulatory body, of the facilities for the manufacture of the Products, or any request for information from the FDA or other regulatory body related to the manufacture of the Products, as soon as practically possible after Neoprobe becomes aware of such inspection or such request.

8.6   Recalls . Upon mutual consent of the Parties, which consent may not be unreasonably withheld, or in the case of a recall required by an agency with competent jurisdiction, Neoprobe shall be required to institute and fund any recall, field corrective action, or the like in circumstances relating to a breach by Neoprobe of the warranty set forth in Article 11 below or other breach of its representations, warranties, guarantees, covenants or other obligations hereunder. In such circumstances, the actual retrieval of the Products and costs associated with that retrieval shall be undertaken and absorbed by Neoprobe. The Parties shall maintain adequate records concerning traceability of the Products, and shall cooperate with each other in the event that any procedures described in this paragraph are undertaken. In the event of any such recall, Neoprobe shall accept recalled Products and deliver to Ethicon replacement Products at Neoprobe’s sole cost and expense.

8.7   Cooperation . Because regulatory requirements vary throughout the world, the Parties agree to cooperate with one another to obtain regulatory approvals.

8.8   Adverse Experiences and Product Complaints . Each Party shall notify the other within three (3) business days of any serious and life-threatening adverse experiences related to the Product of which it becomes aware. Each Party shall notify the other within ten (10) business days of any other adverse experiences related to a Product of which it becomes aware. Neoprobe shall be responsible for all reporting to the FDA and all other regulatory bodies where any Product is marketed. Neoprobe shall provide Ethicon with a copy of the quarterly adverse experience reports for the Products, or any other reportable events, which Neoprobe is required by the Act to submit to the FDA or any other regulatory requirements in countries where any Product is marketed, within three (3) business days of its submission. Each Party shall notify the other of any serious complaints relating to the Products which it receives within thirty (30) days of becoming aware of such complaint.

8.9   Corrective Action . In the event any governmental agency having jurisdiction shall request or order, or if Ethicon shall determine to undertake, any corrective action with respect to any Product, including any recall, corrective action or market action, and the cause or basis of such recall or action is attributable to a breach by Neoprobe of any of its warranties, guarantees, representations, obligations or covenants contained herein, then Neoprobe shall be liable, and shall reimburse Ethicon for the reasonable costs of such action including the cost of any Product which is so recalled whether or not any such specific unit of Product shall be established to be in breach of any warranty by Neoprobe hereunder.

8.10   Provisio