EMPLOYMENT AGREEMENT
 
Peerless Systems Corporation, a Delaware Corporation, (the “Company”) and its
successors and assigns, and Edward M. Gaughan, a natural person (“Executive”)
(collectively, the “Parties”), make this EMPLOYMENT AGREEMENT (“Agreement”) as
of December 3, 2008 (“Commencement Date”).
 
RECITALS
 
1. WHEREAS, Executive is currently employed by the Company as the Acting
President.
 
2. WHEREAS, the Company wishes to employ Executive and Executive wishes to be
employed by Company in said position.
 
3. WHEREAS, the Company and Executive thus enter into this Employment Agreement
to outline the terms and conditions of Executive’s new position with Company and
except as set forth herein, simultaneously wish to extinguish any and all
obligations owed by each Party to the other arising out of their prior
employment relationship.
 
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth, the Company and Executive agree as follows:
 
AGREEMENT
 
1. Employment.
 
(a) At-Will.  The Term of this Agreement shall begin on the Commencement Date
and shall continue “at-will” until either party elects to terminate this
Agreement pursuant to Paragraph 5 (the “Term”).
 
(b) Duties and Responsibilities.  The Executive will report to William
Neil  (“Neil”), the Board of Directors (the “Board”), or another appointee of
the Board.  Executive shall be employed as Acting President and Vice
President/Head of Sales and shall perform and discharge well and faithfully the
duties which may be assigned to him from time to time by the Board and/or Neil
in connection with the conduct of the Company’s business as well as those duties
which are normally and customarily vested in an Acting President and Vice
President/Head of Sales of a corporation.
 
Executive’s job responsibilities shall include, but not be limited to, anything
reasonably requested or required of Executive on behalf of the Company.
 
(c) Extent of Services and Business Activities.  Executive shall devote his
full-time efforts to the business of the Company and shall not devote time to
other activities except with the prior consent of the Board of the
Company.  Executive covenants and agrees that for so long as he is employed by
the Company, Executive shall not, whether as an executive, employee, employer,
consultant, agent, principal, partner, member, stockholder, corporate officer or
director, or in any other individual or representative capacity, whether or not
for compensation, engage in or participate in or render services to any other,
provided, however, that, notwithstanding the foregoing, Executive (a) may invest
in securities of any entity, solely for investment purposes and without
participating in the business thereof, if (x) such securities are traded on any
national securities exchange or the National Association of Securities Dealers,
Inc. Automated Quotation System, and (y) Executive does not, directly or
indirectly, own two percent (2%) or more of any class of securities of such
entity.
 

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(d) Location.  During the Term, Executive shall regularly perform his duties
from his home office located in the state of Kentucky or at the request of the
Board, at the Company’s principal location (the “Headquarters”).  In addition to
spending time at the Headquarters, Executive may be required to travel from time
to time in order to perform his duties hereunder.
 
2. Compensation.
 
(a) Base Salary.  Executive shall be paid an annual base salary (“Base Salary”)
during the Term of two hundred thousand dollars ($200,000.00).  Executive’s Base
Salary shall be payable in installments consistent with the payroll practices
established by the Company with respect to its senior executive employees.
 
(b) [*************]1
 
(c) [*************]2
 
(d) [*************]3
 
(e) Payment.  Payment of all compensation to Executive hereunder shall be made
in accordance with the relevant written Company policies in effect from time to
time, including normal payroll practices, and shall be subject to all applicable
employment and withholding taxes.  This provision shall survive the termination
of Executive’s employment with the Company, for any reason.
 
3. Other Employment Benefits.
 
(a) Business Expenses.  Upon submission of itemized expense statements, in the
manner as shall be specified by the Company, Executive shall be entitled to
reimbursement for reasonable business and travel expenses duly incurred by
Executive in the performance of his duties under this Agreement, pursuant to
written Company policy and any relevant written policies established by the
Board and provided to Executive.
 

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1 Material omitted pursuant to Confidentiality Treatment Request with the
Securities and Exchange Commission
2 Material omitted pursuant to Confidentiality Treatment Request with the
Securities and Exchange Commission
3 Material omitted pursuant to Confidentiality Treatment Request with the
Securities and Exchange Commission
 
 
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(b) Benefit Plans.  To the extent offered by the Company, Executive shall be
entitled to participate, on a basis commensurate with his position, in the
Company’s medical insurance, retirement (e.g., non-matching 401(k) plan) and
other benefit plans pursuant to their terms and conditions during the Term of
this Agreement. Nothing in this Agreement shall preclude the Company or any
affiliate of the Company from terminating or amending any employee benefit plan
or program from time to time.
 
(c) Vacation.  Executive shall be credited with Six Hundred and Sixty-One (661)
vacation hours as of the execution of this Agreement.  Executive agrees to use a
minimum of Eighty (80) of those hours during the 2008 calendar year and another
One Hundred Sixty (160) hours ending the calendar year 2010.  Executive must
exhaust the remaining balance of his vacation bank during the 2011 calendar
year.  Executive acknowledges that he is not entitled to accrue any further
vacation until all vacation balances are exhausted.  However, once exhausted
Executive will again begin to accrue vacation at the rate applicable to other
senior executives of the Company.
 
(d) No Other Benefits.  Executive understands and acknowledges that the
compensation and benefits specified in Paragraphs 2 and 3 of this Agreement are
the only compensation and benefits he is entitled to receive under this
Agreement.
 
4. Confidentiality; Unfair Competition; Non-Solicitation Agreement.  Concurrent
with Executive’s execution of this Agreement, Executive shall execute and
deliver to the Company a non-disclosure and confidentiality agreement in the
form attached hereto as Exhibit A (the “Non-Disclosure Agreement”).  The terms
of the Non-Disclosure Agreement are incorporated by this reference as if set
forth in full.
 
5. Termination of Employment.
 
(a) Termination of At-Will Employment.  Either the Company or Executive may
terminate Executive’s employment at any time with or without advance notice or
cause.  In such an event, Executive will only be entitled to the Accrued
Obligations as set forth below.
 
(b) Payments Upon Termination.  If Executive’s employment is terminated for any
reason by either party, the Company shall promptly pay or provide to the
Executive, or his estate, (i) the Executive’s earned but unpaid Base Salary
accrued through the date of termination, (ii) accrued, but unpaid, vacation time
through such date of termination, (iii) any Bonus or Incentive Compensation
required to be paid to the Executive pursuant to this Agreement, to the extent
earned prior to the date of termination and payable, but not previously paid,
(iv) reimbursement of any business expenses incurred by the Executive prior to
the Date of Termination that are reimbursable under Paragraph 3(a) above, and
(v) any vested benefits and other amounts due to Executive under any plan,
program, policy of, or other agreement with, the Company(subsections (i) to (v),
above, are referred to together as the “Accrued Obligations”).
 
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(c) Severance Payments.  In addition, in the event Executive’s employment is
terminated by the Company without Cause (as Cause is defined below) and
Executive executes a general release in favor of the Company in the form
attached hereto as Exhibit “B” no later than thirty (30) days following
Executive’s last day of employment with the Company (but not before Executive’s
last day of employment) Executive shall receive the equivalent of nine (9)
months Base Salary payable in one lump sum within ten (10) business days from
Executive’s full execution of such release agreement less deductions required by
law.  Executive shall also receive reimbursement for nine (9) months of COBRA
premiums for Executive’s existing healthcare coverage and shall have ninety (90)
days from his last day of employment to exercise any vested but unexercised
stock options.
 
For purposes of Section 5(c) only, Cause shall be defined as (i) Executive’s
conviction, pleading guilty or no contest with respect to a felony involving
dishonesty or moral turpitude, (ii) Executive’s commission of any act of theft,
fraud, dishonesty, or falsification of any employment or Company records, (iii)
Executive’s engagement in misconduct that is detrimental to the Company’s
reputation or business, (iv) Executive’s refusal without proper legal reason to
substantially perform the duties and responsibilities required of Executive, or
(v) any breach by Executive of any material term of this Agreement (including
without limitation the Non-Disclosure Agreement) and/or of Executive’s fiduciary
duties to the Company.
 
6. Executive’s Duties Upon Termination.
 
(a) Cooperation.  After notice of termination, Executive shall, at the Company’s
expense and subject to Executive’s professional availability, cooperate with the
Company, as reasonably requested by the Company, to effect a transition of
Executive’s responsibilities and to ensure that the Company is aware of all
matters being handled by Executive.
 
(b) Return of Company Property.  Within seven days of the termination of
Executive’s employment under this Agreement for any reason, Executive will
return all Company property in Executive’s possession to the Company.
 
(c) Resignation of Office.  On the termination of Executive’s employment for
whatever reason, Executive agrees that Executive shall resign any directorship
or any other offices held by Executive in the Company or any subsidiary of the
Company.
 
7. Assignment and Transfer.  Executive’s rights and obligations under this
Agreement shall not be transferable by assignment or otherwise, and any
purported assignment, transfer or delegation thereof shall be void.  This
Agreement shall be assignable by the Company and inure to the benefit of, and be
binding upon and enforceable by, any purchaser of substantially all of Company’s
assets, any corporate successor to Company or any assignee thereof; provided
however that such assignee assumes in writing the Company’s obligations
thereunder.
 
8. No Inconsistent Obligations.  This Agreement and the Accompanying
Non-Disclosure Agreement shall represent the sole agreement with Company as to
the subject matter herein, and Executive has no other employment relationship
and is not subject to any other employment agreement with the Company or any
other affiliate of the Company and Executive has no obligations, legal or
otherwise, inconsistent with the terms of this Agreement or with Executive
undertaking employment with the Company.  Executive represents and warrants that
Executive has the right and power to enter into this Agreement, to perform
Executive’s obligations hereunder and by entering into this Agreement and
performing Executive’s obligations hereunder Executive is not in conflict with
any agreement with any third party.  The Company represents and warrants that
the Company has all requisite corporate power and authority to execute and
deliver this Agreement and to perform its obligations hereunder.
 
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9. Mutual Release of Claims Under Prior Employment Arrangement.  In exchange and
as consideration for each Party entering into this Agreement, each Party agrees
to release the other from any claims they may have against the other, as stated
below:
 
(a) Each Party hereby voluntarily, knowingly and willingly releases, acquits and
forever discharges the other Party including, without limitation, each of their
former, current and future parents, subsidiaries, divisions, affiliates,
predecessors, successors and assigns and all of their current, former and future
agents, employees, officers, directors, shareholders, members, joint ventures,
attorneys, representatives, predecessors, successors, assigns, owners and
servants) from any and all claims, costs or expenses of any kind or nature
whatsoever, whether known or unknown, foreseen or unforeseen, which against any
or all of them any Party ever had, now has or hereinafter may have, against the
other Party, up to and including the date of the Parties’ execution of this
Agreement.
 
(b) It is a condition hereof, and it is the Parties intention in the execution
of the General Release in subparagraph 9(a), above, that the same shall be
effective as a bar to each and every claim hereinabove specified, and in
furtherance of this intention, the Parties hereby expressly waive any and all
rights and benefits conferred upon them by Section 1542 of the California Civil
Code (or its Kentucky equivalent), which provides:
 
A general release does not extend to claims which the creditor does not know or
suspect to exist in his or her favor at the time of executing the release, which
if known by him or her must have materially affected his or her settlement with
the debtor.
 
(c) Executive further acknowledges and agrees that he is not owed any wages,
commissions, bonuses, MBO’s, accrued but unused vacation pay or unreimbursed
business expenses except as set forth herein arising out of or relating to
Executive’s prior employment with the Company.
 
10. Miscellaneous.
 
(a) Survival.  The provisions of this Agreement, including, without limitation
Paragraphs 10(c) (Arbitration), contained herein shall survive the termination
of employment.
 
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(b) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Kentucky without regard to conflict of
law principles.
 
(c) Arbitration .  With the exception of any claims for workers compensation,
unemployment insurance, claims before any governmental administrative agencies
or claims related to the National Labor Relations Act, any controversy relating
to this Agreement or Employee’s employment shall be settled by binding
arbitration according to the American Arbitration Association’s Employment
Arbitration Rules and Mediation Procedures (available at http://www.adr.org) and
subject to the Federal Arbitration Act and the Federal Rules of Civil Procedure
(including their mandatory and permission rights to discovery.)  This provision
to arbitrate applies to both Company and Executive.  Such arbitration shall be
presided over by a single arbitrator in Delaware.  Such binding arbitration is
applicable to any and all claims under state and federal employment related
statutes including, without limitation, the Fair Employment and Housing Act, the
Age Discrimination in Employment Act, the Family Medical Leave Act, the Title
VII of the Civil Rights Act and any similar statute law or regulation of the
state of Kentucky, as well as any claims related to a claimed breach of this
Agreement.  The Company shall bear all costs uniquely associated with the
arbitration process, including the arbitrator’s fees where required by law.  The
arbitrator shall have the authority to award any damages authorized by law,
including, without limitation, costs and attorneys’ fees.  The Parties agree to
execute all documents necessary to keep the documents, findings, and award, if
any, of the arbitration confidential, including, without limitation, execution
of a protective order.
 
(d) Amendment. This Agreement may be amended only by a writing signed by
Executive and by a duly authorized representative of the Company (other than
Executive) as approved by the Board.
 
(e) Severability. If any term, provision, covenant or condition of this
Agreement, or the application thereof to any person, place or circumstance,
shall be held to be invalid, unenforceable or void, the remainder of this
Agreement and such term, provision, covenant or condition as applied to other
persons, places and circumstances shall remain in full force and effect,
provided however, that any such provision found invalid, unenforceable or void
shall be deemed amended only to the extent necessary and shall preserve the
intent of the parties hereto.
 
(f) Construction. The headings and captions of this Agreement are provided for
convenience only and are intended to have no effect in construing or
interpreting this Agreement. The language in all parts of this Agreement shall
be in all cases construed according to its fair meaning and not strictly for or
against the Company or Executive.
 
(g) Nonwaiver. No failure or neglect of either party hereto in any instance to
exercise any right, power or privilege hereunder or under law shall constitute a
waiver of any other right, power or privilege or of the same right, power or
privilege in any other instance. All waivers by either party hereto must be
contained in a written instrument signed by the party to be charged and, in the
case of the Company, by an officer of the Company (other than Executive) or
other person duly authorized by the Company.
 
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(h) I.R.C. 409A.  Unless otherwise expressly provided, any payment of
compensation by Company to Executive, whether pursuant to this Agreement or
otherwise, shall be made within two and one-half months (2½ months) after the
later of the end of the calendar year of the Company’s fiscal year in which
Executive’s right to such payment vests (i.e., is not subject to a “substantial
risk of forfeiture” for purposes of Code Section 409A of the Internal Revenue
Code of 1986, as amended (“Code”)).  To the extent that any severance payments
come within the definition of “involuntary severance” under Code Section 409A,
such amounts up to the lesser of two times the Executive’s annual compensation
for the year preceding the year of termination or two times the 401(a)(17) limit
for the year of termination, shall be excluded from “deferred compensation” as
allowed under Code Section 409A, and shall not be subject to the following Code
Section 409A compliance requirements.  All payments of “nonqualified deferred
compensation” (within the meaning of Section 409A) are intended to comply with
the requirements of Code Section 409A, and shall be interpreted in accordance
therewith. Neither party individually or in combination may accelerate any such
deferred payment, except in compliance with Code Section 409A, and no amount
shall be paid prior to the earliest date on which it is permitted to be paid
under Code Section 409A.  In the event that Executive is determined to be a “key
employee” (as defined in Code Section 416(i) (without regard to paragraph (5)
thereof)) of Company at a time when its stock is deemed to be publicly traded on
an established securities market, payments determined to be “nonqualified
deferred compensation” payable following termination of employment shall be made
no earlier than the earlier of (i) the last day of the sixth (6th) complete
calendar month following such termination of employment, or (ii) Executive’s
death, consistent with the provisions of Code Section 409A.  Any payment delayed
by reason of the prior sentence shall be paid out in a single lump sum at the
end of such required delay period in order to catch up to the original payment
schedule.   Notwithstanding anything herein to the contrary, no amendment may be
made to this Agreement if it would cause the Agreement or any payment hereunder
not to be in compliance with Code Section 409A.
 
(i) Notices. All notices, requests, demands, claims and other communications
hereunder will be in writing.  Any notice, request, demand, claim or other
communication hereunder will be deemed duly given as of the day such information
is sent by registered or certified mail, return receipt requested, postage
prepaid, and addressed to the intended recipient as set forth below:
 
If to Executive:
 
Mr. Edward M. Gaughan
14605 Woodlake Trace
Louisville, Kentucky  40245
Tel: 
502-245-3090

Fax: 
502-245-0896

 
If to Company:
 
Peerless Systems Corporation,
a Delaware corporation
Attn:  Mr. William Neil
2381 Rosecrans Avenue, Suite 400
El Segundo, CA 90245
Tel: (310) 297-3146
 
with an additional copy to (which copy will not constitute notice):

Chairman of Board
2381 Rosecrans Avenue, Suite 400
El Segundo, CA 90245
 
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Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication will be deemed to have been duly
given unless and until it is received by the intended recipient (which shall be
evidenced by fax or e-mail confirmation, or registered receipt, or declaration
via a messenger).  Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
 
(i) Assistance in Litigation. Executive shall, during and after termination of
employment, upon reasonable notice, furnish such information and proper
assistance to the Company as may reasonably be required by the Company in
connection with any litigation in which it or any of its subsidiaries or
affiliates is, or may become a party; provided, however, that such assistance
following termination shall be furnished at mutually agreeable times and for
mutually agreeable compensation.
 
(j) Employee Acknowledgment. The undersigned Executive hereby acknowledges that
he has had the option to consult legal counsel in regard to this Agreement, that
he has read and understands this Agreement, that he is fully aware of its legal
effect, and that he has entered into it freely and voluntarily and based on his
own judgment and not on any representations or promises other than those
contained in this Agreement.  Further, Executive hereby agrees to abide by all
federal, state, and local laws, ordinances and regulations.
 
(k) Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which will be deemed an original and all of which together
will constitute one and the same instrument.
 
(l) Entire Agreement. This Agreement, previously executed Change of Control
Severance Agreement and the documents referenced herein and executed herewith
contain the entire agreement and understanding between the Parties hereto and
supersede any prior or contemporaneous written or oral agreements,
representations and warranties between them respecting the subject matter
hereof.
 
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of
the date set forth above.
 
Peerless Systems Corporation, Inc. (“Company”)
 
By:      /s/ William R. Neil                                   
Name:  William R. Neil
Title: Acting Chief Executive Officer and Chief Financial Officer
 
Dated: December 10, 2008                      
 
/s/ Edward M. Gaughan
 
Mr. Edward M. Gaughan (“Executive”)
 
Dated:  December 10, 3008                    

 
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