Execution Copy

EXHIBIT 10.1

AGREEMENT AND PLAN OF REORGANIZATION

     THIS AGREEMENT AND PLAN OF REORGANIZATION (the “Agreement”) is entered into
as of this 28th day of March, 2005 by and between, Victory Acquisition Corp., a
Delaware corporation (“Newco”), and Vialta, Inc., a Delaware corporation
(“Target”). Capitalized terms not defined in the body of this Agreement shall
have the meaning ascribed to them on Exhibit A.

RECITALS

          A. The parties intend that, subject to the terms and conditions
hereinafter set forth, Newco will merge with and into Target in a statutory
merger (the “Merger”), with Target to be the surviving corporation, all pursuant
to the terms and conditions of this Agreement and a Certificate of Merger
substantially in the form of Exhibit B (the “Certificate of Merger”) and the
applicable provisions of the laws of the State of Delaware. Upon the
effectiveness of the Merger, all outstanding capital stock of Newco (“Newco
Stock”) will be converted into capital stock of Target as the surviving
corporation of the Merger.

          B. All outstanding shares of Newco are owned by Fred S.L. Chan and
certain family members and trusts for the benefit of Mr. Chan and his family.
Newco has been formed solely to facilitate and effect this Merger with Target,
with the existence of Newco to be transitory and discontinued upon the
consummation of the Merger. Newco will conduct no business prior to the Merger.
Newco has pledged to Target, to secure Newco’s obligations under this Agreement,
all shares of Target’s common stock owned or controlled by Newco pursuant to the
Pledge Agreement dated as of an even date hereof and attached as Exhibit C
hereto (the “Pledge Agreement”).

          C. The Merger is intended for federal income tax purposes to be
treated as a redemption of the shares of Target Common Stock outstanding
immediately prior to the Effective Time (other than Target shares held by Newco
contributed to Newco shortly prior to the Closing Date by those stockholders of
Target who will continue as stockholders of Target after the Merger), pursuant
to Section 302 of the Code.

          D. Following the Merger, Target will no longer be a reporting company
pursuant to Section 12 of the Exchange Act.

          E. The Board of Directors of Target and the Special Committee
appointed by the Board of Directors of Target (the “Special Committee”): (i) has
determined that the Merger is advisable and fair to, and in the best interests
of, Target and its stockholders, (ii) has approved this Agreement, the Merger
and the other transactions contemplated by this Agreement and (iii) has
determined to recommend that the stockholders of Target adopt and approve this
Agreement and approve the Merger. In addition, the Special Committee has
received the opinion of Salem Partners LLC that the Merger is fair from a
financial point of view to Target and its stockholders (other than Mr. Chan and
his Affiliates).

     In consideration of the foregoing and the representations, warranties,
covenants and agreements set forth in this Agreement, the parties agree as
follows:

 

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

 

          1. PLAN OF REORGANIZATION

               1.1 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time, Newco will be merged with and into Target,
with Target as the Surviving Corporation in the Merger, pursuant to this
Agreement and the Certificate of Merger and in accordance with applicable
provisions of the laws of the State of Delaware, and the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of Delaware
Law. Without limiting the generality of the foregoing, at the Effective Time,
all the property, rights, privileges, powers and franchises of Newco and Target
shall vest in the Surviving Corporation, and all debts, liabilities and duties
of Newco and Target shall become the debts, liabilities and duties of the
Surviving Corporation.

               1.2 Effect on Capital Stock. Subject to the terms and conditions
of this Agreement, at the Effective Time, by virtue of the Merger and without
any action on the part of Newco, Target or the holders of any of the following
securities:

                    1.2.1 Certain Defined Terms. The term “Merger Consideration”
shall mean $0.36 per share of Target Common Stock in cash.

                    1.2.2 Conversion of Newco Stock. Each share of Newco capital
stock immediately prior to the Effective Time (the “Newco Stock”) will be
cancelled and extinguished and automatically converted into the right to receive
one share of Common Stock of the Surviving Corporation.

                    1.2.3 Cancellation of Newco Stock. Each share of Target
Common Stock held by Newco or its officers, directors, stockholders or
Affiliates immediately prior to the Effective Time (the “Newco Target Stock”)
shall automatically be cancelled and retired and shall cease to exist, and no
cash or other stock consideration shall be delivered or deliverable in exchange
therefor.

                    1.2.4 Cancellation of Treasury Stock. Each share of Target
Common Stock held by Target or any Subsidiary (as defined below) of Target
(“Treasury Stock”) shall automatically be cancelled and retired and shall cease
to exist, and no cash or other stock consideration shall be delivered or
deliverable in exchange therefor.

                    1.2.5 Conversion of Other Shares. Subject to Section 1.3,
each share of Target Common Stock issued and outstanding immediately prior to
the Effective Time, other than shares of Newco Target Stock and shares of
Treasury Stock, will be cancelled and extinguished and automatically converted
into the right to receive the Merger Consideration in cash upon compliance with
the procedures contemplated in Section 6.2 hereof.

                    1.2.6 Options. At the Effective Time, each holder of a then
outstanding vested option which is then exercisable to purchase shares of Target
Common Stock (“Target Options”) (other than options held by Newco, its officers,
directors, stockholders or Affiliates immediately prior to the Effective Time
(“Newco Options”) which shall be cancelled) shall automatically be cancelled and
converted into the right to receive in settlement thereof and net of applicable
withholding taxes, cash in an amount equal to the

-2-

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

 

product of (i) the Merger Consideration minus the applicable exercise price per
share of such Target Options multiplied by (ii) the number of vested shares of
Target Common Stock that such option may purchase upon exercise. If and to the
extent required by the terms of the plans governing such options or the option
granted thereunder, Target shall use its reasonable efforts to obtain the
consent of each holder of outstanding options to the foregoing treatment of such
options. At the Effective Time, each unvested Target Option shall automatically
be terminated without further rights.

               1.3 Dissenting Shares. Notwithstanding any provision of this
Agreement to the contrary, any shares of Target Common Stock outstanding
immediately prior to the Effective Time and held by a holder who has not voted
in favor of the Merger or consented thereto in writing and who has demanded
appraisal for such shares in accordance with Delaware Law or California Law, as
applicable, shall not be converted into or represent a right to receive the
Merger Consideration as provided in Section 1.2.5 but instead at the Effective
Time (or at such later time) shall be converted into the right to receive only
such consideration as may be determined to be due with respect to such
Dissenting Shares under Section 262 of the Delaware Law or Chapter 13 of the
California Law, as applicable. From and after the Effective Time, a holder of
Target Common Stock that becomes a holder of Dissenting Shares shall not be
entitled to exercise any of the voting rights or other rights of a stockholder
of the Surviving Corporation. If any holder of shares of Target Common Stock who
demands appraisal under Delaware Law and/or the California Law, as applicable,
shall effectively withdraw or lose (through failure to perfect or otherwise) the
right to appraisal, then, as of the later of (i) the Effective Time and (ii) the
occurrence of such withdrawal or loss, such holder’s shares shall no longer be
Dissenting Shares and shall automatically be converted into and represent only
the right to receive its portion of the Merger Consideration as provided in
Section 1.2.5 without interest thereon, upon surrender of the certificate
representing such shares pursuant to Section 6.2(b).

               1.4 Other Effects of the Merger. Subject to the terms and
conditions of this Agreement, at the Effective Time (a) the Certificate of
Incorporation of Target shall be amended in its entirety to read as set forth in
Exhibit D hereto, (b) the Bylaws of Newco will be the Bylaws of the Surviving
Corporation, and (c) the Board of Directors and officers of Newco will become
the Board of Directors and officers of the Surviving Corporation.

               1.5 Further Assurances. Target agrees that if, at any time after
the Effective Time, the Surviving Corporation considers or is advised that any
further deeds, assignments or assurances are reasonably necessary or desirable
to vest, perfect or confirm in the Surviving Corporation title to any property
or rights of Target or Newco, the Surviving Corporation and its proper officers
and directors may execute and deliver all such proper deeds, assignments and
assurances and do all other things necessary or desirable to vest, perfect or
confirm title to such property or rights in the Surviving Corporation and
otherwise to carry out the purpose of this Agreement, in the name of Target or
Newco.

               1.6 Tax Treatment. The Merger is intended to be treated for
federal income tax purposes as a redemption of the shares of Target Common Stock
(other than Newco Stock), pursuant to Section 302 of the Code. Cash payable to
stockholders of Target, other than Newco, will be subject to taxable treatment
under the Code. Shares of Newco held

-3-

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

 

by stockholders of Newco (received by them in exchange for the contribution of
an equal number of Target shares) will be exchanged for shares of Target in the
Merger, and will be treated as continuing interests in Target.

               1.7 Proxy Statement and Schedule 13E-3.

                    1.7.1 As promptly as practicable after the execution of this
Agreement, Target and Newco shall cooperate and promptly prepare and file with
the Securities and Exchange Commission (“SEC”) a proxy statement relating to the
meeting of Target’s stockholders to be held in connection with the Merger
(together with any amendments thereof or supplements thereto, the “Proxy
Statement”), a joint Rule 13e-3 Transaction Statement on Schedule 13E-3 (the
“Schedule 13E-3”) with respect to the Merger and any other filings made by or
required to be made by Target with the SEC other than the Proxy Statement and
Schedule 13E-3 (the “Other Filings”), if any. The respective parties shall cause
the Proxy Statement, the Schedule 13E-3 and any Other Filings to comply as to
form in all material respects with the applicable provisions of the Exchange
Act, including Regulation 14A and Rule 13e-3 thereunder, and any other
applicable laws. The respective parties, after consultation with the other, will
use all reasonable efforts to respond to any comments made by the SEC with
respect to the Proxy Statement, the Schedule 13E-3 and any Other Filings. Target
and Newco shall furnish to each other all information concerning it and the
holders of its capital stock as the other may reasonably request in connection
with such actions and the preparation of the Proxy Statement, the Schedule 13E-3
and any Other Filings.

                    As promptly as practicable after the clearance of the Proxy
Statement and the Schedule 13E-3 by the SEC, Target shall mail the Proxy
Statement to its stockholders (or, if the SEC chooses not to review the Proxy
Statement and the Schedule 13E-3, within 10 days after the date that the SEC
notifies Target that it will not review the Proxy Statement). The Proxy
Statement shall include the recommendation of the Target Board of Directors and
the Special Committee that adoption of the Merger Agreement by Target’s
stockholders is advisable and that Target Board of Directors and the Special
Committee has determined that the Merger is fair to, and in the best interests
of, Target Stockholders other than Mr. Chan, Newco and their Affiliates, subject
to Target Board of Directors or the Special Committee’s right to withdraw,
modify or amend such recommendation if Target Board of Directors or the Special
Committee, as applicable, determines in good faith, after receipt of the advice
of its outside counsel, that such action is necessary for Target Board of
Directors and the Special Committee to comply with their fiduciary duties under
applicable law.

                    No amendment or supplement to the Proxy Statement, the
Schedule 13E-3 or any Other Filings will be made by Target without the approval
of Newco, which shall not be unreasonably delayed or withheld. Target will
advise Newco promptly after it receives notice thereof, of any request by the
SEC for amendment of the Proxy Statement or any Other Filings or comments
thereon and responses thereto or requests by the SEC for additional information.

                    1.7.2 Each of the parties agrees to use its reasonable
efforts to cooperate and to provide each other with such information as any of
such parties may reasonably request in connection with the preparation of the
Proxy Statement, the Schedule

-4-

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

 

13E-3 and the Other Filings. Each party agrees promptly to supplement, update
and correct any information provided by it for use in the Proxy Statement, the
Schedule 13E-3 and the Other Filings to the extent that it is or shall have
become incomplete, false or misleading. If at any time prior to the Effective
Time, any event or circumstance relating to Newco or its officers and directors,
should be discovered by Newco which should be set forth in an amendment to the
Proxy Statement, the Schedule 13E-3 or Other Filings, Newco shall promptly
inform Target. If at any time prior to the Effective Time, any event or
circumstance relating to Target, or its officers or directors, should be
discovered by Target which should be set forth in an amendment or a supplement
to the Proxy Statement, any Other Filing or the Schedule 13E-3, Target shall
promptly inform Newco.

               1.8 Stockholders’ Meeting. Subject to Section 1.7 hereof, in
accordance with Target’s certificate of incorporation and by-laws, Target shall
call and hold a meeting of its stockholders (including any adjournment thereof,
the “Target Stockholders’ Meeting”) as promptly as practicable for the purpose
of voting upon the approval of the Merger, and Target shall use its reasonable
efforts to hold Target Stockholders’ Meeting as promptly as practicable after
the date on which the Proxy Statement is cleared by the SEC. Notwithstanding the
foregoing, Target may adjourn, delay, cancel or not call or hold the Target
Stockholders’ Meeting at any time before the vote of stockholders at the Target
Stockholders’ Meeting is taken with regard to the Merger and this Agreement, if
Target’s Board of Directors or the Special Committee withdraws, modifies or
amends its recommendation in accordance with Section 1.7.1 hereof or determines
in accordance with Section 1.7.1 that it is required by its fiduciary duties or
applicable law to notify the Target Stockholders of any Acquisition Proposal
prior to the taking of such vote.

          2. REPRESENTATIONS AND WARRANTIES OF TARGET

     Target hereby represents and warrants that, except as set forth on the
Target Disclosure Letter delivered to Newco herewith:

               2.1 Organization and Good Standing. Target and each of its
Subsidiaries is an entity duly organized, validly existing and in good standing
under the laws of the jurisdiction of its organization, has the corporate or
other power and authority to carry on its business as now conducted, and is
qualified as a foreign corporation in each jurisdiction listed on Section 2.1 of
the Target Disclosure Letter. Except as listed on Section 2.1 of the Target
Disclosure Letter, Target does not own or lease any real property, has no
employees in, and does not maintain a place of business in any foreign country
or in any state of the United States other than California.

               2.2 Power, Authorization and Validity.

                    2.2.1 Power and Capacity. Target has the corporate power and
authority to enter into and, subject to the approval of this Agreement by the
requisite holders of the issued and outstanding shares of Target Common Stock as
required by applicable law and this Agreement, perform its obligations under
this Agreement. The execution, delivery and performance of this Agreement have
been duly and validly approved and authorized by

-5-

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

 

Target’s Board of Directors as required by applicable law and Target’s
certificate of incorporation and bylaws.

                    2.2.2 No Filings. No filing, authorization or approval,
governmental or otherwise, by Target is necessary to enable Target to enter
into, and to perform its obligations under, this Agreement, except for (a) the
filing of the Certificate of Merger with the Delaware Secretary of State, and
the filing of appropriate documents with the relevant authorities of other
states in which Target is qualified to do business, if any, (b) such filings as
may be required to comply with federal and state securities laws, (c) compliance
with Section 1203 of California Law and (d) the approval of the holders of a
majority of the issued and outstanding shares of Target Common Stock of the
transactions contemplated hereby.

                    2.2.3 Binding Obligation. Subject to approval of this
Agreement and the Merger by the requisite vote of the stockholders of Target,
this Agreement is, assuming this Agreement constitutes valid and binding
obligations of Newco, valid and binding obligations of Target enforceable in
accordance with its terms, except as to the effect, if any, of (a) applicable
bankruptcy, insolvency and other similar laws affecting the rights of creditors
generally, (b) rules of law governing specific performance, injunctive relief
and other equitable remedies, and (c) the enforceability of provisions requiring
indemnification in connection with the offering, issuance or sale of securities.

               2.3 Capitalization.

                    2.3.1 Authorized and Outstanding Capital Stock. The
authorized capital stock of Target consists of 400,000,000 shares of Common
Stock, $0.001 par value, of which 83,052,852 shares are issued and outstanding,
as of March 7, 2005. All issued and outstanding shares of Target Common Stock
have been duly authorized and were validly issued, are fully paid and
nonassessable, are not subject to any right of rescission, are not subject to
preemptive rights by statute, the Certificate of Incorporation or Bylaws of
Target, or any agreement or document to which Target is a party or by which it
is bound and have been offered, issued, sold and delivered by Target in
compliance with all registration or qualification requirements (or applicable
exemptions therefrom) of applicable federal and state securities laws. There is
no liability for dividends accrued but unpaid with respect to Target’s
outstanding securities.

                    2.3.2 Options/Rights. Except as disclosed in Section 2.3.2
of the Target Disclosure Letter, there are no shares of preferred stock, stock
appreciation rights, options, warrants, calls, rights, commitments, conversion
privileges or preemptive or other rights or agreements outstanding to purchase
or otherwise acquire any of Target’s capital stock or any securities or debt
convertible into or exchangeable for shares of Target capital stock or
obligating Target to grant, extend or enter into such option, warrant, call,
commitment, conversion privileges or preemptive or other right or agreement.
Section 2.3.2 of the Target Disclosure Letter sets forth a true and complete
list of each outstanding option to acquire shares of Target Common Stock, the
exercise price thereof, the vesting schedule therefor.

-6-

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

 

               2.4 Subsidiaries. Except for the Subsidiaries of Target listed on
Section 2.4 of the Target Disclosure Letter (collectively the “Subsidiaries” and
each a “Subsidiary”), each of which is wholly-owned by Target, Target does not
have any subsidiaries or any interest, direct or indirect, in any corporation,
partnership, joint venture or other business entity.

               2.5 No Violation of Existing Agreements. Neither the execution
and delivery of this Agreement nor the consummation of the transactions
contemplated hereby will conflict with, or (with or without notice or lapse of
time, or both) result in a termination, breach, impairment or violation of
(a) any provision of the Certificate of Incorporation or Bylaws of Target or any
Subsidiary, as currently in effect, (b) in any material respect, any material
instrument or contract to which Target or any Subsidiary is a party or by which
Target or any Subsidiary is bound or (c) subject to the filings or other
compliance contemplated by Section 2.2.2 any federal, state, local or foreign
judgment, writ, decree, order, statute, rule or regulation applicable to Target
or any Subsidiary or their respective assets or properties.

               2.6 Litigation. As of the date hereof and except as disclosed on
Section 2.6 of the Target Disclosure Letter, to the knowledge of Target, there
is no action, proceeding, claim or investigation pending against Target or any
Subsidiary before any court or administrative agency. As of the date hereof,
there is not outstanding against Target or any of it Subsidiaries or any of
their properties any judgment, writ or decree.

               2.7 Taxes. Except as disclosed on Section 2.7 of the Target
Disclosure Letter, Target and each of its Subsidiaries has filed all federal,
state, local and foreign tax returns required to be filed, has paid all taxes
required to be paid in respect of all periods for which returns have been filed,
has established an adequate accrual or reserve for the payment of all taxes
payable in respect of the periods subsequent to the periods covered by the most
recent applicable tax returns, has made all necessary estimated tax payments.
Neither Target nor any Subsidiary is delinquent in the payment of any tax or is
delinquent in the filing of any tax returns, and no deficiencies for any tax
have been threatened, claimed, proposed or assessed in writing which have not
been paid. No tax return of Target or any Subsidiary is currently being audited
by the Internal Revenue Service or any state taxing agency or authority. For the
purposes of this Section, the terms “tax” and “taxes” include all federal,
state, local and foreign income, gains, franchise, excise, property, sales, use,
employment, license, payroll, occupation, recording, value added or transfer
taxes, governmental charges, fees, levies or assessments (whether payable
directly or by withholding), and, with respect to such taxes, any estimated tax,
interest and penalties or additions to tax and interest on such penalties and
additions to tax.

               2.8 Title to Properties. Target has good and marketable title to
all of its assets as shown on the balance sheet filed with its most recent
periodic filing with the SEC under the Exchange Act (the “Balance Sheet”), free
and clear of all liens, charges, restrictions or encumbrances (other than for
taxes not yet due and payable). All machinery and equipment included in such
properties is in good condition and repair, normal wear and tear excepted, and
all leases of real or personal property to which Target or any Subsidiary is

-7-

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

 

a party are fully effective and afford Target or the Subsidiary peaceful and
undisturbed possession of the subject matter of the lease.

               2.9 Contracts and Commitments. Neither Target nor any Subsidiary
is in default in any material respect under any contract that is material to the
business of Target or a Subsidiary.

               2.10 Intellectual Property. Target and the Target Subsidiaries
own, or have the right to use, all material Intellectual Property Rights (as
defined below) required for the conduct of their respective businesses as
presently conducted (such Intellectual Property Rights being hereinafter
collectively referred to as the “Target IP Rights”). There are no material
royalties, honoraria, fees or other payments payable by Target to any person by
reason of the ownership, use, license, sale or disposition of the Target IP
Rights (other than as set forth in Section 2.10 of the Target Disclosure
Letter). To the Knowledge of Target, neither the manufacture, marketing,
license, sale or intended use of any product currently licensed or sold by
Target or any of the Target Subsidiaries violates any license or agreement
between Target or any of the Target Subsidiaries and any third party or
infringes any Intellectual Property Right of any other party. Target has taken
reasonable and practicable steps designed to safeguard and maintain the secrecy
and confidentiality of, and its proprietary rights in, all material Target IP
Rights. All current officers, employees and consultants of Target and each
Subsidiary have executed and delivered to Target or the Subsidiary an agreement
regarding the protection of proprietary information and the assignment to Target
or the Subsidiary of all Intellectual Property Rights arising from the services
performed for Target or the Subsidiary by such persons. Exhibit 2.10 to the
Target Disclosure Letter sets forth a true and complete list of each material
(i) patent and patent application, (ii) copyright registration and copyrights
registration application; (iii) each trademark registration and trademark
registration application and (iv) each domain name, in each case pursuant to
federal, state and foreign laws owned or filed on behalf of Target or any of its
Subsidiaries. To the Knowledge of Target, as of the date hereof, no person is
infringing Target’s Intellectual Property Rights. As used herein, the term
“Intellectual Property Rights” shall mean all worldwide industrial and
intellectual property rights, including patents, patent applications, patent
rights, trademarks, trademark applications, trade names, service marks, service
mark applications, domain names, copyright, copyright applications, franchises,
licenses, inventories, know-how, trade secrets, customer lists, proprietary
processes and formulae, all source and object code, algorithms, architecture,
structure, display screens, layouts, inventions, development tools and all
documentation and media constituting, describing or relating to the above,
including manuals, memoranda and records.

               2.11 Compliance with Laws. Target and each of its Subsidiaries
has complied in all material respects with all applicable laws, ordinances,
regulations, and rules, and all orders, writs, injunctions, awards, judgments,
and decrees applicable to it or to the assets, properties, and business thereof
(the violation of which would have a material adverse effect upon its business),
including: (a) all applicable federal and state securities laws and regulations,
(b) all applicable federal, state, and local laws, ordinances, regulations, and
all orders, writs, injunctions, awards, judgments, and decrees pertaining to
(i) the sale, licensing, leasing, ownership, or management of its owned, leased
or licensed real or

-8-

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

 

personal property, products and technical data, (ii) employment and employment
practices, terms and conditions of employment, and wages and hours and
(iii) safety, health, fire prevention, environmental protection, toxic waste
disposal, building standards, zoning and other similar matters, (c) the Export
Administration Act and regulations promulgated thereunder and all other laws,
regulations, rules, orders, writs, injunctions, judgments and decrees applicable
to the export or re-export of controlled commodities or technical data, (d) the
Immigration Reform and Control Act, and (e) the Foreign Corrupt Practices Act.
Each of Target and the Subsidiaries has received all material permits and
approvals from, and has made all filings with, government agencies and
authorities that are necessary in connection with its business as currently
conducted.

               2.12 Employees, ERISA and Other Compliance.

                    2.12.1 Neither Target nor any Subsidiary has any employment
contracts or consulting agreements currently in effect that are not terminable
at will (other than agreements with the sole purpose of providing for the
confidentiality of proprietary information or assignment of inventions).

                    2.12.2 Copies of all Target Employee Plans (and, if
applicable, related trust agreements) and all amendments thereto and written
interpretations thereof (including summary plan descriptions) have been filed in
a timely manner, together with the three most recent annual reports (Form 5500,
including, if applicable, Schedule B thereto) prepared in connection with any
such Target Employee Plan. All contributions due from Target or any Subsidiary
with respect to any of the Target Employee Plans have been made as required
under ERISA or have been accrued on Target’s or any such Target Subsidiary’s
financial statements as of the date of the Balance Sheet. Each Target Employee
Plan has been maintained substantially in compliance with its terms and with the
requirements prescribed by any and all statutes, orders, rules and regulations,
including ERISA and the Code, which are applicable to such Target Employee
Plans. Target has no Target Pension Plans.

                    2.12.3 No benefit payable or which may become payable by
Target or any Subsidiary pursuant to any Target Employee Plan or as a result of
or arising under this Agreement shall constitute an “excess parachute payment”
(as defined in Section 280G(b)(1) of the Code) which is subject to the
imposition of an excise Tax under Section 4999 of the Code or which would not be
deductible by reason of Section 280G of the Code.

               2.13 No Brokers. Except for the fees and expenses payable by
Target to Salem Partners LLC in accordance with that certain letter agreement
dated March 3, 2005 and expenses payable by Target to Needham & Co., Inc.,
neither Target nor any of the Target Stockholders is obligated for the payment
of fees or expenses of any investment banker, broker or finder in connection
with the origin, negotiation or execution of this Agreement or the Certificate
of Merger or in connection with any transaction contemplated hereby or thereby.

               2.14 Insurance. Target and its Subsidiaries maintain and at all
times during the prior three years have maintained fire and casualty, general
liability insurance which it believes to be reasonably prudent for similarly
sized and similarly situated

-9-

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

 

businesses. Target and its Subsidiaries have in full force and effect workers’
compensation insurance required in each jurisdiction where any of them is
required to maintain such insurance because of its business operations. Target
has not received any notification from any carrier issuing any policy under
which it is currently the insured a notice of cancellation or of limitation of
coverage. Target does not have any claim pending under any insurance policy of
Target, and Target has not been denied coverage under any such policy for any
claim, asserted in connection with any pending or threatened litigation against
Target or for any material claim asserted by Target under any insurance policy
in the last year.

               2.15 SEC Documents.

                    2.15.1 SEC Reports. Since January 1, 2003, as of their
respective filing dates, or, with respect to registration statements as of their
effective dates, and prior to the date of this Agreement, in each case as
amended or supplemented, Target’s reports, filings, registration statements and
other documents required to be filed by it with the SEC (“Target SEC Documents”)
were filed and complied in all material respects with the requirements of the
Exchange Act or the Securities Act, as applicable, and none of the Target SEC
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances in which they were made,
not misleading, except to the extent corrected, modified or superseded by a
subsequently filed Target SEC Document.

                    2.15.2 Disclosure Statements. (a) The Proxy Statement, as
supplemented or amended, if applicable, at the time such Proxy Statement or any
amendment or supplement thereto is first mailed to stockholders of Target, at
the time such stockholders vote on adoption of this Agreement and at the
Effective Time and (b) the Schedule 13E-3 and any Other Filings or any
supplement or amendment thereto, at the time of the filing thereof and at the
time of any distribution or dissemination thereof, in each case, will not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein, in the light of the
circumstances under which they are made, not misleading. The representations and
warranties contained in this Section 2.15.2 will not apply to statements or
omissions included in the Proxy Statement, Schedule 13E-3 or any Other Filings
based upon information furnished in writing to Target by or on behalf of Newco
or its Affiliates.

               2.16 Certain Balance Sheet Items. Section 2.16 of the Target
Disclosure Letter sets forth, as of February 28, 2005, Target’s (i) cash and
cash equivalents, as defined by GAAP, and (ii) inventory changes through such
date from December 31, 2004 (the date of Target’s last physical inventory). Such
information is prepared from Target’s books and records in accordance with GAAP.

          3. REPRESENTATIONS AND WARRANTIES OF NEWCO

     Newco hereby represents and warrants that, except as set forth on the Newco
Disclosure Letter delivered to Target:

-10-

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

 

               3.1 Organization and Good Standing. Newco is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has the corporate power and authority to own, operate and lease
its properties. Newco has not and will not conduct any business prior to the
Effective Time.

               3.2 Power, Authorization and Validity.

                    3.2.1 Newco has the right, power, legal capacity and
authority to enter into and perform its obligations under this Agreement, and
all agreements to which Newco is or will be a party that are required to be
executed pursuant to this Agreement (the “Newco Ancillary Agreements”). The
execution, delivery and performance of this Agreement and the Newco Ancillary
Agreements have been duly and validly approved and authorized by Newco’s Board
of Directors in compliance with applicable law and the certificate of
incorporation and bylaws of the Newco.

                    3.2.2 No filing, authorization or approval, governmental or
otherwise, is necessary to enable Newco to enter into, and to perform it
obligations under, this Agreement and the Newco Ancillary Agreements, except for
the filing of the Certificate of Merger with the Delaware Secretary of State.

                    3.2.3 This Agreement and the Newco Ancillary Agreements are,
or when executed by Newco will be, valid and binding obligations of Newco
enforceable in accordance with their respective terms, except as to the effect,
if any, of (a) applicable bankruptcy, insolvency and other similar laws
affecting the rights of creditors generally, (b) rules of law governing specific
performance, injunctive relief and other equitable remedies and (c) the
enforceability of provisions requiring indemnification in connection with the
offering, issuance or sale of securities; provided, however, that the
Certificate of Merger will not be effective until filed with the Delaware
Secretary of State.

               3.3 No Violation of Existing Agreements. Neither the execution
and delivery of this Agreement nor any Newco Ancillary Agreement, nor the
consummation of the transactions contemplated hereby, will conflict with, or
(with or without notice or lapse of time, or both) result in a termination,
breach, impairment or violation of (a) any provision of the Certificate of
Incorporation or Bylaws of Newco, as currently in effect, (b) in any material
respect, any material instrument or contract to which Newco is a party or by
which Newco is bound, or (c) any federal, state, local or foreign judgment,
writ, decree, order, statute, rule or regulation applicable to Newco or its
assets or properties.

               3.4 Vote Required. All votes or consents of the holders of any of
the outstanding shares of capital stock or any other securities of Newco
necessary to approve this Agreement or the Merger have been obtained.

               3.5 Finders’ Fees. There is no investment banker, broker, finder
or other intermediary who might be entitled to any fee or commission from Newco
or any of its Affiliates upon consummation of the Merger.

-11-

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

 

               3.6 Additional Contribution. Newco has entered into an Additional
Contribution Agreement with Mr. Chan. True and correct copies of the Additional
Contribution Agreement have been provided to Target.

               3.7 Capitalization. The authorized capital stock of Newco
consists of 50,000,000 shares of common stock, $0.0001 par value per share, of
which 32,039,840 shares are issued and outstanding as of the date hereof. On the
date hereof, Newco and the parties listed on Section 3.7 of the Newco Disclosure
letter have entered into the Contribution Agreement, a true and correct copy of
which is attached as Exhibit 3.7 hereto, whereby each party thereto contributes
all of the Target Common Stock owned, legally or beneficially, by them, as of
the date hereof or hereafter through the Effective Time, to Newco. The parties
to the Contribution Agreement represent and, as of the Closing Date will
represent, all of the legal and beneficial owners of common stock of Newco.
Except as set forth on Section 3.7 of the Newco Disclosure Letter, Newco has no
liabilities. Newco has good and marketable title to all of its assets, free and
clear of all liens, charges, restrictions or encumbrances (other than for taxes
not yet due and payable or the pledge of the Newco Target Stock pursuant to the
Pledge Agreement).

               3.8 Voting. Newco has entered into the Voting Agreement dated as
of the date hereof among Newco and Target attached hereto as Exhibit E.

               3.9 Information in Securities Filings. All documents required to
be filed by Newco or its Affiliates with the SEC in connection with the Merger,
and any information supplied by Newco or their Affiliates for inclusion or
incorporation by reference in the Proxy Statement, the Schedule 13E-3 and any
Other Filings, or any supplement or amendment to any such filings, will not at
the respective times when such are filed with the SEC and/or are first
published, given or mailed to Target’s stockholders, as the case may be, and at
the Effective Time, in each case, contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they are
made, not misleading. The representations and warranties contained in this
Section 3.9 will not apply to statements or omissions included in any such
filings based upon information furnished in writing by or on behalf of Target.

               3.10 Limited Operations of Newco. Newco was formed in 2005 solely
for the purpose of engaging in the Merger. Newco has not engaged in any other
business activities. Except for (i) obligations or liabilities incurred in
connection with its organization and the Merger and (ii) this Agreement and any
other agreements and arrangements contemplated hereby or entered into in
furtherance hereof, Newco has not incurred any obligations or liabilities or
engaged in any business activities.

          4. TARGET PRECLOSING COVENANTS

     During the period from the date of this Agreement until the earlier of the
Effective Time or the termination of this Agreement as permitted in Section 9.1,
Target covenants and agrees as follows:

-12-

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

 

               4.1 Advice of Changes. Target will promptly advise Newco in
writing of any change which is expected to have a Material Adverse Effect on
Target. Target shall also deliver, promptly when available, to Newco a monthly
unaudited balance sheet and statement of operations commencing with the month
ending March 31, 2005, which financial statements shall be prepared in the
ordinary course of business, in accordance with Target’s books and records and
GAAP.

               4.2 Maintenance of Business. Except as disclosed in the Target
Disclosure Letter, as contemplated by this Agreement or as consented to by
Newco, which consent will not be unreasonably delayed or withheld, Target will
use reasonable efforts to conduct its business and its relationships with
customers, suppliers, employees and others in substantially the same manner as
it has prior to the date hereof and will not accelerate or delay the payment or
collection of accounts. Without limiting the foregoing, until the Effective Time
or earlier termination of this Agreement, except as disclosed in the Target
Disclosure Letter or as contemplated by this Agreement, Target will not, and
will not permit any of its Subsidiaries to do any of the following, without the
prior written consent of the President of Newco, which consent will not be
unreasonably withheld or delayed:

                         (a) Incur any indebtedness for borrowed money except in
the ordinary course of business consistent with past practices;

                         (b) enter into any transaction not in the ordinary
course of business;

                         (c) encumber or permit to be encumbered any of its
assets except in the ordinary course of its business consistent with past
practice and to an extent which is not material;

                         (d) dispose of any of its assets except in the ordinary
course of business consistent with past practice;

                         (e) enter into any material lease or contract for the
purchase or sale of any property, real or personal;

                         (f) fail to maintain its equipment and other assets in
good working condition and repair according to the standards it has maintained
to the date of this Agreement, subject only to ordinary wear and tear;

                         (g) pay any bonus, increased salary or special
remuneration to any officer, employee or consultant (except for normal salary
increases consistent with past practices not to exceed 10% per year and except
pursuant to existing arrangements previously disclosed to Newco) or enter into
any new employment or consulting agreement with any such person;

                         (h) change accounting methods, except as required by
GAAP or by a governmental authority, or materially revalue any of its assets;

-13-

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

 

                         (i) declare, set aside or pay any cash dividend or
distribution in respect of capital stock, or redeem or otherwise acquire any of
its capital stock;

                         (j) amend or terminate any contract, agreement or
license to which it is a party except those amended or terminated in the
ordinary course of business, consistent with past practice, and which are not
material in amount or effect;

                         (k) lend any amount to any person or entity, other than
(i) advances for travel and expenses which are incurred in the ordinary course
of business consistent with past practice, not material in amount and documented
by receipts for the claimed amounts or (ii) any loans pursuant to the Target
401(k) Plan;

                         (l) guarantee or act as a surety for any obligation
except for the endorsement of checks and other negotiable instruments in the
ordinary course of business, consistent with past practice, which are not
material in amount;

                         (m) waive or release any material right or claim except
in the ordinary course of business, consistent with past practice;

                         (n) issue or sell any shares of its capital stock of
any class (except upon the exercise of an option or warrant currently
outstanding), or any other of its securities, or issue or create any warrants,
obligations, subscriptions, options, convertible securities, or other
commitments to issue shares of capital stock, or accelerate the vesting of any
outstanding option or other security;

                         (o) split or combine the outstanding shares of its
capital stock of any class or enter into any recapitalization affecting the
number of outstanding shares of its capital stock of any class or affecting any
other of its securities;

                         (p) merge, consolidate or reorganize with, or acquire
any entity;

                         (q) amend its Certificate of Incorporation or Bylaws;

                         (r) license any of its technology or intellectual
property except on a non-exclusive basis and in the ordinary course of business
consistent with past practice;

                         (s) change any tax election, agree to any audit
assessment by any tax authority, settle any tax dispute or liability, or file
any federal or state income or franchise tax return outside of the ordinary
course of business;

                         (t) change any insurance coverage or permit any
coverage in force to lapse, or issue any certificates of insurance;

                         (u) take any action with the intention directly or
indirectly to adversely impact any transaction contemplated by this Agreement;

-14-

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

 

                         (v) unless authorized by the Board of Directors of
Target, commence any action at law or in equity or any arbitrations, other than
to enforce Target’s rights and remedies under this Agreement; or

                         (w) agree to do, or permit any Subsidiary to do or
agree to do, any of the things described in the preceding clauses 4.3(a) through
4.3(v).

               4.3 Regulatory Approvals. Target will execute and file, or join
in the execution and filing, of any application or other document that may be
necessary in order to obtain the authorization, approval or consent of any
governmental body, federal, state, local or foreign which may be reasonably
required, or which Newco may reasonably request (at Newco’s sole cost and
expense, except with regard to the preparation and distribution of the Proxy
Statement and the conduct of the Target special meeting of stockholders to
consider the Merger and this Agreement), in connection with the consummation of
the transactions contemplated by this Agreement. Target will use its reasonable
efforts to obtain all such authorizations, approvals and consents.

               4.4 Necessary Consents. Target will use its reasonable efforts to
obtain such written consents and take such other actions as may be necessary to
allow the consummation of the transactions contemplated hereby.

               4.5 Litigation. Target will notify Newco in writing promptly
after learning of any material actions, suits, proceedings or investigations by
or before any court, board or governmental agency, initiated against it or any
Subsidiary, or to the Knowledge of Target threatened against it or any
Subsidiary after the date of this Agreement.

               4.6 Access to Information. Target will allow Newco and its agents
reasonable access the files, books, records and offices of Target and each
Subsidiary, including, any and all information relating to Target’s taxes,
commitments, contracts, leases, licenses, and real, personal and intangible
property and financial condition. Target will cause its accountants to cooperate
with Newco and its agents in making available all financial information
reasonably requested, including the right to examine all working papers
pertaining to all financial statements prepared or audited by such accountants.

               4.7 Target Dissenting Shares. As promptly as practicable after
the date of the Target Stockholders’ Meeting and prior to the Closing Date,
Target shall furnish Newco with the name and address of each holder of
Dissenting Shares and the number of Dissenting Shares owned by such Target
Dissenting Stockholder. Surviving Corporation shall take all steps required
pursuant to Chapter 13 of the California Law, to mail to each stockholder of
Target, as required, in a timely manner, a notice of the approval of the Merger
and containing such additional information as required pursuant to Chapter 13 of
the California Law.

               4.8 Satisfaction of Conditions Precedent. Subject to the
fiduciary obligations of Target, the Board of Directors and the Special
Committee, Target will use its reasonable efforts to satisfy or cause to be
satisfied all the conditions precedent which are set forth in Section 8, and
Target will use its reasonable efforts to cause the transactions

-15-

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

 

contemplated by this Agreement to be consummated, and, without limiting the
generality of the foregoing, to obtain all consents and authorizations of third
parties and to make all filings with, and give all notices to, third parties
that may be necessary on its part in order to effect the transactions
contemplated hereby.

               4.9 Section 16 Matters. Prior to the Effective Time, Target shall
take action (in accordance with that certain no-action letter, dated January 12,
1999, issued by the SEC to Skadden, Arps, Slate, Meagher & Flom) designed to
provide that the treatment of Target Options will qualify for exemption under
Rule 16b-3(d) or (e), as applicable, under the Exchange Act.

               4.10 Other Proposals. Prior to Target Board of Directors or
Special Committee, after receiving an Acquisition Proposal, withdrawing or
modifying its approval or recommendation of this Agreement or the Merger or
adjourning or canceling any scheduled meeting of stockholders of Target to
consider this Agreement or the Merger, approving or recommending an Acquisition
Proposal, or entering into an agreement with respect to an Acquisition Proposal,
Target shall provide Newco with a written notice (a “Notice of Acquisition
Proposal”) advising Newco of the Acquisition Proposal, specifying the material
terms and conditions of such Acquisition Proposal and identifying the person
making such Acquisition Proposal, and neither Target nor any Subsidiary shall
enter into an agreement with respect to an Acquisition Proposal until two
business days after the first Notice of Acquisition Proposal with respect to a
given third party was given to Newco.

               4.11 Available Cash. Target shall deliver to Newco, two business
days prior to the Closing Date, Target’s written good faith estimate of Target’s
cash and cash equivalents as of midnight on the day prior to the Closing Date.

               4.12 Resignation of Directors and Officers. Target shall use
reasonable efforts to obtain the resignation, as of the Effective Time, of the
directors and officers of Target in office immediately prior to the Effective
Time as directors and officers of the Surviving Corporation.

          5. NEWCO COVENANTS

     During the period from the date of this Agreement until the Effective Time,
Newco covenants and agrees as follows:

               5.1 Advice of Changes. Newco will promptly advise Target in
writing of any event occurring subsequent to the date of this Agreement that
would render any representation or warranty of Newco contained in this
Agreement, if made on or as of the date of such event or the Closing Date,
untrue or inaccurate in any material respect.

               5.2 Regulatory Approvals. Newco will execute and file, or join in
the execution and filing, of any application or other document that may be
necessary in order to obtain the authorization, approval or consent of any
governmental body, federal, state, local or foreign, which may be reasonably
required, or which Target may reasonably request, in connection with the
consummation of the transactions contemplated by this Agreement.

-16-

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

 

Newco will use its reasonable efforts to obtain all such authorizations,
approvals and consents.

               5.3 Satisfaction of Conditions Precedent. Newco will use its
reasonable efforts to satisfy or cause to be satisfied all the conditions
precedent which are set forth in Section 7, and Newco will use its reasonable
efforts to cause the transactions contemplated by this Agreement to be
consummated, and, without limiting the generality of the foregoing, to obtain
all consents and authorizations of third parties and to make all filings with,
and give all notices to, third parties that may be necessary or reasonably
required on its part in order to effect the transactions contemplated hereby.

               5.4 Indemnification; Insurance. At all times following the
Merger, the Surviving Corporation shall indemnify all present and former
directors or officers of Target and its Subsidiaries (“Indemnified Parties”)
against any costs or expenses (including reasonable attorneys’ fees), judgments,
fines, losses, claims, damages, penalties or liabilities (collectively, “Costs”)
incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of or pertaining to matters, existing or occurring at or prior to the
Effective Time, whether asserted or claimed prior to, at or after the Effective
Time, by reason of the fact of such Indemnified Party’s service as a director or
officer of Target or any of its Subsidiaries, except to the extent it is
determined in a final, non-appealable determination by a court of competent
jurisdiction that such indemnification is prohibited by applicable law, to the
extent such Costs have not been paid for by insurance and shall, in connection
with defending against any action for which indemnification is available
hereunder, promptly advance to such Indemnified Parties any reasonable costs and
expenses as incurred by or on behalf of such Indemnified Parties; provided that
such advance shall be conditioned upon such Indemnified Parties’ agreement
promptly to return such amounts if a court of competent jurisdiction shall
ultimately determine that indemnification of such Indemnified Parties is
prohibited by applicable law. The foregoing rights shall be in addition to any
rights to which any Indemnified Party may be entitled by reason of the by-laws
or certificate of incorporation of Target or any of its Subsidiaries, any
contract and/or any applicable law. Target shall acquire and the Surviving
Corporation will maintain (and not cancel or allow to lapse) for a period of not
less than six years from the Effective Time Target’s current directors’ and
officers’ liability insurance and indemnification policy (or a policy providing
substantially similar coverage) (the “D&O Insurance”) for all persons who are
directors and officers of Target and its Subsidiaries covered by Target’s D&O
Insurance as of the Effective Time. The provisions of this Section are intended
for the benefit of, and shall be enforceable by, each Indemnified Party and his
or her heirs and representatives.

               5.5 Section 16 Matters. Prior to the Effective Time, Newco shall
take action (in accordance with that certain no-action letter, dated January 12,
1999, issued by the SEC to Skadden, Arps, Slate, Meagher & Flom) designed to
provide that the treatment of Target Options will qualify for exemption under
Rule 16b-3(d) or (e), as applicable, under the Exchange Act.

               5.6 Target Common Stock. Newco will, until the Effective Time or
the earlier termination of this Agreement, legally and beneficially own all of
the shares of Target

-17-

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

 

Common Stock contributed pursuant to the Contribution Agreement. No shareholder
of Newco will legally or beneficially own any shares of Target Common Stock
other than indirectly through the ownership of Newco Stock.

          6. CLOSING MATTERS

               6.1 The Closing. Subject to termination of this Agreement as
provided in Section 9 below, the Closing will take place at the offices of Kaye
Scholer LLP, 1999 Avenue of the Stars, Suite 1700, Los Angeles, CA 90067-6048,
at 10:00 a.m., Pacific Time on the date that is one business day following
receipt of the required Target stockholder approval, or, if all conditions to
closing have not been satisfied or waived by such date, one business day after
all conditions to closing have been satisfied or waived (such date on which the
Closing occurs, the “Closing Date”). Concurrently with the Closing, the
Certificate of Merger will be filed in the office of the Delaware Secretary of
State. The Certificate of Merger will provide that the Merger shall become
effective upon filing or at such later time as may be mutually agreed by Newco
and Target.

               6.2 Exchange of Certificates.

                         (a) Exchange Agent. Mellon Shareholder Services, or
other mutually acceptable entity, shall act as exchange agent (the “Exchange
Agent”) in the Merger. Concurrent with the Effective Time, Target shall
irrevocably deposit with the Exchange Agent, for the benefit of the holders of
shares of Target Common Stock and vested Target Options, and for exchange in
accordance with this Agreement and the Certificate of Merger, cash in an amount
sufficient to pay the Merger Consideration (such cash being hereinafter referred
to as the “Exchange Fund”) payable pursuant to this Agreement and the
Certificate of Merger, in exchange for outstanding shares of Target Common Stock
and vested Target Options; provided, however, that if Target shall not have
sufficient cash to pay the entire Merger Consideration at the Effective Time,
then Newco shall, at the Effective Time, deposit into the Exchange Fund an
amount of cash equal to the shortfall of such Merger Consideration
(“Shortfall”), not to exceed Four Million Dollars ($4,000,000.00). In order to
facilitate the deposit by Newco of any such Shortfall, no later than two
(2) business days before the projected Closing Date, Target shall deliver to
Newco a written statement, signed by its Chief Financial Officer, evidencing the
amount of cash and cash equivalents which it then has on hand and the amount of
any projected Shortfall. Prior to the Effective Time, Target shall provide to
the Exchange Agent a list of all holders of vested Target Options, including
mailing addresses for such holders contained in Target’s books and records.

                         (b) Exchange Procedures. As soon as practicable after
the Effective Time, the Surviving Corporation shall cause the Exchange Agent to
mail to each holder (other than Newco, its Affiliates, Target, any Target
Subsidiary or any holder claiming to hold Dissenting Shares) of record of vested
Target Options or a certificate or certificates which immediately prior to the
Effective Time represented issued and outstanding shares of Target Common Stock
(collectively, the “Certificates”), (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and shall be in such customary form and have such other customary
provisions as Target and Newco may agree upon prior to

-18-

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

 

the Closing, including whereby any shares of Target Common Stock surrendered in
exchange for the Merger Consideration shall waive any claim as Dissenting
Shares) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for the Merger Consideration. Upon surrender of a
Certificate for cancellation to the Exchange Agent, together with a duly
executed letter of transmittal and such other documents as may be reasonably
required by the Exchange Agent, the holder of such Certificate shall be entitled
to receive in exchange therefor the Merger Consideration multiplied by the
number of shares of Target Common Stock represented by such Certificate pursuant
to the provisions of this Agreement and the Certificate of Merger, and the
Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of shares of Target Common Stock which is not registered
on the transfer records of Target, the Merger Consideration may be issued to a
transferee if the Certificate representing such Target Common Stock is presented
to the Exchange Agent, accompanied by all documents required to evidence and
effect such transfer and by evidence that any applicable stock transfer taxes
have been paid. Until surrendered as contemplated by this Section 6.2(b), each
Certificate (other than Certificates held by Newco, its Affiliates, Target, any
Target Subsidiary or any holder claiming to hold Dissenting Shares) shall be
deemed, on and after the Effective Time, to evidence only the right to receive
Merger Consideration as contemplated by this Agreement and the Delaware Law, or
to the extent the shares represented thereby constitute Dissenting Shares, only
the right to receive consideration as set forth in Section 1.2. Upon delivery of
a duly executed letter of transmittal and such other documents as may be
reasonably requested by the Exchange Agent, the holder of Target Options shall
be entitled to receive, in cash, the amount determined pursuant to Section 1.2.6
with respect to such holder’s vested Target Options. No interest will accrue on
any Merger Consideration payable under this Agreement.

                         (c) No Further Ownership Rights in Target Common Stock.
All Merger Consideration paid upon the surrender for exchange of shares of
Target Common Stock and Target Options in accordance with the terms of this
Agreement and the Certificate of Merger shall be deemed to have been issued in
full satisfaction of all rights pertaining to such shares of Target Common Stock
and Target Options, respectively. After the Effective Time there shall be no
further registration of transfers on the stock transfer books of the Surviving
Corporation or Target of the shares of Target Stock or Target Options, which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates or Target Options are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Section 6.2 and the Certificate of Merger.

                         (d) Termination of Exchange Fund. Any portion of the
Exchange Fund (including the proceeds of any investments thereof) that remains
undistributed to the stockholders of Target twelve months after the Effective
Time shall be delivered to Surviving Corporation. Any former stockholders or
optionholders of Target who have not theretofore complied with this Section 6.2
and the Certificate of Merger shall thereafter look only to the Surviving
Corporation for payment of their claim for Merger Consideration, as determined
pursuant to this Agreement.

                         (e) No Liability. Neither the Exchange Agent, Newco or
Target shall be liable to any holder of shares of Target Common Stock for any
amount delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.

-19-

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

 

                         (f) Lost, Stolen or Destroyed Certificates. In the
event any Certificates shall have been lost, stolen or destroyed, the Exchange
Agent shall issue in exchange for such lost, stolen or destroyed Certificates,
upon the making of an affidavit of that fact by the holder thereof and the
posting of reasonable bond therefor, the lost, stolen or destroyed certificate
shall be deemed presented for exchange pursuant to Section 6.2(b).

          7. CONDITIONS TO OBLIGATIONS OF TARGET

     Target’s obligations hereunder are subject to the fulfillment or
satisfaction, on and as of the Closing, of each of the following conditions (any
one or more of which may be waived by Target, but only in a writing signed by
Target):

               7.1 Accuracy of Representations and Warranties. Except where the
failure of a representation or warranty to be true and correct would not have a
Material Adverse Effect, the representations and warranties of Newco set forth
in Section 3 (as qualified by the Newco Disclosure Letter) shall be true and
accurate in all respects as of the date of this Agreement, and on and as of the
Closing, with the same force and effect as if they had been made at the Closing,
and except for those representations and warranties that address matters only as
of a particular date (which shall remain true and correct as of such particular
date), with the same force and effect as if they had been made at the Closing,
and Target shall receive a certificate to such effect executed by Newco’s
President and Chief Financial Officer.

               7.2 Covenants. Newco shall have performed and complied in all
material respects with all of its covenants contained in Section 5 on or before
the Closing, and Target shall receive a certificate to such effect signed by
Newco’s President and Chief Financial Officer.

               7.3 Compliance with Law. There shall be no order, decree, or
ruling by any court or governmental agency or threat thereof, or any other fact
or circumstance, which would prohibit, render illegal or enjoin the transactions
contemplated by this Agreement.

               7.4 Stockholder Approval. This Agreement shall have been validly
approved and adopted by the affirmative vote of the holders of a majority of the
shares of Target Common Stock outstanding as of the record date for the Target
Stockholders’ Meeting.

          8. CONDITIONS TO OBLIGATIONS OF NEWCO

     The obligations of Newco hereunder are subject to the fulfillment or
satisfaction on, and as of the Closing, of each of the following conditions (any
one or more of which may be waived by Newco, but only in a writing signed by
Newco):

               8.1 Accuracy of Representations and Warranties. Except where the
failure of a representation or warranty to be true and correct would not have,
alone or in the aggregate, a Material Adverse Effect, the representations and
warranties of Target set forth in Section 3 (as qualified by the Target
Disclosure Letter) shall be true and accurate in all respects as of the date of
this Agreement, and on and as of the Closing, with the same force

-20-

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

 

and effect as if they had been made at the Closing, and except for those
representations and warranties that address matters only as of a particular date
(which shall remain true and correct as of such particular date), with the same
force and effect as if they had been made at the Closing, and Newco shall
receive a certificate to such effect executed by Target’s President and Chief
Financial Officer.

               8.2 Covenants. Target shall have performed and complied in all
material respects with all of its covenants contained in Section 4 on or before
the Closing, and Newco shall receive a certificate to such effect signed by
Target’s President and Chief Financial Officer.

               8.3 Absence of Material Adverse Change. Since the date of this
Agreement, there shall not have been, in the reasonable judgment of the Board of
Directors of Newco, any Material Adverse Effect with respect to Target.

               8.4 Compliance with Law. There shall be no order, decree, or
ruling by any court or governmental agency which would prohibit, render illegal
or enjoin the transactions contemplated by this Agreement.

               8.5 Legal Opinion. Newco shall have received from counsel to
Target an opinion substantially in the form of Exhibit 8.5.

               8.6 Available Cash. Target shall not have less than fourteen
million five hundred thousand dollars ($14,500,000) in cash and cash equivalents
as of midnight on the day prior to the Closing Date.

               8.7 Stockholder Approvals. This Agreement shall have been
approved and adopted by the affirmative vote of the holders of a majority of the
shares of Target Common Stock outstanding as of the record date for the Target
Stockholders’ Meeting.

          9. TERMINATION OF AGREEMENT

               9.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, and except as set forth below, whether before or
after the requisite approvals of the stockholders of Target or Newco:

                         (a) by mutual written consent duly authorized by the
Boards of Directors of Newco and Target;

                         (b) by either Target or Newco if the Merger shall not
have been consummated by August 13, 2005 for any reason; provided, however, that
the right to terminate this Agreement under this Section 9.1(b) shall not be
available to any party whose action or failure to act has been a principal cause
of or resulted in the failure of the Merger to occur on or before such date;

                         (c) by either Target or Newco if a governmental entity
shall have issued an order, decree or ruling or taken any other action, in any
case having the effect

-21-

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

 

of permanently restraining, enjoining or otherwise prohibiting the Merger, which
order, decree, ruling or other action is final and nonappealable;

                         (d) by either Target or Newco, if the approval and
adoption of this Agreement, and the approval of the Merger, by the stockholders
of Target shall not have been obtained by reason of the failure to obtain the
required vote at a meeting of Target stockholders duly convened therefor or at
any adjournment thereof at which a vote thereon was taken; provided, however,
that the right to terminate this Agreement under this Section 9.1(d) shall not
be available to Target where the failure to obtain the Target stockholder
approval shall have been caused by the failure of Target to fulfill its
obligations under Sections 1.7 or 1.8 and such failure constitutes a material
breach by Target of this Agreement;

                         (e) by Newco (at any time prior to the adoption and
approval of this Agreement and the Merger by the required vote of the
stockholders of Target) if a Triggering Event shall have occurred;

                         (f) by Target, upon a breach of any representation,
warranty, covenant or agreement on the part of Newco set forth in this
Agreement, or if any representation or warranty of Newco shall have become
untrue, in either case such that the conditions set forth in Section 7.1 or
Section 7.2 would not be satisfied as of the time of such breach or as of the
time such representation or warranty shall have become untrue, provided that if
such inaccuracy in Newco’s representations and warranties or breach by Newco is
curable by Newco through the exercise of its commercially reasonable efforts,
then Target may not terminate this Agreement under this Section 9.1(f) for
30 days after delivery of written notice from Target to Newco of such breach,
provided Newco continues to exercise commercially reasonable efforts to cure
such breach (it being understood that Target may not terminate this Agreement
pursuant to this paragraph (f) if such breach by Newco is cured during such
30-day period, or if Target shall have materially breached this Agreement);

                         (g) by Newco, upon a breach of any representation,
warranty, covenant or agreement on the part of Target set forth in this
Agreement, or if any representation or warranty of Target shall have become
untrue, in either case such that the conditions set forth in Section 8.1 or
Section 8.2 would not be satisfied as of the time of such breach or as of the
time such representation or warranty shall have become untrue, provided that if
such inaccuracy in Target’s representations and warranties or breach by Target
is curable by Target through the exercise of its commercially reasonable
efforts, then Newco may not terminate this Agreement under this Section 9.1(g)
for 30 days after delivery of written notice from Newco to Target of such
breach, provided Target continues to exercise commercially reasonable efforts to
cure such breach (it being understood that Newco may not terminate this
Agreement pursuant to this paragraph (g) if such breach by Target is cured
during such 30-day period, or if Newco shall have materially breached this
Agreement); or

                         (h) by Target before approval of this Agreement and the
Merger by Target Stockholders, if the Board of Directors of Target or the
Special Committee determines in good faith, after consultation with outside
legal counsel, that failure to terminate

-22-

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

 

the Agreement is necessary for the Board of Directors of Target or the Special
Committee to comply with their fiduciary duties under applicable law.

         9.2 Effect of Termination. Any proper termination of this Agreement
under Section 9.1 above will be effective immediately upon the delivery of
written notice of the terminating party to the other parties hereto. In the
event of the termination of this Agreement as provided in Section 9.1, this
Agreement shall be of no further force or effect, except (i) as set forth in
this Sections 9.2, 9.3, and 11, each of which shall survive the termination of
this Agreement, and (ii) nothing herein shall relieve any party from liability
for any willful breach of this Agreement. No termination of this Agreement shall
affect the obligations of the parties contained in the Confidentiality
Agreement, all of which obligations shall survive termination of this Agreement
in accordance with their terms.

               9.3 Fees and Expenses.

                         (a) General. Except as set forth in this Section 9.3,
all fees and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expenses whether or not the Merger is consummated.

                         (b) Target Payments. In the event that this Agreement
is terminated by Newco pursuant to Section 9.1(e) or by Target pursuant to
Section 9.1(h) then Target shall promptly, but in no event later than two days
after such termination, pay to Newco the reasonable attorney fees and other
actual out of pocket expenses incurred by Newco in connection with the
negotiation and preparation of this Agreement and related matters, not to exceed
$250,000 in the aggregate. In the event this Agreement is terminated by Newco
under Section 9.1(g), and within six (6) months following such termination, the
Target consummates an Acquisition Proposal (other than with Newco), the Target
shall promptly, but in no event later than two days after the consummation of
such Acquisition Proposal, pay to Newco the reasonable attorney fees and other
actual out of pocket expenses incurred by Newco in connection with the
negotiation and preparation of this Agreement and related matters, not to exceed
$250,000 in the aggregate. Target acknowledges that the agreements contained in
this Section 9.3(b) are an integral part of the transactions contemplated by
this Agreement, and that, without these agreements, Newco would not enter into
this Agreement. Accordingly, if the Target fails to pay in a timely manner the
amounts due pursuant to this Section 9.3(b), and, in order to obtain such
payment, Newco makes a claim that results in a judgment against the Target for
the amounts set forth in this Section 9.3(b), Target shall pay to Newco its
reasonable costs and expenses (including reasonable attorneys’ fees and
expenses) in connection with such suit.

          10. EFFECT OF CLOSING ON REPRESENTATIONS AND COVENANTS

          10.1 No Survival of Representations. All representations, warranties
and covenants of the parties contained in this Agreement will remain operative
and in full force and effect, regardless of any investigation made by or on
behalf of the parties to this Agreement after the date hereof, until the earlier
of the termination of this

-23-

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

 

Agreement or the Closing, whereupon such representations, warranties and
covenants will expire (except for covenants that by their terms survive for a
longer period).

          11. MISCELLANEOUS

               11.1 Governing Law. The internal laws of the State of Delaware
(irrespective of its choice of law principles) will govern the validity of this
Agreement, the construction of its terms, and the interpretation and enforcement
of the rights and duties of the parties hereto.

               11.2 Assignment; Binding Upon Successors and Assigns. Neither
party hereto may assign any of its rights or obligations hereunder without the
prior written consent of the other party hereto. This Agreement will be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.

               11.3 Severability. If any provision of this Agreement, or the
application thereof, will for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances will be interpreted so as reasonably to effect
the intent of the parties hereto. The parties further agree to replace such void
or unenforceable provision of this Agreement with a valid and enforceable
provision that will achieve, to the extent possible, the economic, business and
other purposes of the void or unenforceable provision.

               11.4 Counterparts. This Agreement may be executed in any number
of counterparts, each of which will be an original as regards any party whose
signature appears thereon and all of which together will constitute one and the
same instrument. This Agreement will become binding when one or more
counterparts hereof, individually or taken together, will bear the signatures of
both parties reflected hereon as signatories. This Agreement may be executed and
delivered by facsimile and upon such delivery the facsimile signature will be
deemed to have the same effect as if the original signature had been delivered
to the other party.

               11.5 Other Remedies. Except as otherwise provided herein, any and
all remedies herein expressly conferred upon a party will be deemed cumulative
with and not exclusive of any other remedy conferred hereby or by law on such
party, and the exercise of any one remedy will not preclude the exercise of any
other.

               11.6 Amendment and Waivers. Any term or provision of this
Agreement may be amended, and the observance of any term of this Agreement may
be waived (either generally or in a particular instance and either retroactively
or prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof or default in the performance hereof will
not be deemed to constitute a waiver of any other default or any succeeding
breach or default. The Agreement may be amended by the parties hereto at any
time before or after approval of the Target Stockholders, but, after such
approval, no amendment will be made which by applicable law requires the further
approval of the Target Stockholders without obtaining such further approval.

-24-

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

 

               11.7 No Waiver. The failure of any party to enforce any of the
provisions hereof will not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.

               11.8 Attorneys’ Fees. Should suit be brought by either party to
this Agreement to enforce or interpret any part of this Agreement, the
prevailing party will be entitled to recover, as an element of the costs of suit
and not as damages, reasonable attorneys’ fees to be fixed by the court
(including costs, expenses and fees on any appeal).

               11.9 Notices. Any notice or other communication required or
permitted to be given under this Agreement will be in writing, will be delivered
personally, facsimile or by registered or certified mail, postage prepaid and
will be deemed given upon delivery, if delivered personally, or three days after
deposit in the mails, if mailed, to the following addresses:

         

  If to Newco:   Victory Acquisition Corporation

      19770 Stevens Creek Blvd.

      Cupertino, CA 95014
 
      Attention: President

      Facsimile: (408) 343-1018
 
       

  with a copy to:   Fenwick & West LLP

      275 Battery Street, 15th Floor

      San Francisco, CA 94111

      Attention: Robert Dellenbach

      Facsimile: (415) 281-1350
 
       

  If to Target:   Vialta, Inc.

      48461 Fremont Blvd.

      Fremont, CA 94538

      Attention: Didier Pietri

      Facsimile: (510) 870-3099
 
       

  with a copy to:   Kaye Scholer LLP

      1999 Avenue of the Stars, Suite 1700

      Los Angeles, CA 90067

      Attn: Barry L. Dastin

      Facsimile: (310) 788-1200

or to such other address as a party may have furnished to the other parties in
writing pursuant to this Section 11.9.

               11.10 Construction of Agreement. This Agreement has been
negotiated by the respective parties hereto and their attorneys and the language
hereof will not be construed for or against either party solely by reason that
such party is the claimed drafter thereof. A reference to a Section or an
exhibit will mean a Section in, or exhibit to, this Agreement unless otherwise
explicitly set forth. The titles and headings herein are for reference purposes
only

-25-

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

 

and will not in any manner limit the construction of this Agreement that will be
considered as a whole. The term “includes” or “including” are not limiting.

               11.11 No Joint Venture. Nothing contained in this Agreement will
be deemed or construed as creating a joint venture or partnership between any of
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party will have
the power to control the activities and operations of any other and their status
is, and at all times, will continue to be, that of independent contractors with
respect to each other. No party will have any power or authority to bind or
commit any other. No party will hold itself out as having any authority or
relationship in contravention of this Section.

               11.12 Further Assurances. Each party agrees to cooperate fully
with the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances as may be reasonably
requested by any other party to evidence and reflect the transactions described
herein and contemplated hereby and to carry into effect the intents and purposes
of this Agreement.

               11.13 Absence of Third Party Beneficiary Rights. No provisions of
this Agreement are intended, nor will be interpreted, to provide or create any
third party beneficiary rights or any other rights or remedies of any kind in
any client, customer, affiliate, stockholder, partner or any party hereto or any
other person or entity unless specifically provided otherwise herein, and,
except as so provided, all provisions hereof will be personal solely between the
parties that are signatories to this Agreement.

               11.14 Public Announcement. Upon execution of this Agreement Newco
and Target will issue a press release approved by both parties announcing the
Merger. Thereafter, Newco and Target may issue such press releases, and make
such other disclosures regarding the Merger, as either determines are required
under applicable securities laws or regulatory rules.

               11.15 Confidentiality. Target and Newco each recognize that they
have received and will receive confidential information concerning the other
during the course of the Merger negotiations and preparations. Accordingly,
Newco and Target each agrees (a) to use its respective reasonable efforts to
prevent the unauthorized disclosure of any confidential information concerning
the other that was or is disclosed during the course of such negotiations and
preparations, and is clearly designated in writing as confidential at the time
of disclosure, and (b) to not make use of or permit to be used any such
confidential information other than for the purpose of effectuating the Merger
and related transactions. The obligations of this section will not apply to
information that (i) is or becomes part of the public domain, (ii) is disclosed
by the disclosing party to third parties without restrictions on disclosure,
(iii) is received by the receiving party from a third party without breach of a
nondisclosure obligation to the other party or (iv) is required to be disclosed
by law. If this Agreement is terminated, all copies of documents containing
confidential information shall be returned by the receiving party to the
disclosing party.

-26-

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

 

               11.16 Entire Agreement. This Agreement and the exhibits hereto
constitute the entire understanding and agreement of the parties hereto with
respect to the subject matter hereof and supersede all prior and contemporaneous
agreements or understandings, inducements or conditions, express or implied,
written or oral, between the parties with respect hereto other than the
Confidentiality Agreement between Target and Fred S.L Chan dated February 9,
2005, which Newco expressly agrees hereby to be bound on the same basis as
Mr. Chan. The express terms hereof control and supersede any course of
performance or usage of the trade inconsistent with any of the terms hereof.

[End of page; signatures follow on next page]

-27-

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

 

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
Plan of Reorganization as of the date first above written.

     
“Newco”
  “Target”
 
   
VICTORY ACQUISITION CORP.
  VIALTA, INC.
 
   
By:                                                            
  By:                                                            
 
   
Its:                                                            
  Its:                                                            

[Signature Page to Merger Agreement]

-28-

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

 

EXHIBIT A

DEFINITIONS

     As used in this Agreement, each of the following terms has the meaning
ascribed to it in this Exhibit A

     “Acquisition Proposal” shall mean with respect to Target, any of the
following (other than the Merger): (A) any acquisition or purchase from the
Target by any person or “group” (as defined under Section 13(d) of the Exchange
Act and the rules and regulations thereunder) of more than a 50% interest in the
total outstanding voting securities of the Target or any of its Subsidiaries or
any tender offer or exchange offer that if consummated would result in any
person or “group” (as defined under Section 13(d) of the Exchange Act and the
rules and regulations thereunder) beneficially owning 50% or more of the total
outstanding voting securities of the Target or any of its Subsidiaries or any
merger, consolidation, business combination or similar transaction involving the
Target pursuant to which the stockholders of the Target immediately preceding
such transaction hold less than 50% of the equity interests in the surviving or
resulting entity of such transaction or its parent party; (B) any sale, lease,
exchange, transfer, license, acquisition, or disposition of all or substantially
all of the aggregate fair market value of assets of the Target; or (C) any
liquidation or dissolution of Target.

     “Affiliates” shall mean an affiliate as such term is defined under Section
13(d) of the Exchange Act, provided however, it shall not include any officer or
director of Target, other than Mr. Chan, in the case of either Mr. Chan or
Newco.

     “California Law” shall mean California Corporations Code, as amended.

     “Certificate of Merger” shall have the meaning given to it in Recital A.

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

     “Delaware Law” shall mean Delaware General Corporation Law, as amended.

     “Dissenting Shares” shall mean shares of Target capital stock held as of
the Effective Time by a Target stockholder (other than Newco Target Stock) who
has not voted such Target capital stock in favor of the adoption of this
Agreement and with respect to which appraisal shall have been duly demanded and
perfected in accordance with either (i) Section 262 of the Delaware Law or (ii)
Section 1300 et seq. of the California Law, and such perfected right was not
effectively withdrawn or forfeited.

     “Effective Time” shall mean the filing of the Certificate of Merger with
the Secretary of State of Delaware.

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

     “ERISA Affiliate” shall mean any entity which is a member of (A) a
“controlled group of corporations,” as defined in Section 414(b) of the Code,
(B) a group of entities under “common

 

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

 

control,” as defined in Section 414(c) of the Code, or (C) an “affiliated
service group,” as defined in Section 414(m) of the Code, or treasury
regulations promulgated under Section 414(o) of the Code, any of which includes
Target or any Subsidiary.

     “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.

     “GAAP” shall mean United States generally accepted accounting principles,
as applied by Target consistent with past practice.

     “Knowledge” shall mean, with respect to a party hereto and with respect to
any matter in question, that any of the executive officers (consisting solely of
Didier Pietri and William Scharninghausen with respect to Target) of such party
has actual knowledge of such matter, after reasonable inquiry of such matter
(including inquiry of Target’s employee, Yin-Wu Chen, by Mr. Pietri).

     “Material Adverse Effect” shall mean, when used in connection with an
entity, any change, event, circumstance or effect whether or not such change,
event, circumstance or effect is caused by or arises in connection with a breach
of a representation, warranty, covenant or agreement of such entity in this
Agreement that is or is reasonably likely to be materially adverse to the
business, assets (including intangible assets), financial condition, operations
or results of operations of such entity taken as a whole with its subsidiaries,
except in the case of Target any change, event, circumstance or effect resulting
from general changes in economic and financial market conditions, considered
alone without regard to any other change, circumstance or effect, (i) changes in
conditions (including as a result of changes in laws, including common law,
tariffs, export and import laws, rules, and regulations or the interpretations
thereof) generally applicable to the telecommunications equipment, consumer
electronics, internet telephony or industries that are not unique to Target and
its Subsidiaries, (ii) changes resulting from the announcement of the
transactions described in this Agreement or the identity of Newco or its
Affiliates or from the performance of this Agreement and compliance with the
covenants set forth herein, (iii) any change in the trading prices of the Target
Common Stock between the date hereof and the Effective Time, (iv) any change in
any law or GAAP, which affect entities generally such as Target, (v) any actions
taken by Mr. Chan, Newco or any of their Affiliates and (vi) any matters listed
on Schedule A of the Target Disclosure Letter, and which, in the cases of clause
(i) do not have a disproportionate impact on Target.

     “Merger” shall have the meaning given to it in Recital A.

     “Merger Consideration” shall have the meaning given to it in Section 1.2.1.

     “Newco Stock” shall have the meaning given to it in Recital A.

     “Proxy Statement” shall mean a proxy statement prepared in accordance with
the Exchange Act and applicable rules and regulations.

     “Securities Act” shall mean the Securities Act of 1933, as amended,
including the rules and regulations thereunder.

2

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

 

     “Surviving Corporation” shall mean the Target as the surviving corporation
of the Merger.

     “Target Common Stock” shall mean Common Stock of Target at $0.001 par
value.

     “Target Director Plan” shall mean Target’s 2000 Directors Stock Option
Plan, as amended and restated.

     “Target Employee Plans” shall mean (i) “employee benefit plan,” as defined
in Section 3(3) of ERISA, and (ii) all other written or formal plans or
agreements involving direct or indirect compensation or benefits (including any
employment agreements entered into between Target or any Subsidiary and any
employee of Target or any Subsidiary, but excluding workers’ compensation,
unemployment compensation and other government-mandated programs) currently or
previously maintained, contributed to or entered into by Target or any
Subsidiary under which Target or any Subsidiary or any ERISA Affiliate thereof
has any present or future obligation or liability.

     “Target Incentive Plan” shall mean Target’s 1999 Stock Incentive Plan, as
amended.

     “Target Options” shall mean the outstanding options to purchase Target
Common Stock granted under Target Plans.

     “Target Option Plan” shall mean Target’s 2001 Nonstatutory Stock Option
Plan, as amended.

     “Target Pension Plans” shall mean all Target Employee Plans that
individually or collectively would constitute an “employee pension benefit
plan,” as defined in Section 3(2) of ERISA.

     “Target Plans” shall mean, collectively, Target Incentive Plan, Target
Option Plan, and Target Director Plan.

     “Triggering Event” shall be mean, and be deemed to have occurred, if:
(i) the Special Committee shall for any reason have withdrawn or shall have
amended or modified in a manner adverse to Newco its recommendation in favor of
the adoption and approval of the Agreement or the approval of the Merger;
(ii) Target shall have failed to include in the Proxy Statement the
recommendation of the Special Committee or the Board of Directors of Target in
favor of the adoption and approval of the Agreement and the approval of the
Merger; (iii) the Special Committee fails to reaffirm its recommendation in
favor of the adoption and approval of the Agreement and the approval of the
Merger within 10 business days after Newco requests in writing that such
recommendation be reaffirmed at any time following the public announcement of an
Acquisition Proposal; (iv) the Special Committee shall have approved or publicly
recommended any Acquisition Proposal other than a liquidation or dissolution;
(v) Target shall have entered into any letter of intent or similar document or
any agreement, contract or commitment accepting any Acquisition Proposal; or
(vi) a tender or exchange offer for all of the outstanding securities of Target
shall have been commenced by a person unaffiliated with Newco, and Target shall
not have sent to its securityholders pursuant to Rule 14e-2 promulgated under
the Exchange Act, within 10 business days after such tender or exchange offer is
first

3

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

 

published sent or given, a statement disclosing that Target recommends rejection
of such tender or exchange offer.

4